Caterpillar Unearths a Solid Purchase

Caterpillar (NYSE: CAT  ) , the large Peoria-based manufacturer of construction and mining equipment, successfully rode out the global economic decline. Now it's signaling its belief that the recent commodities recovery is here to stay.

On Monday, the company announced that it will pay $7.6 billion -- $8.6 billion, including net debt -- for Bucyrus (Nasdaq: BUCY  ) , a maker of surface mining equipment. That translates to $92 for each of Bucyrus's shares, a 32% premium above Friday's $69.62 close. Bucyrus's products are used in the production of such minerals as coal, copper, iron ore, and oil from tar sands. To pay for the deal, Caterpillar will likely employ cash, debt, and as much as $2 billion in equity.

While commodities demand has yet to bounce back in traditional markets, minerals-rich developing nations such as Brazil, China, and India appear to be taking up much of the slack. As a result -- and following staff cuts involving 37,000 full-time and contract employees when many of its markets softened -- Caterpillar was able to double its profit in the third quarter.

The newly announced deal -- which is expected to close in mid-2011 -- follows Bucyrus's $1.3 billion acquisition of Terex's (NYSE: TEX  ) mining-equipment division in February. That purchase gave Bucyrus a more robust product line than Milwaukee neighbor and close competitor Joy Global (Nasdaq: JOYG  ) , as Bucyrus attempted to become a one-stop shop for mining. Now it appears that Caterpillar will realize that vision.

In announcing the planned purchase, Caterpillar's still-new CEO Doug Oberhelman said: "For several years, mining customers have been asking us to expand our range of products and services to better serve their increasingly complex requirements. This announcement says to those customers, we heard you loud and clear." He also predicted that "this, and other recent acquisitions, will position Caterpillar for industry leadership and will be positive for our stockholders, customers, and employees."

The announcement accompanies other news from the mining industry: Australia's BHP Billiton (NYSE: BHP  ) , the world's biggest miner, is not surprisingly throwing in the towel on its $38.6 billion offer for PotashCorp (NYSE: POT  ) , amid Canadian opposition. BHP previously failed to complete a proposed purchase of Rio Tinto (NYSE: RIO  ) and an iron ore joint venture with the same company. Perhaps BHP has simply grown too large to gain approval for a sizable deal.

Caterpillar's need to gain regulatory approvals, along with that of Bucyrus shareholders, appears less problematic, especially with blessings in hand from both boards. Furthermore, I'm convinced that the proposed deal appears to portend an excellent fit. And with Mr. Oberhelman alluding to Caterpillar potentially earning $10 per share by 2012, it's difficult to see how the company also wouldn't fit nicely into Foolish portfolios.   

The Fool has established a bear put spread position on Caterpillar. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't have financial interest in any of the companies named above. The Motley Fool has a disclosure policy.


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