Tuesday, December 22, 2009

More Color on the Terex (TEX) - Bucyrus (BUCY) Deal

One must always be cautious when analyzing any sort of deals, purchases, or mergers because if you listen to CEOs every deal done in the history of man has been a "win".  That said, the more I look at the Bucyrus (BUCY) - Terex (TEX) deal the more this one is appealing for both sides; for different reasons. 

Terex (TEX) was one of those companies who lived off the building mania happening in places like Dubai and China i.e. the joke a few years ago was what is the most popular bird in Dubai?  The crane. Due to a massive debt load relative to its market capitalization the stock was under serious pressure and there was talk of "very bad outcomes" as covenants looked to be broken [Feb 12, 2009: Terex Warns of Losses, Job Cuts, and Covenants].  I was actually warning about this company in fall 2008 [Sep 4, 2008: Terex, IBM - Be Careful What you Wish For] right before the world came crashing down

Terex (TEX) is not a company I follow that closely but have it out there with 1 eye as a "global construction" play. Down close to 20% today as the market takes another sacrifice. I think this will be a "preview" of what to expect in the coming 2 quarters from a litanty of multinationals now that we've achieved our goal of exporting our virus worldwide and causing the rest to slow ... (which again is "happily cheered" by the punditry since it means the US can lead the others out of the morasse - as if its that simple - we led them in, we'll lead them out - 1st grade logic)

Heck, even Manitowec (MTW) - a smaller peer of Terex bloated with even more debt, which was on the verge of bankruptcy, now is alive and kicking.  Free money from Ben Bernanke seems to solve almost every problems ...companies that would normally face serious decisions as to viability no longer have to worry.  (remember all the publicly traded commercial REITs which showered us with new shares this spring?)  I mean if Citigroup (C) [with government protection of course] can stay in business, who cannot - at least in the publicly traded space? 
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The company is currently unprofitable but is the poster child for a "cyclical industrial" type of business; for example - just as the world was drinking the last of the Kool Aid in Q4 2007, Terex posted quarterly sales of $2.6 Billion, with $1.67 in profit (at least in Wall Street accounting). To put in comparison how cyclical this type of company is, for all of 2009 Terex will post about $5B in revenue.  Analysts currently have 2010 at a similar revenue range (pre selloff of the mining business) with break even earnings.   I assume after the deal this $5B will drop to $4B to account for the loss of the mining business.  The company is now boasting it can get back to $8B in revenue, with the potential of $6 EPS by 2013.  Perhaps do-able but of course the return of global growth/construction is the key for such predictions.  Long time reader StoneFox Capital has a good piece on the potential in 'Can Terex Focus Its Way to Huge Profits?'

So the story for Terex suddenly becomes much more interesting as this load of cash can address the main worry with the company; it's debt load.  Heck at this rate, I may need to circle back to Manitowec (MTW) [already up from $2 to $10 since March 09] since there is so much capital being forced to seek return and out of safety by "cash is trash" Bernanke.  That said, here to 2013 is going to be loaded with sovereign debt issues, worries about bubbles forming once more, the fallout for the massive loan growth in 1st half 2009 in China, et al.  It's not quite so easy as a CEO snapping his fingers and "everything will be back to normal" in 3-4 years.  The question (as always) for investors is - when do those other issues matter again?  And how much can we make speculating on nirvana, before the horses return to their barns... I assume Dubai won't be needing many cranes near term.
The deal transfers about 20% in sales or roughly $1B from 2009 totals, but only 15% of sales back in the boom times of 2008. The mining segment was also requiring over 20% of working capital expenditures even though in normal times it doesn't produce more then 15% of revenues.

On the Conference Call this morning to discuss the deal, the CEO announced that TEX has a goal to double revenues to roughly the $8B level and EPS to $6 by 2013. Impressive numbers for a $20 stock with a $2.2B market cap if they can achieve those numbers. This is all before redeploying the $1.3B in cash whether via paying down debt or buying other business lines trading at huge discounts. Remember TEX had $9.9B in sales in 2008 or $8.5B excluding the product lines sold so reaching back to $8B isn't much of a stretch.


Let's look at Bucryus as well, which unlike Terex is a company we've owned on and off over the years.  Below we have a nice article written in TheStreet.com which looks at the transaction, but mostly focuses on the Bucryus side of the transaction; and below that is a CNBC video with both CEOs.  In the video the commentary from the Bucryus CEO is the more compelling piece, simply because when we want to know what is really happening in the world we'd much rather listen to what the companies are saying, rather than corrupted government reports.  Tim Sullivan's world view, is almost identical to that of BHP Billiton's CEO back in August. It's a little bit different than the Kool Aid view currently the consensus on Wall Street.

Via TheStreet.com
  • Bucyrus CEO Tim Sullivan told TheStreet Monday that the deal positions his company as a kind of one-stop shop for the huge diversified mining concerns, such as BHP Billiton(BHP), Rio Tinto(RTP) and Freeport McMoRan(FCX). "We can provide them with everything they need," Sullivan said. "This product portfolio becomes, without exception, the largest portfolio of mining machinery in the world. Already since this morning some of our largest customers have called and congratulated us."
  • During the call, executives said that, on a pro forma basis, revenue from the new business lines would boost the company's overall top line to about $3.9 billion from the $2.6 billion projected for 2009, all but guaranteeing an earnings lift in the first year that Bucyrus owns the former Terex unit.

Remember , in American "Wall Street accounting" when you have huge "one time" costs - even the kind that happen every quarter like executive stock options - we pretend they don't exist.  Hence the costs of this acquisition won't matter to Wall Street, and you can value the stock as if the deal cost nothing.  The company earns the new earnings per share, no costs were borne, and we all wink and nod and buy stocks... like magic.
  • Bucyrus executives didn't provide their own earnings forecasts, but one stock analyst covering the heavy-equipment industry, Paul Bodnar of Longbow Research, said Bucyrus could add 35 cents to 40 cents per share to its bottom line in 2010, if the acquisition closes by the end of the first quarter.
  • (wink wink) Those figures exclude deal costs.
  • Analysts have a consensus target for Bucyrus' 2010 EPS of $3.25.

Now after Bucyrus fires enough Terex employees.... err, I'm sorry (have to revert to Wall Street talk)... after Bucrysus finds "synergies", they can take out costs from the mining assets of Terex and it will be a nice boon to long term profitability.
  • Looking deeper in the future, Bodnar said the acquisition could add $1.75 to $2.00 per share to Bucyrus's earnings by 2013, taking into account debt servicing and synergies.
There could be some dilution since there is an option to take some of the $1.3 billion in Bucyrus stock - 'unfortunately' Wall Street analysts have not figured out a way to "exclude new shares" to help pump up stock prices.... I'm sure "financial innovation" will find a way to get around this sooner or later, Alice in Wonderland style.
  • Though the deal announced Sunday night is all-cash, with Bucyrus using a line of credit from JPMorgan Chase, Terex has an option to take $300 million of the purchase price in Bucyrus stock.
Turning abck to the core business, this purchase makes Bucryus an even more global player, and diversifies it further away from coal than closest competitor Joy Global (JOYG).  Both positives.
  • The purchase continues Bucyrus's effort to diversify away from the coal-mining industry, widely regarded as a slow-growth market compared with iron ore or copper. Sullivan said that, with the Terex deal, the company will derive less than 58% of its business from coal mining, down from 65%.
  • Already a more international player than its crosstown rival Joy Global (JOYG), Bucyrus will gain access to markets in Western Australia, one of the globe's premier iron-ore patches. Sullivan also noted gold mines in northern Africa and new ore seams in Indonesia as markets where Bucyrus previously had a small presence or no presence at all, but will once the Terex purchase closes, expected during the first quarter of 2010.
  • Perhaps the most lucrative piece of equipment that Bucyrus will take from the deal, analysts say, are Terex's off-road diesel mining trucks, which compete primarily with Caterpillar (CAT).
This was an interesting point below, as the search for commodities takes us to far more remote areas of the world.
  • Bucyrus, which outbid other parties for the Terex unit, has primarily built equipment powered by electricity, which thus require fairly sophisticated infrastructure at the mine sites. Terex's machines, however -- which include mobile drills, hydraulic excavators and off-road trucks -- use diesel, and thus can access more remote mines in places like Indonesia or Africa.
This definitely makes Bucryus an even more interesting long term investment; and as has been the pattern in industry after industry - consolidation is putting more and more power into fewer and fewer hands.  I've generally been a Joy Global man over the past half decade, but this certainly sticks many feathers into the cap of Bucryus.  It will be interesting if Joy Global, or indeed Caterpillar has any response in the months to come.

--> Video of the 2 CEO's below [email readers will need to come to site to view] - again as important as the comments about the deal are the comments about the global economy.

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