Caterpillar Continues To Extract Value From Bucyrus’ Distribution Business

by Trefis Team
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Low mining investments worldwide due to softening prices of iron ore and several other base metals has weighed on Caterpillar‘s (NYSE:CAT) growth outlook. However, the company continues to unlock value in its mining business by divesting the distribution business of Bucyrus Inc., the mining company it acquired in July 2011 for $8.8 billion. [1]

The Bucyrus acquisition not only provided Caterpillar with a broad range of surface and underground mining products and solutions but also positioned it as the largest provider of mining equipment and machinery in the world. However, at the time of acquisition, the two companies had starkly different distribution models and ever since Caterpillar has been aligning Bucyrus’ distribution model with its own to generate further value in its mining business.

We currently have a stock price estimate of $90.26 for the company, approximately 5% above its current market price.

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Different distribution models of Caterpillar and Bucyrus

Caterpillar for long has maintained a distribution strategy where all its products are sold and serviced by a worldwide network of dealers. For a company of its size, this strategy enables relatively faster growth by utilizing the independent and entrepreneurial attitude of dealers. On the other hand, Bucyrus employed a predominantly direct model to sell and service its products. To align these two different distribution models, Caterpillar has been selling Bucyrus’ distribution business to its existing dealers.

The company has been able to make this alignment in several parts of the world, including several states of Australia, portions of South America, Western Canada, the UK, Peru, South Africa, Botswana, and in the U.S. in Kentucky, southern Indiana, southeastern Ohio and portions of West Virginia. Caterpillar continues to hold discussions with its other dealers that have mining activity in their territories, and and will continue to operate the former Bucyrus distribution business until the transitions have occurred in a given territory.

Caterpillar’s alignment of the two distribution models generates value in its mining business

The sale of Bucyrus’ distribution business to Caterpillar dealers has generated substantial cash for the company. In the second and third quarters of 2012, Caterpillar generated $973 million through seven such sale transactions. [2] In addition, aligning Bucyrus’ distribution business with its dealers rationalizes cost structures and supports margins for the company. Caterpillar’s dealers are able to utilize their existing customer relationships to increase sales of Bucyrus products. Also, a single point of contact for Caterpillar’s mining customers improves the company’s service standards.

All in all, in the current weak global mining industry, Caterpillar’s divestiture of Bucyrus’ distribution business to its existing dealers generates cash, saves costs and raises service standards, thereby generating further value for its mining business.

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Notes:
  1. Caterpillar Completes Acquisition of Bucyrus, Creating Mining Equipment Group With Unmatched Product Range and Unrivaled Customer Support, July 8 2011, www.caterpillar.com []
  2. 2012 Q3 10-Q, www.caterpillar.com []
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