By Kerri Shannon
Caterpillar Inc. (NYSE: CAT), the world's leading manufacturer of construction equipment, announced on Monday that it would pay $8.6 billion for Bucyrus International Inc. (Nasdaq: BUCY) – a maker of large-scale surface and underground mining machinery.
Caterpillar said in a statement the deal would allow the company to continue its expansion into mining and gain from the "robust long-term outlook for commodities." The company is betting that emerging markets' growth will "push demand" for coal and "everything that comes out of the ground."
Caterpillar will pay $7.6 billion for Bucyrus and assume another $1 billion of its debt. The deal values Bucyrus at $92 a share, which is a 32% premium to the company's Nov. 12 closing price of $69.92. Caterpillar will fund the purchase using a combination of cash, debt and the sale of up to $2 billion in new shares.
"The mining industry is very attractive to us for the long term," Caterpillar Chief Executive Officer Doug Oberhelman said in a Bloomberg Television interview. "With all the things going on around the globe with globalization, urbanization and demand for minerals, things in the earth, we will be strong for a long period of time."
Bucyrus' products complement Caterpillar's in that there is hardly any overlap in the types of mining equipment each company makes, allowing Caterpillar to significantly expand its offerings to customers. The deal "fills an important portion in Caterpillar's portfolio," Mark Demos, a fund manager for Fifth Third Asset Management, told Bloomberg. "They do business with these customers and now they will be able to provide them a full line of mining products."
The acquisition is Caterpillar's biggest since 1980 and the largest in the construction and mining machinery industry in the past five years. "For Caterpillar, this is clearly a major acquisition and in line with what they are looking for but bigger than expected," Larry De Maria, an analyst at Sterne, Agee & Leach in New York, told Bloomberg.
Earlier this year, Caterpillar announced plans to build factories in Brazil and China as coal and metals prices rose on growing demand. It also earmarked $700 million this year to invest in the development and improvement of trucks and shovels. Caterpillar hopes these efforts will boost earnings to as much as $10 a share in 2012 and sales to $60 billion.
Caterpillar so far has posted a successful year. Its third-quarter profits nearly doubled from 2009, largely because of rebounding economies outside of the United States. On Oct. 21, the company raised its full-year earnings forecast from $3.80 to $4.00 a share, up from a July estimate of $3.15 to $3.85. Third quarter net income jumped to $1.22 a share from 64 cents the year prior, and sales were up 53% to $11.1 billion.
Caterpillar's sales revenue rose 95% in Latin America and 51% in the Asia-Pacific region. The company gets two-thirds of its sales from markets outside the United States.
Growing overseas demand is driving up the prices of many commodities, including copper – up 17% this year – and silver – up 55% this year. As a result, mining companies will boost capital expenditures by more than 15% in 2011, according to a report by Jefferies & Co. analyst Stephen Volkmann.
The commodities surge also is expected to cause a consolidation boom in the construction and mining industry. Bucyrus was already involved in a deal in February when it paid $1.3 billion for the mining-equipment division of Terex Corp. (NYSE: TEX), which has a strong presence in China and Indonesia.
Caterpillar also made two acquisitions earlier this year. It bought engine maker MWM Holding GmbH of Germany in October for about $810 million, and it finalized a deal for railroad-locomotive manufacturer Electro-Motive Diesel for $820 million in August. The construction giant felt it couldn't wait much longer to snag Bucyrus as the mining sector continues to take off.
"We felt now's the time. Interest rates and financing are very attractive," CEO Oberhelman told CNBC. "It is a very bright future for mining and we identified earlier this year that the mining segment for us is a key strategic area. We're hearing from our customers almost daily about [helping] in this market place."
Caterpillar shares rose 78 cents, or 0.96%, to close at $81.82 on Monday.