Joy Global Tempts With Cheapest Industry Deal: Real M&A

Joy Global Tempts Komatsu With Cheapest Industry Deal
Joy Global, through its P&H Mining Equipment and Joy Mining Machinery businesses, makes everything from crushing equipment to blasthole drills and electric shovels for mining coal, copper and minerals. Photographer: Ariana Lindquist/Bloomberg

Joy Global Inc. is tempting potential acquirers with the chance to secure the world’s largest independent maker of underground mining equipment at the industry’s cheapest takeover valuation.

Joy Global has declined 43 percent since February as mining companies reduced spending amid falling demand for coal in the U.S., forcing the Milwaukee-based manufacturer to cut fiscal 2012 sales and earnings forecasts. The $5.8 billion company traded yesterday at 8.2 times earnings in the last 12 months, lower than 90 percent of similar-sized construction and mining equipment makers, according to data compiled by Bloomberg.

With Joy Global still expecting to post record sales this year and already generating profit margins that are double the industry median, the company may attract suitors such as Tokyo-based Komatsu Ltd. that are willing to bet on a rebound in commodities prices, BB&T Capital Markets said. A buyer could offer a premium of more than 80 percent -- an all-time high for the industry in the U.S. -- and still acquire Joy Global at the least expensive net income multiple on record, the data show.

“The valuation has gotten more attractive,” Stephen Volkmann, a New York-based analyst at Jefferies Group Inc., said in a telephone interview. “If you want to be in the global mining business, this is a way to bulk up in size pretty quickly. The stock is cheaper now, but the company is in good shape financially and margins are high.”

Sandy McKenzie, a spokeswoman for Joy Global, said the company doesn’t comment on speculation, when asked whether it is open to a sale or has been approached by potential buyers. Hiroshi Ishihara, a spokesman for Komatsu, said the company is unable to comment on any possible deals for individual companies.

Shovels, Drills

Joy Global, through its P&H Mining Equipment and Joy Mining Machinery businesses, makes everything from crushing equipment to blasthole drills and electric shovels for mining coal, copper and minerals.

The company last week lowered its sales and earnings projections for the fiscal year ending in October, citing weakened demand for coal in the U.S. and concern about slowing sales of the fuel internationally. The amount of coal used in U.S. electricity generation will fall this year to the lowest level since 1984, the U.S. Energy Department said last month.

Joy Global, which boosted net income in seven of the past eight years, still said it expects to post record sales of $5.5 billion to $5.7 billion this year, an increase of as much as 29 percent from fiscal 2011.

‘Exceptionally Cheap’

The company’s shares, which reached a high this year of $95.71 four months ago, fell to $54.53 yesterday, the lowest since August 2010. The Standard & Poor’s GSCI Spot Index of 24 raw materials fell 13 percent during the same period, including its biggest monthly decline since 2008 in May.

The stock drop left Joy Global valued yesterday at 8.2 times earnings, less than the median price-earnings ratio of about 13 for construction and mining equipment makers globally with a market capitalization greater than $1 billion, according to data compiled by Bloomberg.

“From the valuation multiples, they’re exceptionally cheap,” C. Schon Williams of BB&T said in a phone interview from Richmond, Virginia.

Today, Joy Global’s shares rose about 3 percent to $56.14, the fourth-biggest gain among 61 companies in the Standard & Poor’s 500 Industrials Index.

An acquirer could buy Joy Global’s equity for as much as $10.6 billion and still only value the company at 15.11 times its profit in the last 12 months, data compiled by Bloomberg show. That’s less than the U.S. construction and mining machinery industry’s record-low takeover valuation of 15.15 times net income when Parker Hannifin Corp. bought Commercial Intertech Corp. in 2000, the data show.

The potential premium of more than 80 percent for Joy Global would exceed the industry high of 55 percent.

High Margins

A buyer would be getting a company that earned 13.6 cents in net income from each dollar of sales in the last 12 months, data compiled by Bloomberg show. That’s more than twice the industry’s median profit margin of 6.4 percent. Komatsu, the world’s second-largest maker of excavators, had a profit margin of 8.4 percent, the data show.

Joy Global “is a very well-run company and has some of the highest margins within the machinery industry,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in a phone interview. “It’s always possible” that someone could look to acquire it.

The company also gets about 60 percent of its sales from maintenance and repair work, a recurring source of revenue that an acquirer may find appealing, according to Larry De Maria, a New York-based analyst for William Blair & Co.

Looking Out

Komatsu Chief Executive Officer Kunio Noji said in a December interview that he is looking for acquisition candidates in the U.S. and Europe and that potential targets include a manufacturer of underground mining equipment. That makes Komatsu the most logical suitor for Joy Global, BB&T’s Williams said.

“Right now it’s difficult to persuade targeted companies to be part of our company, and we don’t do hostile takeovers, but I think one day in two or three years they’ll come to us,” Noji said at the time.

Komatsu may feel compelled to consider a takeover of Joy Global now that it has gotten so much cheaper, Williams said.

“Given where the stock is, foreign machinery names such as Komatsu may be taking a harder look at it,” he said. “It’s a good management team, has good brands and it’s in an end-market that Komatsu has said they’re interested in.”

GE Purchases

General Electric Co. last month agreed to buy Australian mining equipment company Industrea Ltd. and signed an initial accord to acquire U.S. underground-mining equipment maker Fairchild International Inc.

While GE CEO Jeffrey Immelt said the company isn’t looking “for any big deals in 2012” and would probably focus on acquisitions between $1 billion and $3 billion, the two recent takeovers signal that it’s interested in expanding into the mining equipment business.

“Typically GE doesn’t look to be a small player in a big business, but rather a larger player in a big business,” William Blair’s De Maria said in a phone interview. GE may look to acquire Joy Global as soon as 2013, he said.

Andrew Williams, a spokesman for Fairfield, Connecticut-based GE, declined to comment on whether it was considering a takeover of Joy Global.

Joy Global’s management team may not want to sell while the stock is depressed, and the company has historically been more of an acquirer than a target, said Brookfield’s Levington. Joy Global completed $2.4 billion in deals in the last five years, data compiled by Bloomberg show.

Only Target

“There would have to be a pretty compelling reason to do it,” Levington said.

Still, after Caterpillar Inc.’s $8.6 billion takeover of mining equipment maker Bucyrus International Inc. last year, Joy Global is the only remaining target that would give buyers a leading position in mining machinery, Jefferies’ Volkmann said.

“It’s more a question of whether the current market conditions drive people to have conversations” about acquiring Joy Global, he said. “It’s really the last asset available.”

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