Japan’s Top Mine Builders Pursue Deals for Commodities Recoveryby
Hitachi Construction to make Bradken its biggest acquisition
Deal follows rival Komatsu’s purchase of Joy Global in July
A second Japanese mining equipment maker is positioning itself for a recovery in commodities, after Hitachi Construction Machinery Co. followed its larger competitor Komatsu Ltd. in announcing what would be its biggest-ever acquisition.
Hitachi Construction, the world’s top maker of giant excavators, has offered A$689 million ($529 million) to buy Australian component maker Bradken Ltd. In July, Komatsu agreed to purchase U.S.-based rival Joy Global Inc. for a record $2.89 billion, signaling its optimism that demand for diggers and loaders will rebound after years of declining commodity prices.
“Miners have put the brakes on too hard,” Shinji Kuroda, an analyst at Credit Suisse Securities (Japan) Ltd., said by phone from Tokyo. “So the rebound will come at some point even if commodity prices continue to slump. The current size of demand for machines and parts has fallen below sustainable levels. The time for a recovery is coming. ”
Tokyo-based Hitachi Construction said Monday it’s offering A$3.25 a share, or a 34 percent premium on Bradken’s closing price on Friday. The Newcastle, New South Wales-based firm saw its stock surge 32 percent in Sydney to A$3.20 after its board recommended the deal.
The acquisition will enable Hitachi Construction to supplement its parts business for mining equipment and boost earnings, according to a statement. Nomura Securities Co. reckons the deal is likely to boost profit by about a tenth.
Bradken “appears to have a degree of competitiveness and profitability, raising the possibility of relatively stable profits as and when sharp corrections in demand for mining machinery come to an end,” Katsushi Saito, managing director of Nomura Securities, said in a note dated Oct. 3. “The number one priority will be to successfully complete the restructuring process at Bradken.”
Bradken, founded in 1922, produces goods from excavator parts to mineral crushing equipment. It announced in August it would streamline units and consider divesting non-core businesses. Nomura calculates the deal will boost Hitachi Construction’s earnings per share by about 10 percent for the financial year through March 2018.
The purchase will create synergies worth more than 20 billion yen ($196 million) in five to six years, Hitachi Construction’s Chief Executive Officer Yuichi Tsujimoto told a briefing. While the company doesn’t expect a demand recovery for mining equipment this fiscal year, it sees mid to long-term growth in the sector, he said.
Metals prices, as measured by the London Metals Exchange index of six contracts, entered a bull market last week, as an improving economy in China, the top consumer, and supply constraints caused by miners chopping production begin to reverse five years of losses.
“Demand for mining equipment could show double-digit growth in 2017,” said Credit Suisse’s Kuroda. And while the market won’t return to previous record levels, “the percentage growth could be big,” he said.
Hitachi Construction plans to start a tender offer for Bradken for six weeks from mid to late-October, according to its statement. The Australian company last year rejected a A$428 million offer from Koch Industries Inc. and Pacific Equity Partners, saying it didn’t reflect its value.
Hitachi Construction will use funds on hand as well as bank borrowing to finance the acquisition, which includes Bradken’s debt of A$288 million. It will also provide an interim A$450 million credit facility if existing debt provisions are affected by the change in control, according to a statement from the Australian company. The deal is subject to regulatory approvals.
The Japanese company, half owned by conglomerate Hitachi Ltd., is Japan’s No. 2 maker of construction and mining equipment and has the biggest share globally of giant excavators used in mines. Its stock gained as much as 1.8 percent in Tokyo and traded 1.1 percent higher at 2,034 yen as of 1:19 p.m. Komatsu, behind only Caterpillar Inc. of the U.S. in the sector, declined 0.2 percent.