Komatsu Makes U.S. Acquisition -- WSJ
July 22 2016 - 2:03AM
Dow Jones News
Japanese company to pay $2.9 billion for mining-equipment maker
Joy Global
By Bob Tita
The struggling mining equipment industry will soon be dominated
by two large companies: Japan's Komatsu Ltd. and its larger U.S.
rival, Caterpillar Inc.
Tokyo-based Komatsu said on Thursday it would buy U.S. equipment
manufacturer Joy Global Inc. for $2.9 billion in a bet that the
mining-equipment market will grow again starting in 2019.
Tumbling prices for mined commodities, such as iron ore, copper
and coal, have driven down demand for mining equipment, roughly a
$50 billion-a-year global industry, according to analysts'
estimates. Equipment makers have downsized operations and cut
costs, while mining companies have indicated that their capital
spending on equipment and mine expansions will continue to decrease
next year.
But Komatsu, which already makes supersize dump trucks used in
mining, said the acquisition would yield innovations that customers
will want to buy as the market recovers and allow it to sell more
complete lines of equipment.
The deal, which would be the largest in Komatsu's history, needs
the approval of Joy's shareholders and has to be reviewed by
antitrust regulators. Komatsu said it expects it to be completed by
the middle of next year.
Komatsu is Japan's leading seller of construction equipment and
the world's second-largest, behind Caterpillar, and already
generates more than 80% of its sales outside Japan. Once the deal
is completed, Komatsu and Caterpillar together would account for at
least a quarter of the world's mining equipment sales,analysts
say.
The Joy acquisition makes "excellent strategic sense," according
to Stephen Volkmann, an analyst for Jefferies & Co. "The
company will be able to provide the full line of mining equipment
to compete with Caterpillar at all levels."
But the success of the deal will largely depend on the recovery
of the equipment market.
Caterpillar pursued a similar strategy when it bought mining
equipment manufacturer Bucyrus International in 2011 for about $8
billion. The deal looked like a shrewd move at the time -- when
mined commodity markets were booming -- but equipment sales have
collapsed in recent years.
Milwaukee-based Joy Global has long been seen as an acquisition
target for a larger company. But more than half of Joy Global's
annual sales come from the coal-mining industry, which has been
hurt by low prices for natural gas and stricter environmental
standards that reduced coal usage for generating electricity.
Komatsu said it plans to operate Joy, which currently has about
12,000 employees, as a separate subsidiary. Thursday's announcement
didn't offer specifics about plants or the size of the Joy
workforce going forward.
A smaller coal industry in the U.S. could have a lasting effect
on Joy's business. Its sales last year were $3.1 billion, down 44%
from a recent high in 2012.
In its most recent quarterly report, Joy said orders for new
machinery were down 9%. Orders for service and repairs on machinery
already in use -- a key revenue source for Joy -- dropped 14%.
Joy said in a statement that the decision to sell the company
was based on "challenging market conditions the company believes
are likely to persist." Joy executives declined to comment
further.
Komatsu said it would pay $28.30 a share in cash for Joy's
stock, a 20% premium to Wednesday's closing price. Joy Global's was
recently trading up nearly 20% at $28.19.
Tokyo-based Komatsu is increasingly looking to acquisitions to
propel sluggish sales of its machinery. Other companies could step
up with higher bids for Joy, but the pool of potential candidates
appears small, given the consolidation that has already occurred in
the machinery sector, analysts say.
--Atsuko Fukase contributed to this article.
Write to Bob Tita at robert.tita@wsj.com
(END) Dow Jones Newswires
July 22, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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