In a bid to expand its rail business from service into engine manufacturing, Caterpillar Inc.’s (CAT) wholly owned subsidiary Progress Rail Services entered into an agreement to purchase Electro-Motive Diesel for $820 million in cash from Berkshire Partners LLC and Greenbriar Equity Group LLC. Caterpillar expects to close the deal by the end of 2010, subject to final regulatory approvals.
The acquisition of Electro-Motive Diesel will enable Caterpillar to provide rail and transit customers an industry-leading range of locomotive, engine and emissions solutions, as well as unmatched aftermarket product and parts support and a full line of rail-related services and solutions.
Headquartered in LaGrange, Illinois, Electro-Motive Diesel designs, manufactures and sells diesel-electric locomotives for all commercial railroad applications and has sold its products in more than 70 countries worldwide.
In addition to its manufacturing activities, Electro-Motive Diesel has an extensive aftermarket business, offering customers replacement parts, maintenance solutions and a range of value-added services. The company is also a global provider of diesel engines for marine propulsion, offshore and land-based oil well drilling rigs and stationary power generation. The company generated 2009 revenues of $1.8 billion.
Electro-Motive Diesel was spun off from General Motors Corporation (MTLQQ) in 2005 and was purchased by Berkshire Partners LLC and Greenbriar Equity Group LLC. Pursuant to the closure of this deal, Electro-Motive Diesel will now be a wholly owned subsidiary of Progress Rail Services. With the addition of Electro-Motive Diesel, Caterpillar will now compete directly with General Electric Co. (GE), another major U.S. maker of locomotives.
Since 2006, Caterpillar has been making concerted efforts to grow its rail and transit business due to its positive long-term outlook on the rail sector. Consequently, Caterpillar has made a total investment of $2 billion in this business, including the Electro-Motive acquisition.
The acquisition comes on the back of another of Caterpillar’s rail related acquisition. Earlier in May, Progress Rail Leasing Corporation, a wholly owned subsidiary of Progress Rail Services, acquired Fenton-based FCM Rail, Ltd. FCM Rail is a leading lessor of maintenance-of-way equipment (MOW) in the United States. The acquisition strengthened Progress Rail’s existing position in the MOW industry by expanding its service offerings.
Demand for railroad locomotives has been weak as the recession lowered demand for transportation of all sorts of bulk commodities. However, rail is estimated to be three times more fuel efficient than road freight transport, and in a climate of high fuel prices and increased awareness of environmental sustainability the future of rails looks promising.
As per the Rail Time Indicators declared by the Association of American Railroads, U.S. Freight Rail Traffic is showing a gradual improvement since February 2010. U.S. Freight Rail Traffic increased 1.5% in February, 8% in March and 15.8% in April from the respective prior-year periods. The 15.8% increase in April is the highest year-over-year percentage increase for any month ever. The recent spike in rail traffic bodes well for the rail industry.
We appreciate Caterpillar’s efforts to boost its presence in the rail industry during this market recovery phase. Further Caterpillar stands to benefit from President Obama’s $787 billion economic stimulus package which includes $8 billion for intercity passenger rail projects and rail congestion grants, with priority for high-speed rail.
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