Bloomberg News

Joy Global Seen Returning 50% More After Quadrupling: Real M&A

November 24, 2011

Nov. 23 (Bloomberg) -- Joy Global Inc., which generated the biggest shareholder returns of any industrial company in America over the past three years, would now be worth about 50 percent more as a takeover target for Komatsu Ltd. or Volvo AB.

Joy Global, subject of renewed takeover speculation in the past month, more than quadrupled in value since 2008 and closed at $81.21 yesterday. With Caterpillar Inc., the world’s largest maker of construction and mining equipment, buying Joy Global’s biggest competitor in July, the Milwaukee-based company may command a record $120 a share in an acquisition, Northcoast Research Holdings LLC and William Blair & Co. said.

While a deal for Joy Global at that price would be the industry’s biggest and cost more than $12 billion, Komatsu would gain the largest independent maker of underground mining equipment and keep it from falling further behind Caterpillar as coal producers increase investment to meet growing demand from emerging economies. Volvo, which said this week it wants to sell its aero-engine unit to focus on heavy trucks and construction machinery, could get a business that is more than twice as profitable as its own, according to data compiled by Bloomberg.

Joy Global “would make a pretty attractive acquisition target,” Brian Rayle, a Cleveland-based analyst for Northcoast Research, said in a telephone interview. A takeover “would make Komatsu a head-on-head player with Caterpillar. If any of those guys wants to either expand their mining business or maintain their mining business, they have to look at it,” he said.

Wheel Loaders

Sandy McKenzie, a spokeswoman for Joy Global, said the company doesn’t comment on rumors or speculation. Marten Wikforss, a spokesman for Gothenburg, Sweden-based Volvo, also declined to comment. A phone call outside normal business hours to Tokyo-based Komatsu’s media relations department wasn’t immediately answered.

Joy Global’s shares slipped 0.7 percent to $80.65 at 9:59 a.m. in New York today. Volvo retreated 2.3 percent to 67.95 kronor in Stockholm. Komatsu’s American depositary receipts, each representing one ordinary share, fell 1.7 percent to $23.79 in New York with Japanese markets closed for a holiday.

Once known as Harnischfeger Industries Inc., Joy Global makes everything from wheel loaders to roof supports and shearers used to cut ore. The company changed its name after emerging from bankruptcy protection in 2001.

Shares Surge

Since November 2008, shares of Joy Global surged 363 percent through yesterday, increasing its value to $8.5 billion, according to data compiled by Bloomberg. The advance was more than seven times the average 49 percent gain for industrial stocks in the Standard & Poor’s 500 Index, the benchmark gauge of American common equity.

In the past three years, Joy Global has also boosted net income by 65 percent, while both Peoria, Illinois-based Caterpillar and Komatsu had declines of at least 24 percent, according to data compiled by Bloomberg.

As U.S. equities recovered from their lows of the year in October, Joy Global led a rally in machinery stocks. Joy Global jumped as much as 6.9 percent on Nov. 16 on speculation that it may be bought by Komatsu, according to William Blair’s Lawrence De Maria. He wrote in a report this week that Joy Global has become a target of increasing takeover speculation after Caterpillar’s $8.8 billion deal for Bucyrus International Inc.

Joy Global is an attractive target because it’s the only independent mining-equipment company with a broad range of products for both underground and surface mining, according to Northcoast Research’s Rayle.

‘Last Invite’

Komatsu, the world’s second-biggest maker of construction and mining machinery, may want to buy Joy Global to expand its presence in the more profitable mining segment as a global economic slowdown hampers the construction industry, he said.

Joy Global earned 21 cents in operating income for each dollar of sales in the past 12 months, data compiled by Bloomberg show. Komatsu had an operating margin of 13 percent.

“It’s sort of the last invite out there,” Rayle said. And the “easiest theoretical buyer is Komatsu,” he said.

Joy Global also gets more than half of its revenue from service work, which is more stable when sales of new machinery and equipment slow, according to Rayle.

The company may also attract the interest of Volvo, according to Ben Elias, a New York-based analyst for Sterne Agee & Leach Inc. Volvo, which gets 20 percent of sales from construction equipment, said on Nov. 21 that it plans to separate from its aero-engine unit. The Swedish company may want to expand into mining equipment to profit from increasing demand for coal as emerging economies try to meet their electricity needs, Elias said.

‘Very Aggressive’

“You’re seeing China and India getting very aggressive on the mining side,” he said. “You’re going to see more people living in cities, living in buildings that require electricity and most of the industrializing countries will base their electricity generation off of coal because it’s plentiful, cheap and relatively clean.”

Hitachi Construction Machinery Co., the world’s largest maker of giant excavators and Komatsu’s closest rival, may also be a potential suitor, said Sterne Agee’s Elias, as well as Atlas Copco AB, which gets about 40 percent of its revenue from construction and mining products, according to Charles Brady, a Boston-based analyst for BMO Capital Markets.

Telephone calls to Tokyo-based Hitachi Construction weren’t immediately answered. Daniel Frykholm, a spokesman for Stockholm-based Atlas, said the company doesn’t comment on rumors or speculation.

Komatsu’s Deals

While Komatsu is large enough and has the financial wherewithal to acquire Joy Global, a bid isn’t likely because the company hasn’t typically pursued takeovers of this size, BMO Capital’s Brady said. The biggest deal Komatsu has ever done was its acquisition of Nippei Toyama Corp. in 2008 for $565 million, data compiled by Bloomberg show.

Volvo may not pursue an acquisition of Joy Global because many of its operations don’t overlap with Joy Global’s so it wouldn’t be able to cut as many costs, William Blair’s De Maria said in a note to clients Nov. 21. Europe’s debt crisis may also make it more difficult for Volvo to obtain financing for a deal compared with Japanese companies, C. Schon Williams, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a telephone interview.

‘Have to Invest’

Still, mining companies are likely to spend at least 50 percent more on capital expenditures this year than in 2010, according to Karen Ubelhart, a New York-based industrials analyst for Bloomberg Industries. As new coal and copper mines are developed to meet growing demand in emerging economies, makers of machinery and equipment for the miners are poised to benefit, which will drive more takeovers of companies like Joy Global, Sterne Agee’s Elias said.

“We’ve seen consolidation with miners,” he said. “Miners are going to have to invest in their equipment. You will get consolidation on the mining equipment side.”

--With assistance from Simon Casey and Sarah Rabil in New York. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Shruti Date Singh in Chicago at ssingh28@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Simon Casey at scasey4@bloomberg.net.


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