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Caterpillar digs deep in $7.6B deal for Bucyrus
By SAMANTHA BOMKAMP
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NEW YORK
Caterpillar, the world's largest construction and mining equipment maker, moved aggressively to capitalize on demand in emerging markets Monday with a $7.6 billion buyout of Bucyrus International.
Bucyrus makes surface mining equipment used for coal, copper, iron ore, oil sands and other minerals.
With a grinding economic recovery ongoing in the West, global companies like Caterpillar Inc. have driven further into China, India and Brazil, where the appetite for raw materials used in construction and mining are strong.
Caterpillar said last month its third-quarter profit doubled, thanks in large part to growth in those markets.
With the Bucyrus deal, Caterpillar seeks to expand its footprint in countries that are "improving infrastructure, rapidly developing urban areas and industrializing their economies," the company said Monday.
The chief executives of both companies touted the deal at a news conference in South Milwaukee, Wis., where Bucyrus International Inc. is based and near where Caterpillar will set up the headquarters for its mining operations.
"There will not be a close second when these two companies come together," said Tim Sullivan of Bucyrus.
Sullivan said he would stay on at least through the acquisition. Doug Oberhelman, who leads Caterpillar, said he would find a way to keep Sullivan on board after that.
Oberhelman said the deal made sense because the companies deal in products that are similar but have little enough overlap as to avoid redundant assets.
"This is not a deal we put together to cut costs," he said. "It's a growth deal."
After years of cutting costs, industry experts had been waiting for a major acquisition like the one Caterpillar announced.
"I think Caterpillar is definitely doubling down, not just on emerging markets, but on commodities in general," Morningstar analyst Adam Fleck said. "Caterpillar is suggesting that were in the very early innings of the commodity price rebound."
Specifically, Fleck thinks Caterpillar is focusing on coal, of which China is a massive importer.
If approved, the acquisition would double Caterpillar's mining revenue.
To land Bucyrus, Caterpillar will pay $92 per share, a 32 percent premium to Bucyrus' closing price on Friday. The deal, which is valued at $8.6 billion including debt, is expected to close in mid-2011.
Shares of Bucyrus jumped 29 percent to $89.70.
Caterpillar made drastic cuts during the recession, vowing then that it would be in a better position when the economy rebounded. It cut 37,000 full-time, contract and part-time workers, though it's since hired back about 15,000 people.
The company now appears ready to make good with a market share grab that could put it in a commanding position in places where the economy has rebounded.
"Our performance through the global economic turmoil of 2008-2009 allowed us to emerge with a strong balance sheet and the ability to make strategic investments in companies like Bucyrus," Oberhelman said.
The Peoria, Ill. company said last month it expects the global economy to grow by about 3.5 percent next year, on par with economists' forecasts. But the company predicts developing regions will grow at about double that rate. And even in the emerging economies where growth is slower, Caterpillar said the replacement of worn out machinery will drive sales even before those economies markedly improve.
The deal, which got the go-ahead from both company boards, still requires approval by regulators and Bucyrus shareholders. Caterpillar expects to save about $400 million a year from the acquisition, starting in 2015.
There is little overlap between the companies, said Fleck, who does not see serious regulatory hurdles.
businessweek.com
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