(Caterpillar-Bucyrus item updated with further detail from the companies' conference call with analysts.)
NEW YORK (
surprise $8.6 billion take-out of
shouldn't be so surprising, since it represents a bet on two of the hottest investment trends of the post-crisis world -- emerging markets and commodities.
Those trends are so hot, in fact, that Bucyrus was able to extract a sweet price, industry observers observed.
"It's a good deal for CAT long term," said Eli Lustgarten, an analyst at Longbow Securities, "and they paid for it."
exceeds the 12-month price target Lustgarten had pegged on Bucyrus of $90 a share.
"I've seen companies buy stuff at the top of a commodities boom," said another analyst, "and they were sorry they did it."
Caterpillar's deal values the smaller company at a forward price-to-earnings multiple of 17.8 times the estimated 2011 earnings for Bucyrus, which missed Wall Street's profit expectations when it reported its third quarter last month. By comparison,
, Bucyrus's cross-town rival and the only major independent mining-equipment maker left in the U.S., has a forward multiple of 15.2.
Before the deal came to light, Bucyrus shares were trading at about 13.5 times 2011 targets, having closed Friday at $69.62. In October, the stock moved above $75 and almost recorded an all-time high, last touched before the financial crisis in June 2008.
"Did we overpay?" said Caterpillar CEO Oberhelman in the conference call to discuss the deal with analysts and investors. "No. In my mind, we paid a fair and full price." He went through the company's arguments for that view: "synergy opportunities, no product overlap to speak of," and a CAT dealer network that already sells certain Bucyrus machines, most notably its big hydraulic shovels. "By our analysis, we've exceeded our hurdle rate on this one by a comfortable range," Oberhelman said.
Caterpillar said it expects the combined company's synergies to add more than $400 million to its annual operating earnings by 2015. In the first year of combined operation, CAT said the deal would be accretive, but only after extracting deal costs.
Bucryus holders will receive cash totalling $7.6 billion (the $8.6 billion figure includes Bucyrus debt.) Caterpillar will fund the purchase with loans, cash from its balance sheet and up to $2 billion raised through a public stock offering. The deal is expected to close in the middle of 2011.
Caterpillar, which partly justified the acquisition by making note of the cheap borrowing rates now available for M&A, has gone acquisitive under Oberhelman, who officially took over as CEO from Jim Owens this summer. The industrial bellwether has also rebounded from the depths of the recession -- and demonstrated better-than-expected growth in recent quarters -- almost entirely on the strength of sales of its mining equipment in places like China, Brazil and India. Meanwhile, the company's stock has shot to a succession of 52-week highs.
Bucyrus itself had strived to capitalize on the same trends, acquiring the mining-equipment manufacturing unit of
for $1.3 billion in late 2009 (the deal closed early this year).
At the time, that deal was hailed for the same reason Caterpillar is hailing its Bucyrus purchase, mainly boosting the company's lineup of mining gear and extending its reach in key overseas markets.
Caterpillar executives trumpeted the combined company's ability to sell products more cheaply to big miners looking to expand projects around the world. The likes of
have announced plans to spend billions of dollars on expanding their mining capacity in the coming years.
The question of product overlap sparked some contention during the conference call. Caterpillar executives downplayed potential redundancies, but the company already set in motion earlier this year a plan to invest $700 million in the organic growth of its mining business, particularly in hydraulic shovels, one of Bucyrus's core businesses. Oberhelman said that the company would need to look again at its shovel plans in light of the Bucyrus deal.
Caterpillar just broke ground in September on a new plant in Texas to build the shovels.
M&A arbitrageurs poured into Bucyrus stock Monday, though a spread still existed between the $92 offer and the level at which Bucyrus stock was trading in afternoon action. Shares of the South Milwaukee company were changing hands at $89.71, up 29%. Earlier in the session, the stock touched $90.21, which was a new all-time high. Volume approached 23 million shares, more than 12 times the daily average.
The sudden shift in Bucyrus' value caused Joy Global stock to jump 8%. Even manufacturers of rolling machinery outside the mining business blew higher as well, with Terex rising 5% and
gaining about 3%.
Caterpillar shares, meanwhile, were rising 2.5% to $83.04.
-- Written by Scott Eden in New York.
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