Caterpillar Leaps to the Top of Mining Equipment

Wow! Caterpillar Inc. announced it will purchase Bucyrus Intl. Inc. (BII) for $7.6 billion cash plus assumption of $1 billion of BII debt for a total transaction price of $8.6 billion or $92 per share, a 32% premium to the BII closing price the day before. The deal is expected to close in mid-2011.

This year BII will have revenues of approximately $3.75, which are all mining related. Caterpillar’s estimated 2010 mining related revenues are $3.9 billion. With only one possibly redundant product category between the two companies (electric-drive trucks, where Cat products are still in development), it is reasonable to add revenues from both companies totaling $7.65 billion in mining equipment sales if they were one company today.

More than 18% of Caterpillar’s revenues would be from mining, making Caterpillar far and away the largest manufacturer of mining equipment worldwide. Komatsu is expected to have 2010 mining equipment revenues of $4.8 billion and BII’s direct competitor, Joy Global (P&H Mining Equipment and Joy Mining Machinery), will have 2010 revenues of approximately $3.4 billion.

What Bucyrus gains.

Massive worldwide distribution for sales, and product support. Caterpillar and BII will have to work out which products will be sold through the Caterpillar dealer network and which ones will be retained for direct sales. Most of Caterpillar’s products are sold through its dealer network but one candidate for direct sales will probably be draglines, some of which cost $100 million.

Manufacturing technology and Caterpillar purchasing power. Many of BII’s products are built as one-off units and would benefit from the Caterpillar Production System expertise as well as Caterpillar’s purchasing power, especially for steel and components. Caterpillar will eventually be able to supply its diesel engines and drive train components for use in BII machines as well.

Caterpillar’s engineering support. Caterpillar has a huge engineering and research budget some of which could easily be repurposed to assist BII with its products.

Sales advantages. The mining industry has become extremely concentrated in the past 10 years. Both BII and Caterpillar management commented that their customers want fewer suppliers and would like to work with one that can offer an entire mine system.

Financing. Caterpillar Financial will be able to offer financing to mining customers. The division recently financed a complete spread of equipment for a start-up iron ore company in Scandinavia.

BII shareholders will receive an attractive price for their shares compared with other companies in the industry.

What does Caterpillar gain?

BII products in the field. Caterpillar estimated the installed BII base has a replacement value of $40 billion. Cat dealers will be able to improve after-sale support for those machines. BII’s revenues are divided 49% new equipment and 51% parts.

One-stop shopping for mines. Both Caterpillar and BII management have said their customers are asking for this.

Terex (O&K) hydraulic shovels. Caterpillar dealers have sold about 30% of the $500 million in annual sales of the O&K machines; the rest has been sold mostly manufacturer direct. Availability of the shovels to the rest of the Caterpillar network will undoubtedly result in bonus business for Caterpillar. The O&K excavators have been among the most successful in the marketplace, and the machine population is probably among the highest in the business, having been sold for nearly 30 years.