By Robert Guy Matthews
Of THE WALL STREET JOURNAL
Caterpillar Inc. is pushing further into the rail business by
buying a maker of locomotives, and taking on General Electric Co.
in the process.
On Tuesday, the heavy-equipment maker said it would pay $820
million for Electro-Motive Diesel, in a bet that freight transport
will grow as the economy strengthens.
Caterpillar, which has invested close to $1.2 billion since 2006
in the rail and transit sector, said its acquisition of
Electro-Motive Diesel will make it the second largest locomotive
and rail services provider in the U.S. behind GE. The investment
adds a production component to Caterpillar's existing rail repair
and service business.
"This acquisition represents the latest step in our strategic
plan to aggressively grow our presence in the global rail
industry," said Caterpillar Vice Chairman Doug Oberhelman, who
takes over as chief executive of Caterpillar in July.
Electro-Motive, which was owned by Berkshire Partners LLC and
Greenbriar Equity Group LLC, had sales of $1.8 billion in 2009.
In 2006, Caterpillar spent $800 million in cash and stock to buy
Progress Rail Services, a railcar maintenance and repair business.
Electro-Motive will become a unit of Progress Rail.
For the last couple years, Caterpillar has been looking to
expand into manufacturing-related services to help offset the
cyclical demand in capital goods. Often during recessions,
companies invest less in new equipment than in servicing existing
machines. Providing aftermarket services allows Caterpillar to tap
into a stream of revenue when original equipment sales slow.
The rail business has been under pressure as the recession put
the brakes on demand for diesel trains to transport goods across
the country. But government spending on stimulus projects is
expected to spur rail projects, as will demand for consumer goods
as the economy recovers.
"What this does is position them as one of the top two players
in the U.S., along with GE," says Lawrence De Maria, industrial
analyst for Sterne Agee.
Once the Electro-Motive Diesel acquisition is completed,
expected by year end, Caterpillar, along with its subsidiary
Progress Rail Services, will have the biggest locomotive customer
fleet on the rails, he said. Electro-Motive Diesel has an installed
base of 33,000 locomotives, and an expanding presence in China and
India.
GE has 15,000 locomotives operating world-wide.
The deal combines two Illinois companies: Caterpillar is based
in Peoria and Electro-Motive is in LaGrange.
(Bob Tita contributed to this article.)