Caterpillar Inc., the world’s largest maker of construction equipment, agreed to buy Bucyrus International Inc. for $7.6 billion to add shovels and drills to its range of mining machinery.
Bucyrus shareholders will receive $92 a share, 32 percent more than the Nov. 12 closing share price, Peoria, Illinois- based Caterpillar said today in a statement. The deal is valued at $8.6 billion including net debt and Caterpillar will fund it with a combination of cash, debt and as much as $2 billion of equity, the company said.
Caterpillar is expanding its mining business as coal and metals producers raise investment to meet growing demand from emerging economies. The company has already announced plans this year to invest $700 million developing trucks and shovels. Growth in mining may help Chief Executive Officer Doug Oberhelman raise earnings to $8 to $10 a share in 2012 and boost sales to as much as $60 billion.
The deal “fills an important portion in Caterpillar’s portfolio,” said Mark Demos, a fund manager for Fifth Third Asset Management in Minneapolis which held 81,113 Caterpillar shares as of June 30. “They do business with these customers and now they will be able to provide them a full line of mining products.”
Bucyrus rose $20.18, or 29 percent, to $89.80 at 4:29 p.m. in Nasdaq Stock Market trading. Caterpillar climbed 78 cents, or 1 percent, to $81.82 on the New York Stock Exchange. Milwaukee- based Joy Global Inc., which also makes mining equipment, gained $5.39, or 7.4 percent, to $77.77 in Nasdaq trading.
“The mining industry is very attractive to us for the long term,” Oberhelman said in a Bloomberg Television interview on “In the Loop” with Betty Liu. “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.”
Mining companies’ capital expenditure globally will rise by more than 15 percent in 2011 as commodity prices rise, Stephen Volkmann, a Jefferies & Co. analyst in New York, said in a report. There’s little overlap between Caterpillar’s and South Milwaukee, Wisconsin-based Bucyrus’s products, he said.
Bucyrus would be Caterpillar’s biggest acquisition since at least 1980, according to data compiled by Bloomberg, followed by the company’s purchase of Perkins Ltd. in 1997 for $1.3 billion.
The deal would also be the largest announced in the construction and mining machinery industry in the past five years, according to data compiled by Bloomberg. The 32 percent premium being paid by Caterpillar compares with the 28 percent average paid in the industry in that period.
While the acquisition looks a “little expensive,” the cost savings Caterpillar may get make the deal look “reasonable,” Demos said. Caterpillar said the acquisition will help save more than $400 million annually beginning 2015.
On Oct. 21, Caterpillar raised its full-year earnings forecast to $3.80 to $4 a share, up from a July prediction of $3.15 to $3.85. Third-quarter net income almost doubled to $1.22 a share from 64 cents a year earlier and sales rose 53 percent to $11.1 billion.
Bucyrus gives Caterpillar an opportunity to gain from growth in emerging markets and tap a business with extensive after-market parts and services opportunities, Larry De Maria, an analyst at Sterne, Agee & Leach in New York who has a “neutral” rating on the shares, said in an interview.
“For Caterpillar, this is clearly a major acquisition and in line with what they are looking for but bigger than expected,” De Maria said.
The transaction will close in mid-2011, Caterpillar said. The company plans to locate its mining business headquarters in South Milwaukee and maintain the Bucyrus brand for certain products.
Bucyrus would pay a $200 million breakup fee to Caterpillar should the deal be terminated under certain conditions, Bucyrus said in a filing.
Caterpillar was advised by JPMorgan Chase & Co. and its legal advisers were Mayer Brown LLP, Sidley Austin LLP and Howrey LLP. Bucyrus was advised by Deutsche Bank AG, UBS AG. Its legal advisers were Sullivan & Cromwell LLP and Arnold & Porter LLP.