CAT Sells Bucyrus' South African Biz

Caterpillar Inc. (CAT - Analyst Report) is selling the equipment, distribution and support business, formerly operated by Bucyrus International in South Africa and Botswana, to Barloworld for $115 million. Caterpillar has also assigned to Barloworld its agreements with Eqstra NH Equipment (Pty) Limited and Eqstra Botswana (Pty) Limited for the purchase of Eqstra’s South Africa and Botswana Bucyrus distributorship and mining services businesses. The total deal is valued at $175 million.

The transaction pursuant to customary closing conditions and regulatory approvals is expected to close in the third quarter of 2012. On completion, Barloworld will provide sales, service and support for all of the former Bucyrus mining products in all its dealership territories in southern Africa.

The 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.

Caterpillar is systematically divesting the Bucyrus distribution businesses, preferably to its dealers having mining activities in their territories. Caterpillar, however, will operate the Bucyrus distribution business until the transitions have occurred in any given territory.

Last month, Caterpillar announced the sale of Bucyrus’ distribution and support unit in Western Australia, Australian Capital Territory and New South Wales to WesTrac Pty Limited for $400 million and Bucyrus’ distribution and support business in Peru to Ferreyros S.A.A. for $75 million.

Earlier, in January, Caterpillar inked a deal to sell Bucyrus’ distribution and support unit in South America, Western Canada and the United Kingdom, to Finning International Inc for $465 million. In last December, Caterpillar sold a part of the Bucyrus distribution business to the Industrial Division of Sime Darby Berhad for $360 million.

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.

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.

However, margin headwinds, the European debt crisis and a slowing Chinese economy may affect its earnings in the near term. Thus, we maintain our Neutral recommendation on Caterpillar. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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 - Snapshot Report), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).