Replies to post #1777 on The Rising Influence of Rising Affluence

[DewDiligence]

BHP's Problem Is Caterpillar's Opportunity

http://online.wsj.com/article/SB10001424052748703326204575616760494426660.html

›NOVEMBER 16, 2010
By LIAM DENNING

Caterpillar's $7.6 billion acquisition of Bucyrus International coming a day after BHP Billiton said it would resume stock buybacks is surely coincidental. That doesn't mean they aren't linked.

The mining industry is printing money [e.g. #msg-56677555]: Citigroup expects it to have aggregate net cash of $70 billion by the end of 2012. BHP's buyback is designed to address an embarrassment of riches now that its bid for Potash Corp. of Saskatchewan is dead [#msg-56687568]. Similarly, Morgan Stanley sees Rio Tinto generating $79 billion beyond what it needs to pay off debt and fund capital-expenditure plans between 2010 and 2015.

When resource producers are rich, equipment providers do well, as anyone who owned oil-field-service stocks this past decade could tell you. Cash chases a slow-growing supply of tools, driving up prices and profits for the likes of Bucyrus.

Little wonder announced synergies relate mostly to pushing a wider suite of equipment through Caterpillar's dealers. This makes sense. But after upfront costs, and taxed and discounted at Caterpillar's own hurdle rate of 12%, synergies don't cover the $1.8 billion premium being paid.

Then again, the Federal Reserve is doing some printing of its own, so debt is cheap. Cut Caterpillar's discount rate to 10% and synergies cover the premium. And the company has effectively redeployed the $700 million it had earmarked for expanding its mining business organically.

Caterpillar has gone all-in on the commodities boom. In particular, Bucyrus should help Caterpillar tap into China's voracious appetite for coal more effectively. After the deal was announced Monday morning, shares in Bucyrus's main competitor, Joy Global, leapt. But just as BHP's Potash bid sparked a re-rating of fertilizer stocks, so Caterpillar's move should have investors re-evaluating coal miners [#msg-56398409, #msg-56547536, #msg-56388944, #msg-49742424].‹

[DewDiligence]

Webcast slides for CAT-BUCY merger:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzUxNzkzNnxDaGlsZElEPTQwNDM4MXxUeXBlPTI=&t=1

Slide #10 shows the competitive landscape in heavy mining equipment.

[DewDiligence]

CAT closes $8.8B Bucyrus acquisition:

http://finance.yahoo.com/news/Caterpillar-Completes-prnews-455310534.html?x=0&.v=1

The $8.8B figure includes $1.2B of assumed debt.

[DewDiligence]

CAT Acquires Chinese Machinery Company for $887M

http://online.wsj.com/article/SB10001424052970204358004577029553247909414.html

›NOVEMBER 11, 2011
By ALISON TUDOR And BOB TITA

Caterpillar Inc. said Thursday it intends to buy ERA Mining Machinery for as much as $887 million, giving Illinois-based Caterpillar greater exposure to the modernization of China's coal mines.

Caterpillar's offer represents a 33% premium to ERA's stock price in Hong Kong before trading was halted Monday in expectation of a takeover announcement. Caterpillar is the world's largest manufacturer of earth-moving and mining equipment.

ERA primarily makes hydraulic roof supports for underground mines and is the third-largest maker of roof supports in China based on sales. For the six months ended June 30, ERA recorded sales of HK$787.2 million (US$101.3 million), up 86% from the year-earlier period. Net profit for the six-month period totaled HK$20.9 million.

The purchase will fortify Caterpillar's recent acquisition of mining-equipment manufacturer Bucyrus International. Although Bucyrus makes roof supports, it and other Western mining-equipment companies have had difficulty penetrating China's coal-mining industry with their own brands and product lines. China's mining sector includes many smaller mine operators that are fiercely loyal to domestic machinery brands, industry observers say [LOL].

"You have to be a local player," said Lawrence De Maria, an analyst for brokerage firm William Blair & Co. "It makes sense for Caterpillar to do."

In a similar move to gain a greater presence in China, Caterpillar rival Joy Global Inc. said in July that it plans to purchase China's International Mining Machinery Holdings Ltd.

Demand for coal in China has been surging as rapid development drives expansion of coal-fired power-generating plants [no kidding]. For the first five months of 2011, electricity production in China rose 12% compared with the same period in 2010. China's coal industry has been undergoing a rapid transformation as the government pushes smaller mining companies to consolidate and deploy more mechanization to increase production and improve mine safety.

Citigroup advised Caterpillar and The Blackstone Group advised ERA.

The investments by Caterpillar and Joy Global represent bets that the mine modernization will continue to drive demand for equipment, even as the government's efforts to reel in inflation slows China's economic growth.

Moreover, Caterpillar's pursuit of ERA Mining suggests that the Peoria, Ill., company is confident that Chinese authorities will approve the acquisition. Acquisitions of Chinese companies by foreign buyers are running at a record pace, with 694 deals valued at a total of US$42.4 billion so far this year, according to data providers Dealogic.

But foreign companies have typically encountered difficulty in obtaining control of Chinese companies. Deals require approval by the Anti-Monopoly Bureau of the Ministry of Commerce and the government has wide latitude to block mergers and buyouts. Joy Global has yet to receive approval for its purchase of International Mining.‹

[DewDiligence]

CAT had a bad quarter due to sharp reductions in sales of heavy equipment, which is somewhat bullish for commodity prices insofar as supply can’t materially expand without large capital expenditures from the mining companies:

http://finance.yahoo.com/news/caterpillar-2q-profit-falls-43-122721848.html

The world's largest maker of construction and mining equipment posted a 43 percent slide in earnings and cut its profit and revenue outlook for the year.

… Profits fell in each of Caterpillar's big divisions. Operating profit fell 61 percent to $550 million in resource industries, which includes mining. It was down 47 percent to $362 million for construction equipment, and down 3 percent to $955 million in power systems, which makes items including large electrical generators and locomotive engines.

… Caterpillar…cut its full-year profit outlook from about $7 per share to $6.50. And revenue is now expected to come in between $56 billion and $58 billion, down from previous guidance of $57 billion to $61 billion.

CAT’s 2010 acquisition of BUCY is not looking too smart right now.