Komatsu digs deep, bets big on Joy Global

by JOHN GREGERSON | July 29, 2016

Digging even deeper into the market share for both construction and mining equipment, Tokyo-based Komatsu Ltd., the closest rival to world industry leader Caterpillar, said last week that it will purchase struggling mining equipment maker Joy Global, Milwaukee WI, for $2.89 billion in cash.

Set to close in mid-2017, the deal marks Komatsu's largest-ever acquisition. As part of the $3.7-billion transaction, the Japanese giant has agreed to assume $845 million of Joy Global's net debt. Once in the fold, Joy Global and its leading brands — P&H, Joy, and recent French acquisition Montabert SAS — will be 100% owned by Komatsu America Corp., based in Rolling Meadows IL.

Although the bigger Komatsu still won't match Cat's size, experts say the deal does put the two firms “toe-to-toe” in virtually all aspects of their operations. “There are just two major players and each one basically does everything,” said Stephen Volkmann, a NYC-based analyst at Jefferies LLC, speaking to reporters last week. Nevertheless, he doubted that the deal would encounter any antitrust issues because the two entities are just distinct enough. Joy Global emphasizes mining and underground work, while Komatsu traditionally focuses on construction and above-grade equipment.

To see Joy Global's investor presentation about its acquisition, click here.

“This is a compelling transaction that delivers substantial and certain value to our stockholders," said Joy Global CEO Ted Doheny. "Our companies share similar cultures and values... We believe this is the right partnership to meet the evolving needs of our customers while furthering our ability to lead the mining industry with game-changing technologies and best-in-class products.”

From a practical standpoint, Doheny also explained that Joy Global’s board of directors had considered the current formidable market hurdles that seem likely to persist. "The mining industry continues to face cyclical headwinds from oversupplied commodities and reduced end user demand, resulting in cash flow restrictions for most producers, creating an increasingly challenging environment," he said. "We are also seeing structural changes in the U.S. and China coal industry."

challenge and opportunity

Indeed, the timing of the acquisition may appear bold — even audacious — to some on Wall Street, given the mining industry has taken a beating in recent years, with steep declines in metal and coal prices taking a serious toll on industry players. In addition to canceled projects, conditions have slowed sales on items ranging from underground tunneling kits for copper mining to large shovels involved coal removal. Joy Global, in particular, has suffered from a drop in business from U.S. coal. The firm posted losses of $1.18 billion in fiscal 2015, and its shares have lost more than 50% of their value since January 2015. By comparison, Komatsu shares declined 20% over the same period.

“Over the long term... the mining equipment business is projected to grow, driven by population growth and rapid urbanization around the world”

— Komatsu Public Statement, July 21, 2016

"Demand for mining equipment has declined dramatically from the peak, reflecting economic slowdown in emerging countries and low commodity prices," Komatsu conceded in announcing the deal. "Over the long term, however, the mining equipment business is projected to grow, driven by population growth and rapid urbanization around the world. In terms of mining techniques, economic rationale will call for use of larger equipment in surface mining as well as further development of underground mining."

With the acquisition, Komatsu now becomes a meaningful participant in underground mining, as well. Merging manufacturing technologies and linking products through Komatsu's fleet management system will further capabilities on both sides "to optimize machine performance and enhance automation for safety and productivity gains,” added Komatsu.

Joy Global's surface mining equipment includes rope shovels, super large wheel loaders, draglines and drills, which Komatsu believes will pair well with its own super large electric dump truck.

Both firms will continue to operate independently until the deal is finalized next summer. Komatsu also has said that it intends to keep all of Joy Global's well-known existing brand names. In the meantime, financial advisors Goldman, Sachs & Co., representing Joy Global, and Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., representing Komatsu, will continue working out the final details of the deal.

Rob McManamy contributed to this story.