Caterpillar to purchase Bucyrus

Caterpillar Inc. recently announced its decision to purchase Bucyrus Intl. Inc. (Bucyrus) for $7.6B cash, plus assumption of $1B of the company’s debt for a total transaction price of $8.6B or $92 per share, a 32% premium to Bucyrus’ closing price the day before.

This year, Bucyrus will have revenues of approximately $3.75B, which are all mining related. Caterpillar’s estimated 2010 mining related revenues are $3.9B. The deal will close in mid-2011. If Bucyrus backs off from the deal, it will pay Caterpillar approximately $200M.

There is only one product category between the two companies that possibly overlaps (trucks), so it is reasonable to add together revenues from both companies (Wall Street would call it accretive) totaling $7.65B in mining equipment sales if they were one company today. If that were the case, more than 18% of Caterpillar’s revenues would be from mining, making Caterpillar far and away the largest manufacturer of mining equipment worldwide. Komatsu is expected to have 2010 mining equipment revenues of $4.8B and Joy Global, which is Bucyrus’ direct competitor, will have 2010 revenues of approximately $3.4B.

Caterpillar will fund the acquisition with up to a $2B in a share offering, $1B cash and $5B of debt. Company management was careful to point out the final financing will be made with an eye to preserving Caterpillar’s A/A2 credit rating which gives it access to low interest money. Caterpillar expects to be able to trim $400M of expenses from the combined business, starting in 2012.

I speculated this transaction in the December 2009 issue of Machinery Outlook in the article, “Bucyrus To Acquire Terex Mining Division,”:

“Now that Bucyrus will own the Terex mining equipment business, there are some interesting questions about its future plans. Until this point the company has not competed with Caterpillar. Now that it owns an electric mining truck business, it will compete with them. Furthermore, a fairly large percentage of the Terex O&K hydraulic mining shovels are distributed by Caterpillar dealers in key mining markets. A major risk to Bucyrus is Caterpillar’s willingness to allow that distribution arrangement to continue.

“And finally, we speculate that once Bucyrus completes the acquisition, it might become an attractive takeover target for Caterpillar. Caterpillar has hinted that it is considering expansion opportunities in the mining equipment arena. Bucyrus’s cable shovel and dragline product lines would fit nicely with Caterpillar’s as well as the Bucyrus (and now Terex) drill products. We already know that the O&K mining shovel line fits with the Caterpillar dealer organization. Bucyrus’ underground mining products dovetail nicely with Caterpillar’s expansion ambitions in that product area, as well. Caterpillar does not build high-wall mining equipment. The only product line where there would be a conflict is the electric mining truck line which was originally the Unit Rig business.

What does Bucyrus gain?

1. Massive worldwide distribution for sales, and product support. Caterpillar and Bucyrus will have to work out which products will be sold through the Caterpillar dealer network and which ones will be retained for direct sales. Most of Caterpillar’s products are sold through its dealer network with the exception of Solar gas turbines and its railroad products. One Bucyrus candidate for direct sales will probably be draglines.

2. Manufacturing technology and Caterpillar purchasing power. Many of Bucyrus’ products are built as one-off units and would benefit from the Caterpillar Production System, and Cat’s purchasing power, especially for steel and components. Caterpillar will eventually be able to supply its diesel engines and drivetrain components for use in Bucyrus machines.

3. Caterpillar’s engineering support. Some of Caterpillar’s huge engineering and research budget could be repurposed to assist with Bucyrus products.