Caterpillar in a Deal to Buy Chinese Mining Machinery Maker

Caterpillar Inc (NYSE:CAT) said on Thursday that it has made an offer of $885 million to buy Chinese ERA Mining Machinery.

This acquisition will strengthen Caterpillar’s mining business, giving it greater exposure to the modernization of Chinese coal mines. A 33 percent premium to ERA’s stock price is represented in Caterpillar’s proposal, on Monday at Hong Kong before trading came to halt following the expectations of a takeover announcement. Caterpillar, the largest manufacturer of mining and earth moving equipment in the world, said that it has received approval from Chinese government’s Ministry of Commerce.

ERA, the Chinese based company,  primarily manufactures hydraulic roof supports for underground mines  and based on sales is the third largest roof support manufacturer in China. ERA documented sales of about HK $787.2 million in the first two fiscal quarters this year, up 86 percent compared to last year in the same period. Total net earnings for the six month period accounted to around HK $20.9 million.

This acquisition will strengthen Caterpillar’s recent acquisition of Bucyrus International, another mining machinery manufacturer. Although Bucyrus manufactures hydraulic roof supports, it and other Western mining machinery manufacturers find it difficult to penetrate into the Chinese coal mining industry with their own line of products and brands. Industry observers say that in China several mining operators are extremely loyal to local machinery brands. Earlier investments in mining have paid off for Caterpillar, mostly because of solid demand for resources.

Caterpillar Inc. last year made the acquisition of Bucyrus International for almost $9 billion. This acquisition gave the conventional heavy machinery manufacturer a major presence in mining industry.

According to Caterpillar the acquisition of ERA Mining Machinery will add around $5 billion to the sales o the company in 2012. Caterpillar is also looking at substantial growth from the Chinese market in the heavy machinery sector, with numerous public and private projects about to take off.

Another equipment maker who saw substantial increase in mining related sales was Milwaukee based Joy Global Inc. Joy Global also has a strong presence in China and has seen a health rise in the sales of mining equipment.

Chinese companies are major buyers of coals, inventories of that resource are being worked down since the past few months. These purchasers will restock their supplies in the future, which will lead to a spur in coal demand, without any effects from slowdown in Chinese economy.

ERA manufactures mining equipment in China. After the acquisition by Caterpillar, the current Chief Executive Officer of ERA will continue to lead the coapany.

Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.