Headlines about Caterpillar's (CAT) $8.6 billion offer for Bucyrus (BUCY) miss the point: This is all about being in position to sell picks and shovels to miners in what is emerging as a commodity boom.
Caterpillar is paying $92 a share - a 32% premium - to take Bucyrus off the table.
The deal will also entail CAT taking on BUCY's $1 billion in debt. Most of the deal will be financed through cash and debt, with perhaps a total of $2 billion in new equity being issued.
The big news here is that BUCY will form the core of a new mining equipment unit for CAT. By 2015, the company expects the business to generate $400 million a year to its earnings, roughly in line with what BUCY was already making, which reveals just how light CAT previously was in mining.
BUCY has suffered in recent months due to a lack of global interest in its underground mining equipment. Instead, sales of bulk mining gear have been relatively high as exploration companies rush to get their projects online while commodity prices are soaring.
This is quite an endorsement for the materials space globally. CAT is spending its cash wisely and gearing up for even stronger commodity demand down the road.
Meanwhile, watch BUCY competitor Joy Global Inc. (JOYG) for a sympathetic bump. Deals like this tend to push up valuations throughout a sector, and a 32% premium is nothing to balk at.
Disclosure: No positions.