Editorial: Komatsu scooping up Joy Global for US$2.9B

Just in time to create even more excitement at the massive, once-every-four-years MINExpo International convention in Las Vegas in September, Tokyo-based manufacturing giant Komatsu has struck a friendly, blockbuster deal to acquire storied Milwaukee-based underground mining equipment manufacturer Joy Global for US$2.9 billion in cash, plus the assumption of US$800 million in debt.

By this time next year, Komatsu and its larger U.S. rival Caterpillar will control at least a quarter of the global mining equipment business, valued at US$50 billion annually.

In explaining its bid for Joy Global, Komatsu argues that the beaten-down mining equipment business will continue to be depressed in the near-term, but will pick up considerably in 2019 and beyond, “driven by population growth and rapid urbanization around the world.”

There’s plenty of corporate history in this deal.

As a manufacturer of all kinds of heavy and industrial equipment, Komatsu has engaged in mining equipment manufacturing since the company was founded in 1921, but stepped things up in the 1990s by buying several mining equipment and distribution businesses in major mining regions worldwide.

Today, Komatsu generates annual revenue of US$4.3 billion from its mining equipment business, but this is only from surface mining equipment, and doesn’t include “super large-sized” loading equipment for surface mining.

Joy Global’s history stretches back even further, with its core P&H business having been founded in 1884 by Alonzo Pawling and Henry Harnischfeger in Milwaukee, Wis., leading in the 1890s to a product line that included earth-moving machines for construction and mining operations. In 1919, Joseph Joy founded Joy Machine Co. in Evansville, Ind., and soon developed the first mechanical loader: model 4BU. The year 2012 was a milestone, with P&H Mining Equipment and Joy Mining Machinery becoming Joy Global. The surface equipment would be branded P&H and the underground equipment, Joy.

Looking ahead at the coming boom in terms of mining techniques, Komatsu says, the “economic rationale will call for use of larger equipment in surface mining as well as further development of underground mining.”

With Joy Global, Komatsu gets a company that is focused on underground mining equipment manufacturing and servicing, plus material handling, with annual revenues of US$3.2 billion through its premium brands of P&H, Joy and Montabert.

After so many years, Komatsu will finally become a meaningful participant in underground mining globally.

At the same time, Joy Global’s lineup of surface mining equipment includes rope shovels, super large wheel loaders, draglines and drills that Komatsu does not offer. Komatsu says Joy Global’s lineup of rope shovels and super large wheel loaders “pair well” with the super large electric dump truck Komatsu makes, and will “generate synergies in sales and services.”

Size of Joy Global’s biggest surface mining equipment in comparison to some of Komatsu’s largest, the PC8000 and PC200. Credit: Komatsu.

Komatsu expects to close the acquisition by April 2017, assuming no rival bid appears. If they give their approval in a vote, Joy Global stockholders would receive US$28.30 per share in cash, or a 20% premium to the share price a day before the offer.

Komatsu says it will operate Joy Global with its 12,000 employees as a separate, wholly owned subsidiary, and will keep the iconic Joy Global brand names.

The two companies’ product lines will integrate well, Komatsu says, “expanding options for customers worldwide, as Komatsu can now offer the underground mining equipment and super large-sized loading equipment of which Joy Global is a leading provider.”

Komatsu’s vision of anticipated synergies between its surface mining equipment and Joy Global’s underground mining equipment and super large sized surface equipment. Credit: Komatsu.

Joy Global’s board of directors, which has unanimously approved the deal, said that in making its determination, it “considered the challenging market conditions the company believes are likely to persist. The mining industry continues to face cyclical headwinds from oversupplied commodities and lower end-user demand resulting in cash-flow restrictions for most producers, creating an increasingly challenging environment. We are also seeing structural changes in the U.S. and China coal industry.” (More than half Joy Global’s sales come from the ailing coal sector.)

Komatsu’s offer — the largest in its history — is not subject to any financing conditions, and the company had total assets of US$25 billion and total equity of US$14 billion as of March 31, 2016, with an “A” credit rating from S&P, and “A2” from Moody’s.

The last notable M&A among mining equipment manufacturers was Caterpillar’s purchase of rival Bucyrus International in 2011 for US$8 billion, during the height of the last commodity boom.