(CAT) Caterpillar Receives Approval for ERA Mining Machinery Limited Buy

Caterpillar Inc. (CAT) has received a go-ahead from the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) for the acquisition of China-based underground coal mining equipment manufacturer ERA Mining Machinery Limited.

ERA Mining Machinery primarily operates through its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co., Ltd., commonly known as Siwei. Siwei possesses a manufacturing base of 600,000 square meters in Zhengzhou, Henan province, where it manufactures and sells roof support equipment to underground mining customers in China.

The offer values ERA up to HKD $6,885 million ($886 million) on a fully diluted basis. It consists of two options: an all-cash alternative to acquire the shares for HKD 88 cents per share, and/or a loan note alternative which will entitle the loan note holder to receive a minimum of HKD 75 cents and up to HKD $1.15 per loan note upon redemption.

Caterpillar had announced its intention to acquire ERA in November last year. The acquisition is in tune with its strategy of strengthening its presence in the Chinese mining industry. This is yet another development in a series of investments carried out by Caterpillar to tap the growing Chinese market.

Caterpillar continues to make significant investments in China and announced a wide range of new facilities. Expansion of an R&D center in Wuxi, China is in the pipeline.

Caterpillar recently announced the expansion of its manufacturing facility in Xuzhou, China, which would augment hydraulic excavator by a substantial 80%. Furthermore, it is adding another product line and is also expanding its wholly owned, Chinese construction equipment company, Shandong Engineering Machinery (“SEM”).

This Siwei acquisition, if consummated, would build on Caterpillar’s recent purchase of Bucyrus International Inc., a South Milwaukee-based manufacturer of surface and underground mining equipment. The Bucyrus acquisition has positioned Caterpillar as the leading global mining original equipment manufacturer. The combined product portfolio dwarfs Joy Global Inc. (JOY), the only other manufacturer of surface and underground mining equipment in the US.

Joy Global is also eyeing the Chinese mining equipment market. In July 2011 the company acquired a 51.6% stake in International Mining Machinery Holdings Ltd., a leading designer and manufacturer of underground longwall coal mining equipment in China.

Caterpillar, like Joy Global, is riding the wave of heightened construction and mining activity in developing markets, triggered by the demand for coal, copper and iron ore. The company expects demand to continue expanding over the next decade.

Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in the emerging markets, will boost its long-term potential. However, in addition to the European debt crisis, signs of a slowdown in China have triggered concerns. China has slashed its 2012 growth target to an eight-year low of 7.5%. A slowing Chinese economy will have a negative effect on infrastructure and construction spending with an impact on Caterpillar’s sales in the near term.

Shares of Caterpillar presently retain a Zacks #1 Rank (short-term Strong Buy recommendation). We reiterate our long-term Neutral rating.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Caterpillar operates two divisions – M&PS and Financial Products. It competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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