Caterpillar Eyes ERA Mining - Analyst Blog

Caterpillar Inc. (CAT) in tune with its twin strategies of strengthening its presence in the mining industry in China has made an offer to acquire China based underground coal mining equipment manufacturer ERA Mining Machinery Limited.

ERA Mining Machinery primarily operates through its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co., Ltd., commonly known as Siwei. Siwei possesses a manufacturing base of 600,000 square meters in Zhengzhou, Henan province, where it manufactures and sells roof support equipment to underground mining customers in China.

The offer values ERA up to HKD $6,885 million ($886 million) on a fully diluted basis. It consists of two options - an all-cash alternative to acquire the shares for HKD 88 cents per share, and/or a loan note alternative, which will entitle the loan note holder to receive a minimum of HKD 75 cents and up to HKD $1.15 per loan note upon redemption.

This is another development in a series of investments carried out by Caterpillar in line with its long-term strategies to tap the growing Chinese market. During the past three decades, Caterpillar has grown from a single sales office in Beijing to 16 locations for manufacturing, 4 research and development facilities, 3 logistics and parts centers and other offices.

Caterpillar continues to make significant investments in China and announced a wide range of new facilities, with a total of nine new facilities under construction. 

This acquisition, if consummated, would build on Caterpillar’s recent purchase of Bucyrus International Inc., a South Milwaukee-based manufacturer of surface and underground mining equipment. The Bucyrus acquisition has positioned Caterpillar as the leading global mining original equipment manufacturer. The combined product portfolio dwarfs Joy Global Inc. (JOYG), the only other manufacturer of surface and underground mining equipment in the US.

Joy Global is also eying the Chinese mining equipment market. In July the company acquired a 51.6% stake in International Mining Machinery Holdings Ltd., a leading designer and manufacturer of underground longwall coal mining equipment in China.

Caterpillar is riding the wave of heightened construction and mining activity in the developing markets, triggered by the demand for coal, copper and iron ore. The company expects demand to continue expanding over the next decade.

Needless to say, Caterpillar’s strong brand name, pricing power and global dealer network put it in an advantageous position to exploit the growing need for infrastructure development worldwide. Shares of Caterpillar presently retain a Zacks #3 Rank (short-term Hold recommendation). We also reiterate our long-term Neutral rating.

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 three divisions – Machines, Engines and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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