DETROIT/PROVIDENCE, Rhode Island (Reuters) - Caterpillar Inc CAT.N sealed its position as the world's No. 1 maker of mining equipment on Monday with its purchase of Bucyrus International Inc BUCY.O for $7.6 billion, the biggest acquisition in its 85-year history.
The deal fills out Caterpillar’s already considerable offering of mining equipment, adding massive shovels and draglines to its existing line of giant mining trucks and specialized excavators used both above and below ground.
Shareholders of Bucyrus will receive $92 cash per share, a 32 percent premium over the stock’s closing price on Friday.
Jim Dugan, a Caterpillar spokesman, said the deal, expected to close in mid-2011, was the biggest in the company’s history by “a long shot.” Including $1 billion of Bucyrus debt being assumed by Caterpillar, the transaction is worth $8.6 billion.
“It’s a good strategic fit,” said Adam Fleck, an analyst at Morningstar. “It about doubles their mining business, which is very profitable. But the price they paid is pretty full.”
Caterpillar, the Peoria, Illinois-based maker of heavy equipment is increasing its exposure to the minerals sector at a time when demand for materials such as iron ore and coal is being spurred by rapid development in emerging markets like China and India.
“It’s a great time to invest in mining. We expect continued urbanization and what I would call modernization to continue in the developing countries,” said Doug Oberhelman, who took over as Caterpillar CEO this year from Jim Owens.
“With interest rates as low as they are today and the world in the early stages of an economic recovery, this was a great time to invest,” he said.
The move, which catapults Caterpillar back into the mining shovel business, a business it left in 2004, could boost the company's exposure to fast-growing emerging economies. Bucyrus generates about a third of its revenue in the developing world, competing primarily with Joy Global Inc JOYG.O.
“The emerging market demand is really what’s driving things,” said Jefferies & Co analyst Stephen Volkmann.
Across the industrial sector, big U.S. companies are counting on emerging-market demand to boost profit as their home economy stutters through a sluggish recovery. Prices of copper, for instance, rose to a record high last week, driven by strong demand for the metal, used in power and construction.
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“Is the height of the commodity boom really the best time to buy?” asked Alex Blanton, an analyst at Ingalls & Snyder who follows Caterpillar. “Hard to tell. A year-and-a-half ago, Bucyrus was selling for $10.50 -- but maybe it wasn’t for sale then.”
Shares of South Milwaukee, Wisconsin-based Bucyrus closed up 29 percent to $89.80 on the Nasdaq, while Caterpillar finished up nearly 1 percent at $81.82 on the New York Stock Exchange.
Bucyrus is a 125-year-old company named for the Ohio town where it was founded. Its equipment was used in the digging of the Panama Canal.
Caterpillar said it would fund the acquisition through a combination of cash, debt and equity.
Oberhelman said financing costs are very attractive, adding that Caterpillar would issue about $2 billion in new shares once the deal closes in mid-2011.
Caterpillar expects the deal to boost its profit in the first year after the closing, excluding 50 cents per share of one-time charges.
Caterpillar already makes a wide range of mining equipment. Earlier this year, it said it hoped to expand the line to meet demand from mining customers, who are scrambling to take advantage of rebounding prices for copper and other minerals.
Analysts said they expect the deal to face little regulatory objection since there is minimal overlap between the two companies’ product lines.
The combined companies expect to cut their costs by some $400 million, beginning by 2015, they said in a statement.
Bucyrus is less than a tenth Caterpillar’s size, measured by revenue. Analysts look for the smaller company to earn $298.5 million on revenue of $3.56 billion this year, versus Caterpillar’s expected profit of $2.55 billion on revenue of $41.13 billion, according to Thomson Reuters I/B/E/S.
Shares of blue-chip Caterpillar have risen 42 percent this year, about three times the 14 percent rise of the Standard & Poor's capital goods industry group .GSPIC.
Caterpillar’s resolve to dig deep into the market coincides with a healthy rebound in customer spending, after the economic downturn significantly curbed miners’ budgets. Global capital spending by mining companies will jump 50 percent to a record $113 billion in 2011, above the record $110 billion in 2008, according to Bernstein Research.
It is the latest in a string of deals in recent months by Caterpillar under Oberhelman. Last month it purchased MWM Holding GmbH, a German maker of gas and diesel engines, from British private equity company 3i Group Plc III.L for $810 million cash. And over the summer it bought EMD, a U.S. maker of train locomotives, for $820 million, putting it into head-to-head competition with General Electric Co GE.N.
The Caterpillar-Bucyrus deal leaves Joy Global as the last remaining stand-alone U.S.-based maker of mining equipment. Joy shares closed up 7.5 percent to $77.77 on the Nasdaq. Heavy equipment makers CNH Global CNH.N and Terex TEX.N also were higher.
Joy Global is “likely to be at a competitive disadvantage,” JP Morgan analyst Ann Duignan said in a research note. She estimated Joy’s fair value at $77 and noted that Terex owns 5.8 million Bucyrus shares.
Bucyrus’ mining equipment dwarfs even the largest Caterpillar vehicles seen on roadways and construction sites, Caterpillar Chief Financial Officer Ed Rapp said.
“While we’ve always thought of ourselves as making big machines, this acquisition takes it to a whole new level,” he joked on a conference call with investors.
Reporting by James B. Kelleher in Detroit and Scott Malone in Providence, Rhode Island; additional reporting by Nick Zieminski in New York; editing by John Wallace, Carol Bishopric, Gary Hill
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