Caterpillar Avoids Issuing Shares for Bucyrus; Uses Cash

Caterpillar Inc. (CAT) has scrapped plans to issue up to $2 billion worth of stock to pay for its purchase of mining-equipment manufacturer Bucyrus International Inc. (BUCY)

The world's largest maker of construction equipment will rely on its cash on hand for the more than $3 billion not covered by the company's debt package for the $7.6 billion purchase of Bucyrus. At the end of the first quarter, Caterpillar had about $3.6 billion in cash from its machinery and engine businesses, including $1.1 billion of free cash flow left over after capital expenditures and $350 million from the sale of a company-owned dealership.

The company's cash balance at the end of fourth quarter was about $1.8 billion, indicating the Peoria, Ill., company's core businesses are generating more than $1 billion a quarter in cash. At that rate, analysts say the payout for Bucyrus isn't likely to leave a long-lasting dent on the company's cash balance.

When Caterpillar said last November that it would acquire Bucyrus, the company said it intended to issue up to $2 billion in Caterpillar stock to pay for the deal. The decision to rely on cash instead suggests company executives are confident that end-market demand, particularly in China and North America, will remain strong in the coming quarters.

Caterpillar's "fundamentals--both market development and its ability to drive profitability--are progressing nicely," Stephen Volkmann, an analyst for Jefferies Equity Research, said in a note Thursday to investors.

Analysts also interpreted the decision not to expand Caterpillar's share count as a sign that company executives don't consider Caterpillar's stock to be overpriced. Expanding the number of shares is typically viewed as dilutive to the stock price.

Caterpillar's stock was recently trading up 1.3% at $104.58 a share. Over the past year, the stock price has climbed about 74%, more than three times as fast as the growth rate for the broad-market Standard & Poor's 500 Index. Caterpillar is trading at about 15 times its projected earnings for 2011 and 11.7 times the anticipated earnings for 2012.

Caterpillar's purchase of Milwaukee-based Bucyrus is the largest acquisition in the company's history. Caterpillar said Tuesday that it had sold a five-part bond issue that raised $4.5 billion for the purchase. The issue includes 18-month and two-year floating-rate note pieces and three-, 10- and 30-year fixed-rate tranches. The 18-month floating-rate tranche was sold for $500 million, the two-year floating-rate and three-year fixed-rate pieces were $750 million each, while the 10- and 30-year pieces are $1.25 billion apiece.

Late last week, Caterpillar received U.S. Justice Department approval to proceed with the Bucyrus purchase following a review of whether the purchase violated anti-trust laws.

   -By Bob Tita, Dow Jones Newswires; 312-750-4129; 
   [e-mail]