Tuesday, December 14, 2010

Buyout Analysis of Caterpillar’s Agreement to Acquire Bucyrus International

On November 15, 2010 Caterpillar Inc. (CAT) announced its agreement to acquire Bucyrus International, Inc. (BUCY) for $92 per share.  The transaction is expected to close in mid-2011.

I did a forecast of BUCY’s future operations assuming a 26.4% growth in revenues in 2010 and 8.0% per year for the years 2011 through 2014; and operating margins of 14.8% in 2010 and 17% for years 2011 through 2014.

Given that forecast and other assumptions (see link below), I calculated a financial buyer’s estimated pretax rate-of-return (PROR) resulting from buying BUCY in a hypothetical asset purchase in which the sellers receive net proceeds equal to $92 per share.  The purchase price is based on BUCY’s 82.253 million fully diluted shares outstanding for the quarter ended September 30, 2010. 

The results of the buyout analysis show an estimated PROR of approximately 11.0% on the financial buyer’s equity investment.  The return would be lower if the buyer were required to grant warrants to subordinated debt providers.

The return for CAT would likely be higher due to operational synergies not available to a financial buyer.  That said, if a financial buyer were able to reduce forecasted operating expenses by 10% per year during its four year ownership period, the estimated PROR on its equity investment would increase from approximately 11.0% to 16.5% - still a low expected return for private equity investments.   

Click here to access PDFs of the various buyout analysis reports at Google Docs. The “Overview” narrative report describes the valuation method and results.

[Note:  If you sign in to Google Docs using your Google account information, Google Docs allows you to view, print and download the buyout analysis reports]


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