Caterpillar digs deep in $7.6b deal for Bucyrus

Caterpillar Inc, the world's largest construction and mining equipment maker, moved aggressively to capitalise on demand in emerging markets Monday with a US$7.6 billion buyout of Bucyrus International.

Bucyrus makes surface mining equipment used for coal, copper, iron ore, oil sands, and other minerals.

With a grinding economic recovery ongoing in the West, global companies like Caterpillar have driven further into China, India, and Brazil, where the appetite for raw materials used in construction and mining is strong.

Caterpillar said last month its third-quarter profit doubled, thanks in large part to growth in those markets.

With the Bucyrus deal, Caterpillar seeks to expand its footprint in countries that are "improving infrastructure, rapidly developing urban areas, and industrialising their economies," the company said Monday.

After years of cutting costs, industry experts had been waiting for a major acquisition like the one Caterpillar announced.

"I think Caterpillar is definitely doubling down, not just on emerging markets, but on commodities in general," Morningstar analyst Adam Fleck said. "Caterpillar is suggesting that we're in the very early innings of the commodity price rebound."

Specifically, Fleck thinks Caterpillar is focusing on coal, of which China is a massive importer.

If approved, the acquisition would double Caterpillar's mining revenue.

To land Bucyrus International Inc, based in South Milwaukee, Wisconsin, Caterpillar will pay US$92 per share, a 32 per cent premium to Bucyrus' closing price on Friday.

The deal, which is valued at US$8.6 billion including debt, is expected to close in mid-2011.

Drastic cuts

Caterpillar made drastic cuts during the recession, vowing then that it would be in a better position when the economy rebounded. It cut 37,000 full-time, contract, and part-time workers, though it has since hired back about 15,000 people.

"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

The Peoria, Illinois, company said last month it expects the global economy to grow by about 3.5 per cent next year, on par with economists' forecasts.

But the company predicts developing regions will grow at about double that rate.

- AP

And even in the emerging economies where growth is slower, Caterpillar said the replacement of worn out machinery will drive sales even before those economies markedly improve.

The deal, which got the go-ahead from both company boards, still requires approval by regulators and Bucyrus shareholders. Caterpillar expects to save about US$400 million a year from the acquisition, starting in 2015.

AP