Caterpillar Offers $885 Million to Buy ERA

Caterpillar Inc. (CAT), the world’s largest maker of construction and mining equipment, offered as much as HK$6.89 billion ($885 million) to buy ERA Mining Machinery Ltd. to expand sales in China.

Caterpillar will pay 88 Hong Kong cents a share or a loan note that can be redeemed for 75 cents to HK$1.15, Peoria, Illinois-based Caterpillar said yesterday in a statement. The offer values ERA at HK$4.49 billion to HK$6.89 billion, 33 percent more than its last price before the offer. ERA jumped as much as 23 percent today.

Buying ERA gives Caterpillar control of a company that designs, manufactures, and sells underground coal-mining equipment in China. The Asian nation may have economic growth of about 9 percent next year, Caterpillar said last month.

“They’re expanding into a growing market,” said Jamie Spiteri, head dealer at Shaw Stockbroking Ltd. in Sydney. “They have the capacity to diversify and they’re doing so because they recognize that in the space they operate in, China is probably one of their competitive threats in years to come.”

ERA traded at 79 cents at the 12 p.m. lunch break in Hong Kong. Caterpillar rose 0.6 percent to $92.20 at the close of trading in New York, taking its gains to 15 percent over the past 12 months. The offer is dependent on regulatory approval by Chinese antitrust authorities, Caterpillar said.

‘Very Attractive’

Mining “is a very attractive industry and the fact that it fits our capabilities, we say this is an industry we want to invest in,” Steve Wunning, Caterpillar’s group president, said today in an interview in Hong Kong. The company will submit an application for approval to China’s Ministry of Commerce early next week, he said.

Caterpillar is paying 19.6 times ERA’s earnings before interest and tax, compared with the 29.36 average of 11 industry deals since 2002, according to data compiled by Bloomberg. There have been $5.6 billion of deals in the construction and mining machinery sector this year, compared with $14.4 billion last year.

Joy Global Inc., the maker of P&H and Joy mining equipment, in July agreed to buy China’s International Mining Machinery Holdings Ltd. for HK$4.55 billion. Joy paid 21.73 times earnings before interest and tax, according to data compiled by Bloomberg.

Core Business

Caterpillar is focusing on its core manufacturing business and the growing market for mining equipment, which is being driven by rising demand for metals and coal in developing nations. The company completed the $8.8 billion acquisition of Bucyrus International Inc. in July to add mining products including drills and roof supports.

“While Bucyrus does a lot in underground coal mining, we felt like we needed to do one more thing to put ourselves in a strong position in China underground coal mining”, Wunning said. The company is “not zeroing in” on other acquisitions at this time, he said.

Caterpillar joins Japanese rivals Komatsu Ltd. and Hitachi Construction Machinery Co. in seeking to increase mining revenue in China, the world’s largest market. ERA sells equipment through its Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co., Ltd. unit.

“While Caterpillar is a giant with big presence in North America and Europe, the company has trailed Japanese companies such as Komatsu in China’s construction machinery market,” Hiroyuki Soma, an analyst at Mizuho Investors Securities Co., said in Tokyo. “Expansion by Caterpillar in China is a threat to Japanese producers. Competition is set to intensify.”

Hitachi Construction Machinery, the world’s biggest maker of giant excavators, plans to build its third mining-equipment factory in Japan by 2013 as demand for thermal-coal rises in Asia, Senior Vice President Shinichi Mihara said Nov. 1 in an interview.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Masumi Suga in Tokyo at msuga@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Simon Casey at scasey4@bloomberg.net

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