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Caterpillar Now A Miner Major
At least one major global corporation is making a very large, very public bet that growth in commodity exploration and extraction is here to stay. Caterpillar (NYSE:CAT) announced a large deal on Monday whereby it is buying mining equipment maker Bucyrus (Nasdaq:BUCY) for $8.6 billion in cash. With this deal, Caterpillar will now get upwards of 20% of its revenue from the mining category and will become the only player in the world that touches every major category of mining equipment.
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The Proposed Deal
By the terms of the deal, Caterpillar will pay $92 per share in cash to the holders of Bucyrus stock. That is a net price tag of $7.6 billion and a 32% premium to Fridays' closing price. This is a robust price for Bucryus by almost any standard. Not only is this is 22% premium to the 2008 boom-time high in the stock, but it values Bucyrus at a trailing EV/EBITDA of over 15, a future EV/EBITDA of nearly 12 and more than double the 2011 revenue estimate for the company. To put this in context, 8 to 10 times EBITDA is generally considered to be a quite healthy forward multiple for this type of company.
What CAT Gets
In buying Bucyrus, Caterpillar becomes a complete mining equipment company. Mining was already a significant business here (10% of last quarter's revenue) and a growth driver (over 100% year-on-year growth in the last quarter). All of that was achieved, though, with a rather limited product line; Caterpillar is a major player in the dozers, wheel loaders, trucks and excavators but did nothing in terms of drills, shovels, draglines, belt systems and so on.
With Bucyrus in the fold, and including Bucyrus' acquisition of Terex's (NYSE:TEX) mining business, the new company will cover every significant category of mining equipment. It is fair to assume, then, that there could be potentially huge synergies for Caterpillar and significant cross-sell opportunities.
Where Does This Leave the Sector?
There is an investing cliché that says it is often better for investors to invest in picks and shovels rather than try to succeed in finding gold themselves. With this deal, that advice becomes much harder to follow. Joy Global (Nasdaq:JOYG) will stand as the clearest (and really only) pure play - with a sizable business in surface drills, draglines, belt systems, shearers and so on but no exposure to "trucks" (machinery like dozers, excavators, wheel loaders and so on).
What of the other companies? Komatsu (Nasdaq:KMTUY) is quite similar to Caterpillar in some respects, with a decent business in those "trucks" and excavators, but quite a bit more exposure to construction. Hitachi likewise has a small mining business, while Swedish companies Atlas Copco and Sandvik are active in segments like drills (both) and belt systems (Sandvik). It will be interesting to see, then, if there are any deals done as a reaction to this merger in an attempt to likewise create an all-in-one competitor to rival the new Caterpillar mining business.
The Bottom Line
Clearly, Caterpillar is sending a message to every investor that it expects mining to be a growth market for some time to come. Given that coal mining alone is such a huge part of the mining category and coal is so critical to global electricity generation, Caterpillar is making a reasonable prediction that Peabody (NYSE:BTU) and its peers will need to keep digging. If Caterpillar is right overall, though, and the Freeport McMoRans (NYSE:FCX) and Rio Tintos (NYSE:RIO) of the world continue to see high prices, the demand for mining equipment is only going to get stronger and mining will be a major part of Caterpillar's profit base for years to come. (For more, see Analyzing An Acquisition Announcement.)
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Proposed Deal
By the terms of the deal, Caterpillar will pay $92 per share in cash to the holders of Bucyrus stock. That is a net price tag of $7.6 billion and a 32% premium to Fridays' closing price. This is a robust price for Bucryus by almost any standard. Not only is this is 22% premium to the 2008 boom-time high in the stock, but it values Bucyrus at a trailing EV/EBITDA of over 15, a future EV/EBITDA of nearly 12 and more than double the 2011 revenue estimate for the company. To put this in context, 8 to 10 times EBITDA is generally considered to be a quite healthy forward multiple for this type of company.
What CAT Gets
In buying Bucyrus, Caterpillar becomes a complete mining equipment company. Mining was already a significant business here (10% of last quarter's revenue) and a growth driver (over 100% year-on-year growth in the last quarter). All of that was achieved, though, with a rather limited product line; Caterpillar is a major player in the dozers, wheel loaders, trucks and excavators but did nothing in terms of drills, shovels, draglines, belt systems and so on.
Where Does This Leave the Sector?
There is an investing cliché that says it is often better for investors to invest in picks and shovels rather than try to succeed in finding gold themselves. With this deal, that advice becomes much harder to follow. Joy Global (Nasdaq:JOYG) will stand as the clearest (and really only) pure play - with a sizable business in surface drills, draglines, belt systems, shearers and so on but no exposure to "trucks" (machinery like dozers, excavators, wheel loaders and so on).
What of the other companies? Komatsu (Nasdaq:KMTUY) is quite similar to Caterpillar in some respects, with a decent business in those "trucks" and excavators, but quite a bit more exposure to construction. Hitachi likewise has a small mining business, while Swedish companies Atlas Copco and Sandvik are active in segments like drills (both) and belt systems (Sandvik). It will be interesting to see, then, if there are any deals done as a reaction to this merger in an attempt to likewise create an all-in-one competitor to rival the new Caterpillar mining business.
The Bottom Line
Clearly, Caterpillar is sending a message to every investor that it expects mining to be a growth market for some time to come. Given that coal mining alone is such a huge part of the mining category and coal is so critical to global electricity generation, Caterpillar is making a reasonable prediction that Peabody (NYSE:BTU) and its peers will need to keep digging. If Caterpillar is right overall, though, and the Freeport McMoRans (NYSE:FCX) and Rio Tintos (NYSE:RIO) of the world continue to see high prices, the demand for mining equipment is only going to get stronger and mining will be a major part of Caterpillar's profit base for years to come. (For more, see Analyzing An Acquisition Announcement.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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