The Biggest Deal in Big Equipment

When your machines have epitomized the gargantuan scale of global mining operations for 129 years running, nothing but a really big deal will do.

Building what CEO Tim Sullivan called "the largest portfolio of mining machinery in the world," Bucyrus (Nasdaq: BUCY  ) over the weekend announced a $1.3 billion friendly bid to acquire the mining equipment unit of Terex (NYSE: TEX  ) . Like the company's watershed acquisition of dragline excavator giant Marion in 1997, Bucyrus' competitive victory over Terex transforms the landscape of the mining equipment sector in a very big way.

While the deal itself did not find its way into this Fool's crystal ball, Bucyrus' competitive edge over Terex since the financial crisis took hold stemmed from Bucyrus' specialization within the least impaired of all industrial sectors: mining. Toss in Bucyrus' solid financial footing in contrast to Terex's shovel-sized debt load, and the ingredients for substantial outperformance were baked into the cake.

Terex will have the option to receive $300 million of the proceeds in Bucyrus shares. Given the enormous advances in both market share and economies of scale that Bucyrus gains in the transaction, I believe that Terex would be well-served to retain an investment in its former competitor. Bucyrus, after all, has just doubled the size of its potential market, and anticipates a 50% revenue boost alongside some $100 million in cost savings. As an added bonus, the venerable manufacturer gains a serious leg up on its remaining rival, Joy Global (Nasdaq: JOYG  ) .

Who makes what?
Stripped of its mining equipment unit, Terex becomes a more focused generalist. Terex will continue to produce aerial work platforms and backhoes for the construction sector, those familiar lift trucks for utility companies, asphalt layers and bridge inspection rigs for exposure to investments in infrastructure, and container port equipment from the resuscitated Fantuzzi acquisition. Terex will be well-positioned for broad economic recovery when it eventually comes, though this Fool will not be holding his breath.

Bucyrus takes a full suite of mining equipment, and makes it sweeter. Just as Cliffs Natural Resources (NYSE: CLF  ) is now a one-stop shop for steelmakers, diversified miners like Rio Tinto (NYSE: RTP  ) could now conceivably address all of their mining equipment needs through this single supplier.

Already a leading force in draglines and shovels, Bucyrus will now offer those monster trucks essential to carrying mined material away from the extraction site. In this regard, Bucyrus becomes a direct competitor to Caterpillar (NYSE: CAT  ) , as both companies will build trucks capable of handling 400 tons in a single load. Given Bucyrus' long-standing track record of building its way to competitive strength, Caterpillar is in no position to rest on its laurels. However, Caterpillar and Deere (NYSE: DE  ) will remain the giants in their respective niches, which include equipment for forestry and agricultural applications in addition to general construction equipment.

Bucyrus' existing line of underground longwall mining solutions and conveyor systems (acquired from DBT in 2007) will be complemented above ground by Terex's highwall equipment, hydraulic excavators, crushers and screeners, etc. The two companies' product lines may overlap a bit when it comes to blasthole drills, but otherwise this Fool finds little indication of redundancy in the pairing. Meanwhile, Bucyrus picks up 38 additional facilities to broaden its geographical reach with 100 locations worldwide.

Joy Global may be taking a backseat to Bucyrus here, but the Oracle of Milwaukee is not about to shy away from a battle of the monster diggers. Although Joy Global lacks those charismatic haul trucks and hefty highwall miners, the manufacturer can compete effectively with just about all other items in Bucyrus' newly expanded product line.

Like Bucyrus, Joy Global can equip both underground and surface miners with a full range of solutions from roof supports to conveyors. When it comes to the gargantuan draglines and shovels that spark the imaginations of young sandbox enthusiasts everywhere, Joy Global and Bucyrus are the undisputed titans.

The sector outlook
Joy Global was crystal clear in its recent assessment that foreign demand for commodities -- led prominently by China and India -- is driving the rapidly improving outlook for mining equipment manufacturers even as domestic demand shows no identifiable signs of recovery. For a comprehensive discussion of the interrelated outlooks for commodity demand, commodity prices, and the necessary mining equipment, I would direct Fools to my recent analysis, "The Ultimate Commodity Update."

According to the consistently astute management at Joy Global:

Seaborne traded commodity prices are strong and improving based on the strength of current demand from the emerging markets, the start of demand improvement from the industrialized countries, and the realization that mining will run out of excess capacity well before the industrial sector reaches its full capacity. Mining companies see the need to restart expansion projects and have been announcing significant increases in their capital expenditure budgets for 2010.

I believe it would be premature to interpret the Bucyrus/Terex deal as signifying anything tangible about the outlook for broader recovery in the American industrial base. With that said, this productive pair of proud American companies -- by empowering the global mining industry with innovative and durable machines -- stands as a hopeful reminder that America may yet produce its way back to real economic recovery.

It is your turn to sound off. Using the comments section below, please share your outlook for commodity demand and the mining equipment sector.

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Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Cliffs Natural Resources and The Fool owns shares of Terex. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy is busy learning Mandarin.


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