CAT - On the Prowl and Digging For Gold

Two words:  Joy Global

Heavy equipment maker Caterpillar Inc (CAT.N) set the largest deal in its history on Monday, saying it would buy Bucyrus International Inc (BUCY.O) for $7.6 billion, accelerating its expansion in mining.

The deal to create a huge global supplier of trucks, hydraulic shovels, blasting drills and coal-mining equipment marks a step-up in acquisitions by Caterpillar under its new chief executive, Doug Oberhelman.

The Peoria, Illinois-based company is increasing its exposure to the minerals sector at a time when demand for materials ranging from iron ore to coal is being spurred by rapid economic development in emerging markets like China and India.

"The mining segment for us is a key strategic area," Oberhelman, who took over from Jim Owens this year, said on CNBC television. "Demand for minerals, for coal, for lots of things that come out of the ground will be increasing as urbanization occurs."

Bucyrus shareholders will receive $92 cash per share, a 32 percent premium over the stock's closing price on Friday.Bucyrus shares rose 29 percent to $90 in morning trade on the Nasdaq, while Caterpillar was fractionally higher at $81.61 on the New York Stock Exchange.

Oberhelman, who added that financing costs are very attractive, said Caterpillar would issue about $2 billion in new shares once the deal closes in mid-2011.  (quick math:  7.6B - $2B = $5.6B - anyone thing debt will be added to the balance sheet?  Plus assumed debt.  CAT balance sheet is in good shape, but this will not help a cyclical company - yes, mining is still cyclical.)

"We're at the early beginning of the cycle in our core business and in mining," he said.

The deal is the biggest in Caterpillar's 85-year history by "a long shot," said Jim Dugan, a company spokesman. Including $1 billion of Bucyrus debt being assumed by Caterpillar, the transaction is worth $8.6 billion.

Caterpillar already makes a wide range of mining equipment. Earlier this year it said it hoped to expand the line to meet demand from mining customers, who are scrambling to take advantage of rebounding prices for copper and other minerals.