Caterpillar Inc. (CAT) is selling the distribution and support unit, formerly operated by Bucyrus International Inc. in Western Australia, Australian Capital Territory and New South Wales. The business will be bought by WesTrac Pty Limited of South Guildford, Western Australia, for $400 million. The sale of the unit is part of its integration of Bucyrus. WesTrac is a wholly owned subsidiary of Seven Group Holdings Limited and is one of the largest Caterpillar dealers in the world.
The distribution business was included in Caterpillar’s purchase of Bucyrus Inc., a South Milwaukee-based manufacturer of surface and underground mining equipment, in July 2011. The $8.8 billion buyout was the biggest deal ever in Caterpillar’s history. It capitalized on the rising demand for coal and minerals triggered by growth in emerging nations.
The current divestment is expected to close by the end of the second quarter. In December last year, Caterpillar sold a part of the Bucyrus distribution business to the Industrial Division of Sime Darby Berhad for $360 million. Again, in January this year, Caterpillar sold the distribution and support unit formerly operated by Bucyrus. in South America, Western Canada and the United Kingdom, to Finning International Inc. of Vancouver, Canada, for $465 million.
Caterpillar is also in discussion with WesTrac regarding the former Bucyrus distribution and support businesses in the WesTrac dealership territories in North Eastern China. Caterpillar is systematically divesting the Bucyrus distribution businesses, preferably to its dealers having mining activities in their territories. Cat however will operate the Bucyrus distribution business until the transitions have occurred in a given territory.
The Caterpillar-Bucyrus combined portfolio broadens Caterpillar's mining equipment product line, resulting in the most expansive product offering in the mining equipment industry. Furthermore, Caterpillar can leverage Bucyrus’ strong presence in the emerging markets, its successful aftermarket parts business and support services for its equipment. The Bucyrus acquisition positions Caterpillar as the leading global mining original equipment manufacturer. The combined product portfolio dwarfs Joy Global Inc. (JOY), the only other manufacturer of surface and underground mining equipment in the US.
Caterpillar’s backlog is at a record level, which holds promise for the year ahead. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in the emerging markets, will boost its long-term potential. Add to it, the company’s top line will continue to grow on the back of increasing demand for construction and mining equipment in the long term.
However, recent monthly sales data reflect a slowdown from the torrid pace of growth witnessed early last year. This may be the fallout of the European debt crisis, the ensuing uncertainties and the threat of moderating growth in China. Shares of Caterpillar presently retain a Zacks #3 Rank (short-term Strong Hold recommendation).
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. Caterpillar operates two divisions – M&PS and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).
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