3rd UPDATE: Caterpillar Expands Rail Unit With Locomotive Buy
June 01 2010 - 5:39PM
Dow Jones News
Caterpillar Inc. (CAT) announced plans Tuesday to expand its
rail business by paying $820 million in cash for U.S. locomotive
maker Electro-Motive Diesel.
The planned deal would double the size of Caterpillar's rail
franchise and pit the company against General Electric Co. (GE) in
the locomotive sector at a time when global demand is recovering
with the help of government-led stimulus efforts.
Retiring Caterpillar CEO Jim Owens steered the company into rail
with the 2006 acquisition of U.S. repair specialist Progress Rail,
a year after union opposition blocked its efforts to acquire
Electro-Motive Diesel, or EMD, from General Motors.
Caterpillar plans to retain the EMD brand, which it is buying
from Berkshire Partners LLC and Greenbriar Equity Group LLC. It
aims to close by year-end, but it offered no guidance on how it
will finance the purchase or its impact on earnings.
Berkshire and Greenbriar bought the business from General Motors
Corp. in 2005, paying $201 million, and say they have helped it
bring in new management, renegotiate labor deals, upgrade
manufacturing facilities, and increase its focus on its
international business. They said that prior to the unsolicited
approach from Caterpillar, they had been considering a dividend
recapitalization of the company.
"Caterpillar is a very logical buyer," said Berkshire Managing
Director Larry Hamelsky. "EMD will benefit from partnering with a
large, global industrial company to support its next stage of
growth."
EMD had sales of $1.8 billion last year, up from $800 million at
the time of its buyout, and claims to have the largest installed
base of locomotives in the world with 33,000, including an
expanding presence in China and India. GE has 15,000 locomotives
operating worldwide.
Global locomotive sales have been highly cyclical but are
starting to recover and offer higher-margin streams from servicing
trains and associated equipment.
The latest acquisition takes Caterpillar's spending on rail to
$2 billion, including recent small bolt-on deals for a U.S. leasing
company, and an equipment business acquired from GE.
"This acquisition represents the latest step in our strategic
plan to aggressively grow our presence in the global rail
industry," said Caterpillar Vice Chairman and CEO-elect Doug
Oberhelman in a statement.
Oberhelman, who takes over as chief executive in July, was
instrumental in the acquisition of Progress Rail.
EMD provides Caterpillar with a new market for its diesel
engines in the aftermath of the company's exit from the
highway-truck-engine market this year.
Shares of Caterpillar on Tuesday closed about 2.5% lower at
$59.27.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
Robert.tita@dowjones.com
(Doug Cameron, Matt Jarzemsky and Daniel Hausmann contributed to
this article.)
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