In a move that took the mining equipment sector—as well as investment analysts— by surprise, Caterpillar Inc. announced on November 15 it had entered into an agreement to acquire fellow mining supplier Bucyrus International for an outlay of $7.6 billion. The acquisition, said Caterpillar, will position the company to capitalize on what it sees as a robust long-term outlook for commodities-driven rapid growth in emerging markets.
Under the terms of the deal, which has been approved by the boards of directors of both companies, Bucyrus shareholders will receive $92 per share—$7.6 billion in aggregate, in cash. The transaction represents an implied premium of 32% to Bucyrus’ share price as of November 12, 2010. Caterpillar will fund the acquisition through a combination of cash from the balance sheet, debt and up to $2 billion in equity. Including assumption of $1 billion of Bucyrus net debt, the deal’s overall value is around $8.6 billion.
The transaction is expected to close in mid-2011. Caterpillar said it intends to maintain the Bucyrus brand for the principal Bucyrus legacy products, and will relocate its mining-business offices to the Milwaukee, Wisconsin area, where Bucyrus is headquartered. The integrated mining business group will fall under the purview of Steve Wunning, Caterpillar’s group president for resource industries.
With 2009 sales and revenues of $32.4 billion, Caterpillar is the world’s largest manufacturer of construction and mining equipment. Of that total revenue, approximately $18 billion came from machinery sales and another $11.4 billion from its engine business. About 28% of its 2009 machinery sales came from the mining sector, with another 7% from quarrying and aggregates.
Bucyrus’ 2009 revenues totaled $2.7 billion, an increase of 5.8% over the previous year, and its 2010 sales are predicted to total about $3.7 billion. Cat’s acquisition comes at a time when Bucyrus is in the process of assimilating a sizable acquisition of its own: the $1.3-billion purchase of Terex Mining announced in late 2009. The Terex acquisition expanded Bucyrus’ product portfolio to include hydraulic excavators, drills and haulage trucks, in addition to its existing rope shovel, dragline and underground mining products.
Founded in 1880, Bucyrus filed for Chapter 11 bankruptcy in 1994 but re-emerged in 1996 when stakeholders approved the revival of Bucyrus-Erie—as its mining equipment manufacturing business had been known since 1929—as Bucyrus International. Over the past decade, it became a more service-oriented company, rather than just a pure builder of ‘heavy iron,’ and expanded its business model and structure to become a global player. Roughly 75% of its revenue currently comes from outside the United States, almost a complete reversal from just a few decades ago when 80% of its income originated in the U.S.
The Bucyrus deal is the latest development in an extremely active year for Caterpillar, during which it initiated more than a dozen acquisitions, including locomotive maker Electro-Motive Diesel and German engine builder MWM; introduced a number of new products; and announced an aggressive expansion plan for its haulage truck product line and a program to design and produce hydraulic shovels (See “Cat to Develop New Mining Shovel Line and Expand Truck Production Capacity,” E&MJ July/August 2010, p. 86.)
“Our performance through the global economic turmoil of 2008–2009 allowed us to emerge with a strong balance sheet and the ability to make strategic investments in companies like Bucyrus,” said Caterpillar Chairman and CEO Doug Oberhelman.
Caterpillar predicted that by 2015 it could begin to benefit from more than $400 million in annual synergies from the Bucyrus purchase. Some of these, for example, would emerge from the support of Caterpillar’s global dealer network, offering a one-stop shop for global mining customers; application of Caterpillar’s remanufacturing products and services, as well as installation of Caterpillar engines and components in Bucyrus equipment; scale and cost efficiencies in areas such as purchasing and engineering; and manufacturing efficiencies through the Caterpillar Production System.
The abruptness of the acquisition—which developed and was executed over just a two-month period—caught many industry observers off guard, and during a conference call with industry analysts following the initial announcement, executives were questioned as to whether a bidding war had taken place; a premise Bucyrus CEO Tim Sullivan strongly denied.
“We were not shopping [Bucyrus]. Doug [Oberhelman] approached me 60 days ago,” Sullivan said. “We talked about the potential coming together of the two companies. The proposition of these two companies coming together and creating an enterprise, the value that we think these two companies coming together provides the marketplace, was the full story. And it [was such] a good combination for our shareholders and for our employees that we consummated the deal very quickly.”
From a mining equipment standpoint, the acquisition raises some questions about product-line overlap, as both Caterpillar and Bucyrus—through its purchase of Terex Mining—offer an extensive lineup of mine trucks. Although the large Terex haulers are electric drive and Caterpillar’s mining trucks have traditionally employed mechanical drive, Cat recently developed and is actively marketing its electric-drive, 350-ton 795F AC rigid-body hauler (See “OEMs Upshift as Haul Truck Market Picks Up Speed,” E&MJ November 2010, p. 28) In addition, Caterpillar announced in June it planned to re-enter the mining shovel market and would produce a line of hydraulic excavators spanning the 125- to 800-ton operating weight classes. Cat said it would begin pilot production of the 125-ton class shovel in early 2011, with commercial units expected to be available later in 2011. Commercial availability of larger shovels was planned for 2013–2014.
However, the former Terex, now Bucyrus, line of O&K hydraulic excavators spans an extensive size range topped by the 1,000-mt RH400, the largest shovel of its kind. Through a 2004 arrangement between Caterpillar and Terex, Cat’s independent dealers have been allowed to support the O&K excavators on a global basis.
Responding to questions from analysts regarding these potential product conflicts, Caterpillar Group President and CFO Ed Rapp said: “You’ve heard about our expansion of truck capacity in Decatur, what we’re going to do in India, and we see that investment happening. The place where we’ll take a look at the investment relative to our plans is in the hydraulic shovel area. And we’re going to take time to really understand that. I think the thing that is exciting about this deal, though, is it moves us into a full line provider of hydraulic shovels three to five years faster than we would have got there otherwise.
“Yes, we’ve got an electric truck under development in the test phase right now,” he said. “But as you’ve heard us talk in the past, the biggest challenge in the truck market today is capacity—having enough capacity. So we look at this as an opportunity to broaden that capacity base to better serve the market. So, I wouldn't be looking at rationalization. I’d look at [the acquisition as] primarily built around a growth story. On the truck side, as you know, historically, we’ve been a mechanical drive and the Bucyrus truck has been electric. In a lot of cases, we’ve served different markets. And so we do think that there are complementary features in terms of our truck offering that are very different than what their truck offering is.”
Oberhelman also commented on the perceived overlap. “It seems to me in product development we can more closely match the loading and hauling tools—the shovels and our trucks. We didn't have those big loading tools in the past; we stopped at a 994-size loader, for example.”
Another consideration that was unclear following the acquisition announcement was what role, if any, Bucyrus CEO Tim Sullivan would play in Caterpillar’s integrated mining group. Oberhelman said Sullivan had offered to stay until the closing of the transaction. Beyond that, he said, “Tim’s background and contacts in the customer world are an asset that we’ll be evaluating.”