Joy Global Seen as Deal Target With Weir for GE Mining
By Tara Lachapelle and Tim Catts
General Electric Co.’s plans to build its mining-equipment division through acquisitions means companies from Joy Global Inc. to Weir Group Plc are now takeover candidates. Joy Global, a maker of underground mining equipment with an operating margin that’s double the median among similar-sized machinery companies, is a logical choice, William Blair & Co. said. To Oriel Securities Ltd., GE (GE) will probably be drawn to Weir. The largest provider of pumps to miners is projected to increase sales faster than the industry median through 2014, according to data compiled by Bloomberg.
GE plans to bulk up through acquisitions to meet a goal of more than doubling annual mining revenue to $5 billion within a few years, the chief executive officer of GE Transportation said in an interview last week. That would follow the pattern GE set in the oil-and-gas industry with the purchases of Dresser Inc. and a John Wood Group Plc unit. GE’s interest comes after buyers announced $3.78 billion in deals this year for construction- and mining-machinery companies, triple the amount during the same period in 2011, data compiled by Bloomberg show.
“It looks to me to be much cheaper and much more intelligent for GE to consider buying rather than building when it comes to this,” Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion including GE shares, said in a telephone interview. “Joy looks to me to be a great representative of the group and kind of a leader,” he said. “It’s big enough that it would have an impact.”
“The GE Mining business believes that we can get good value out of smaller, focused acquisitions that allow us to quickly and relatively easily add technology, GE expertise, and geographical reach,” GE Mining CEO Geoff Knox said in a statement. “These can yield strong, quicker returns on a relatively small investment. However, we will continue to look at larger acquisitions that may bring similar quick benefits within a larger enterprise.”
GE announced the new division, called GE Mining and based in Brisbane, Australia, yesterday at the MINExpo conference in Las Vegas. The company already offers products and services to miners, including water desalination systems and electrical turbines derived from jet engines, of which GE Aviation is the largest manufacturer.
GE had about $2 billion in mining-related sales in 2011 and plans to boost that to $5 billion in a few years with the help of acquisitions, said Lorenzo Simonelli, the CEO of GE Transportation, which oversees the mining unit. It has already done deals to expand the mining business, announcing transactions in May for Industrea Ltd. and Fairchild International Inc.
“It is a good time to be looking at acquisitions in a value sense,” Knox said in a phone interview. “We have to be targeted in buying into spaces that leverage what we already do. We want to use our current knowledge and add it to the product line we’re acquiring and make it smarter and more appealing.”
GE expanded its oil-and-gas division, which the company says will generate $15 billion in sales this year, through takeovers. Those include Dresser, an oil-field equipment maker, for $3 billion in October 2010 and the well-support division of John Wood Group four months later for about $2.8 billion.
Joy Global, a Milwaukee-based maker of everything from crushing equipment to drills and electric shovels for mining coal, copper and minerals, looks “increasingly likely” as an acquisition target for GE, according to Larry De Maria, a New York-based analyst at William Blair.
“Joy would provide GE with definitive scale in a large aftermarket business, as well as some synergies in mine electrification,” he said in a phone interview.
With $4.4 billion in revenue last year, Joy Global would help GE “quickly” reach its sales goal for the new mining division, De Maria said. Joy Global earned about 21.2 cents of operating profit for every dollar of sales in the past 12 months, an operating margin double the median of 10.6 percent for machinery companies valued between $1 billion and $10 billion, data compiled by Bloomberg show.
The $6.4 billion company trades for 8.8 times trailing 12- month earnings, a lower valuation than 91 percent of the group, the data show.
“GE can go out and borrow in the marketplace at ridiculously low rates, then turn around and buy a company at this kind of valuation,” Holland said. “It makes sense.”
Telephone and e-mail messages left for Sandy McKenzie, a Joy Global spokeswoman, weren’t returned.
Another possibility is Weir (WEIR), which GE might find appealing because the 3.7 billion pound ($6 billion) company sells equipment to both the mining and oil industries, according to analysts from Oriel Securities and Investec Ltd.
While Weir is the largest provider of hydraulic fracturing equipment, used to extract oil and gas, it also manufactures pumps that handle mine slurry — waste that contains metals and sediment. More than half of the company’s revenue last year came from its minerals division, while the oil-and-gas business accounted for a third, data compiled by Bloomberg show.
“All of what Weir does is applicable to GE,” Chris Dyett, a London-based analyst for Investec, said in a phone interview. “It’s definitely a possibility that GE would look at a name like this.”
Weir’s sales are projected to climb 26 percent from 2011 to 2014, versus the median rate of 20 percent among peers, according to analysts’ estimates compiled by Bloomberg. The shares trade for 12.1 times earnings, less than the industry average of about 20.5, the data show.
“Weir has attractive and undervalued assets in these two growth industries,” Harry Philips, a London-based analyst for Oriel, wrote in a note to clients yesterday. “Weir has been seen as a possible bid target of GE for its oil and gas assets, and now mining can be added to the potential attractions.”
Today, shares of Weir rose 4 percent to 1,811 pence for the biggest increase in the FTSE 100 Index. Joy Global fell 5.5 percent to $56.88, and GE slipped 0.2 percent to $22.31.
Phone messages left for Glasgow, Scotland-based Weir weren’t returned.
Boart Longyear Ltd. (BLY), the largest provider of mineral- drilling services, is another potential target for GE, said Achur Iskounen, managing partner of Iskounen & Co. The shares fell 31 percent through yesterday since the South Jordan, Utah- based corporation cut its 2012 earnings forecast on Aug. 30.
The stock trades for 4.2 times profit, the third-lowest valuation among mining services companies listed in Australia, data compiled by Bloomberg show. At A$754 million ($786 million), it’s a smaller target than Joy Global and Weir.
“The equity market has unduly punished their equity valuation,” said Iskounen, whose approximately $10 million fund counts Boart Longyear as its biggest holding. “The global footprint is such that the valuation pays for itself. I think this would make a really compelling acquisition target.”
“I am not aware of any conversations or of being approached by GE” about a possible takeover, Monika Portman, a spokeswoman for Boart Longyear, said in an e-mail.
Boart Longyear shares rose 2.1 percent to A$1.67 today, the highest price in almost a month.
Joy Global and Weir are bigger than the $1 billion to $3 billion range GE CEO Jeffrey Immeltgave for acquisitions this year. “Don’t look for any big deals in 2012,” Immelt wrote in his annual letter to shareholders, released in March.
“The conclusion most people seem to be jumping to is Joy Global, but GE has said its sweet-spot acquisition size” is less than that stock’s market value, Shannon O’Callaghan, a New York-based analyst with Nomura Holdings Inc., said in a phone interview. “What we’ll probably see GE do are small-to-medium bolt-ons.”
Mining companies are reducing capital expenditures, presenting a potential headwind to GE Mining and the rest of the equipment industry. Worldwide spending will drop as much as 14 percent through 2014 from a peak of $136 billion this year, JPMorgan Chase & Co. said in a Sept. 20 report.
BHP Billiton Ltd. (BHP), the world’s biggest mining company, delayed about $68 billion of projects last month after second- half profit fell 58 percent. Fortescue Metals Group Ltd. (FMG), Australia’s third-biggest iron-ore producer, cut its full-year spending forecast on Sept. 4 by 26 percent to $4.6 billion.
The reductions are already hurting suppliers. Yesterday, Caterpillar Inc. (CAT), the biggest construction and mining equipment maker, cut its forecast for 2015 earnings. Last month, Joy Global lowered its full-year profit and sales forecasts.
“The business is in a cyclical downturn in mining, but GE still likes the space and they want to try to fill in their existing capabilities,” O’Callaghan said.
GE should do a big deal, instead of piecing together a unit with smaller acquisitions, Jeffrey Sprague, an analyst and co- founder of Vertical Research Partners Inc. in New York, said in a phone interview.
“They could certainly buy a bunch of companies and increase their sales footprint, but it seems like it would still just be a collection of random stuff without it being a really strong franchise,” Sprague said. “I don’t think they’re going to buy Joy based on what they’re saying and what their MO seems to be, but if they really want to be big in mining, they probably should.”