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December 9, 2010
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For Immediate Release
Chicago, IL – December 9, 2010 – Zacks.com Analyst Blog features: Caterpillar Inc. (CAT), JPMorgan Chase & Co. (JPM), Bucyrus International Inc. (BUCY), Joy Global Inc. (JOYG) and Forest Labs (FRX).
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Here are highlights from Wednesday’s Analyst Blog:
CAT Gets Bridge Loan for Bucyrus
Caterpillar Inc. (CAT) has entered into a bridge loan agreement of up to $8.6 billion from certain financial institutions led by JPMorgan Chase Bank, the investment bank arm of JPMorgan Chase & Co. (JPM) to fund its previously announced acquisition of Bucyrus International Inc. (BUCY).
Caterpillar, however, added it might not utilize the whole amount for the acquisition and instead may issue debt and/or equity. The company might use the loan to refinance Bucyrus' debt and pay related fees.
Under the bridge loan agreement, Caterpillar would have to maintain a net worth of at least $9 billion at all times in each fiscal year. Net worth in this case means consolidated stockholders' equity including preferred stock but excluding Pension and other post-retirement benefits that are reflected in Accumulated Other Comprehensive Income or loss.
According to the agreement, the bridge loan would have an increasing interest rate starting at 1.25 percentage points to 2 percentage points more than the London Interbank offered rate (LIBOR). The margin over LIBOR is dependent on the company’s credit ratings. The spread over the lending benchmark would increase every 90 days, within the range of 1.5 percentage points to 3.125 percentage points.
The $8.6 Bucyrus deal, if it gets through, would be the biggest ever in the company’s history. The acquisition, subject to regulatory and Bucyrus shareholder approvals, is slated to close in mid-2011.
Caterpillar had earlier announced that it intended to fund the consideration of $8.6 billion through cash, up to $2 billion in equity and included the assumption of $1.0 billion in debt. Bucyrus shareholders will receive $92 per share, which translates to a premium of 32% on Bucyrus' share price as of November 12, 2010.
The combined portfolio will broaden Caterpillar's mining equipment product line resulting in the most expansive product offering in the mining equipment industry.
Caterpillar expects the deal to be accretive to its profit in the first full year, i.e., 2012, excluding 50 cents per share of one-time charges. Synergy benefits are expected to noticeably add to operating profit in 2013 and exceed $400 million annually in 2015.
Caterpillar has a narrow product line compared to Bucyrus. The acquisition will bring Bucyrus’ broad product portfolio of electric rope shovels, draglines, hydraulic shovels, drills, underground mining equipment, trucks and highwall miners and complement Caterpillar’s existing mining product line. Further, Caterpillar can leverage Bucyrus’ strong presence in the emerging markets, its successful aftermarket parts business and support services for its equipment.
Caterpillar had a sound cash horde of $2.3 billion as of September 30, 2010. The debt-to-capital ratio, for Machinery and Engines, improved to 39.1% as of September 30, 2010 compared with 49.5% as of June 30, 2010.
Our Take
Though the loan will increase Caterpillar’s debt-to-capital ratio and interest burden, we believe these negatives will be offset by the synergies expected form the Bucyrus acquisition. The Bucyrus acquisition is expected to position Caterpillar as the leading global mining original equipment manufacturer and the combined product portfolio will dwarf Joy Global Inc. (JOYG), the only U.S based manufacturer of surface and underground mining equipment.
We believe Caterpillar’s strong brand name, pricing power and global dealer network places it in an advantageous position to exploit the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and expanding existing operations, particularly in emerging markets, will boost its long-term potential. We currently have a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.
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 three divisions – Machines, Engines and Financial Products.
Forest Labs Inks Deal for Pain Drugs
Forest Labs (FRX) recently entered into an agreement with Gruenenthal GmbH for the development and commercialization of two pain management candidates. The license agreement covers GRT 6005, a novel oral small molecule analgesic and its follow-on compound, GRT 6006.
Terms of the Deal
Per the terms of the deal, Forest Labs will make an undisclosed upfront license payment to Gruenenthal. Besides this, Forest Labs will make payments on the achievement of development and commercialization milestones. The company will also pay royalties on product sales. The companies will share development costs. While Forest Labs will have exclusive rights in the US and Canada, the company may execute the option to co-promote in Europe. Similarly, Gruenenthal has exclusive rights in Europe and the option to co-promote in the US and Canada.
Neutral on Forest Labs
We currently have a Neutral recommendation on Forest Labs, which is supported by a Zacks #3 Rank (short-term “Hold" recommendation). We are concerned about long-term growth at Forest Labs, especially from 2012 when Lexapro is exposed to generic competition. That puts a lot of pressure on the pipeline to come through.
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