Caterpillar Inc., in buying Bucyrus International Inc. for $8.6 billion in cash and debt last spring, acquired an expanded presence selling to companies benefiting from the ongoing commodities boom. It also put the spotlight on Bucyrus archrival Joy Global Inc., sparking a run of consolidation in the mining equipment sector and raising questions about Joy Global's long-term future as an independent company.
Bucyrus and Joy Global have been linked for more than 100 years, ever since Bucyrus moved from its namesake city in Ohio in 1893 to set up shop across town from Joy in Milwaukee. Bucyrus traces its roots back to supplying the steam shovels used to dig the Panama Canal but, like Joy, grew through the years to supply a range of underground and surface mining equipment.
Cat's purchase overnight transformed the rivalry, inserting the resources of a $42.6 billion-in-sales behemoth into a market where Joy and Bucyrus were of similar size and scale, generating about $3.5 billion in annual sales apiece.
Joy Global, which had done very little M&A since emerging from bankruptcy in 2001, has gone on the offensive in the months since the Cat-Bucyrus deal closed. The company last May spent $1.1 billion to acquire LeTourneau Technologies Inc. from Rowan Cos., and in July it spent $585 million for an initial 41% stake in Hong Kong-based International Mining Machinery Holdings Ltd. in a step toward buying the entire company.
That may not be enough. Joy has seen earnings grow from less than $1 per share in the fiscal quarter ended last January to $1.82 per share for its most recent period, fueled by a 27% increase in sales year over year on new orders from developing markets.
But the most recent results failed to hit analyst estimates, and the company's shares trade below year-ago levels. Should demand for commodities remain strong and mining investment continue, Joy Global, as one of the only remaining pure-play mining equipment companies, could be "a very attractive" target, according to a recent note from Barclays Capital analyst Andy Kaplowitz.
Also left to be seen is whether Bucyrus will prove to be a good deal for Cat. The company paid a rich 23 times consensus earnings, leading some skeptics to worry it was overpaying for a highly cyclical business at the top of the cycle.
But at least the company has cash to spend: Caterpillar weathered the recession better than most. And Cat has been vocal about its desire to expand into new markets, adding MWM Holding GmbH for $810 million and Electro-Motive Diesel Inc. for $820 million in addition to buying Bucyrus in an effort to move beyond its core U.S. construction market.
Caterpillar last month recouped $360 million of its purchase price by selling part of Bucyrus' distribution business to Sime Darby Bhd. of Malaysia. More Bucyrus-related divestitures are expected as Cat transitions the mining business to its own distribution platform.