The deal to create a huge global supplier of trucks, hydraulic shovels, blasting drills and coal-mining equipment marks a step-up in acquisitions by Caterpillar under its new chief executive, Doug Oberhelman.
The Peoria, Illinois-based company is increasing its exposure to the minerals sector at a time when demand for materials ranging from iron ore to coal is being spurred by rapid development in emerging markets like China and India.
"The mining segment for us is a key strategic area," Oberhelman, who took over from Jim Owens this year, said on CNBC television. "Demand for minerals, for coal, for lots of things that come out of the ground will be increasing as urbanization occurs."
The move could help Caterpillar continue to boost its exposure to fast-growing emerging economies. Bucyrus generates about a third of its revenue in the developing world.
"The emerging market demand is really what's driving things in the mining industry," said Jefferies & Co analyst Stephen Volkmann.
The deal marks Caterpillar's return to a market it exited in 2004, and where it will face the well established Joy Global Inc , which roughly splits the market with Bucyrus.
Bucyrus is a 125-year-old company named for the Ohio town where it was founded. It is now based in South Milwaukee, Wisconsin.
Early Cycle in Mining
Oberhelman said financing costs are very attractive, adding that Caterpillar would issue about $2 billion in new shares once the deal closes in mid-2011.
"We're at the early beginning of the cycle in our core business and in mining," he said.
The deal is the biggest in Caterpillar's 85-year history by "a long shot," said Jim Dugan, a company spokesman. Including $1 billion of Bucyrus debt being assumed by Caterpillar, the transaction is worth $8.6 billion.
Caterpillar already makes a wide range of mining equipment. Earlier this year it said it hoped to expand the line to meet demand from mining customers, who are scrambling to take advantage of rebounding prices for copper and other minerals.
That demand is driven by rapid infrastructure development in the developing world.
"It's probably smart long term," said Eli Lustgarten, an analyst at Longbow Securities. "Mining is a big part of Caterpillar's long-term future. It gives them a much, much broader product line with a very, very big installed base."
Analysts said they expect the deal to face little regulatory objection since there is minimal overlap between the two companies' product lines.
The combined companies expect to cut their costs by some $400 million, beginning by 2015, they said in a statement.
Bucyrus is less than a tenth Caterpillar's size, measured by revenue. Analysts look for the smaller company to earn $298.5 million on revenue of $3.56 billion this year, versus Caterpillar's expected profit of $2.55 billion on revenue of $41.13 billion, according to Thomson Reuters I/B/E/S
Shares of blue-chip Caterpillar have risen 42 percent this year, about three times the 14 percent rise of the Standard & Poor's capital goods industry group.
Digging Deeper
Emerging economies have been boosting investments in power infrastructure and other construction, driving demand for copper, iron ore and coal. A rosy outlook for demand and price stability have inspired miners to expand capacity.
Caterpillar's resolve to dig deep into the market coincides with a healthy rebound in customer spending, after the economic downturn significantly curbed miners' budgets. Global capital spending by mining companies will jump 50 percent to a record $113 billion in 2011, above the record $110 billion in 2008, according to Bernstein Research.
It is the latest in a string of deals in recent months by Caterpillar under Oberhelman. Last month it purchased MWM Holding GmbH, a German maker of gas and diesel engines, from British private equity firm 3i
