China deal ends distraction, but not questions, for Caterpillar
Caterpillar Inc's deal to cut the purchase price of a Chinese mining-equipment maker it bought last year ends an embarrassing episode that overshadowed the company's effort to expand in China and distracted its executives for months.
Now, analysts say, comes the hard part: Proving to investors that ERA Mining Machinery, the Chinese maker of hydraulic roof supports that Caterpillar purchased, really can help penetrate China's huge underground mining market.
In January, Caterpillar took a $580 million impairment related to the ERA deal after discovering what it characterized as a "deliberate, multi-year, coordinated accounting misconduct" at Siwei, a subsidiary that handled ERA's principal business.
Late on Thursday, Caterpillar said it reached a deal with the former controlling shareholders of ERA to cut $135 million from the $886 million purchase price - a move welcomed by analysts even if the money involved was, in the words of one, "a blip" in the U.S. company's overall finances.
"Outside of the reduction in purchase price, the chief benefit of the settlement is to eliminate the management distraction caused by the issue and get on with realizing the potential that led Caterpillar to buy this company in the first place," said Alex Blanton, a senior analyst at Clear Harbor Asset Management in New York.
"Whether or not it realizes the potential is another question," he said.
The deal reduces the outstanding obligations Caterpillar has to MML, and to former ERA directors Emory Williams and John Lee, as well as MML shareholder James Thompson, to $29.5 million. Caterpillar still owed the four about $164 million.
In exchange, Caterpillar agreed to end any litigation targeting the Chinese company's former directors or auditors related to the alleged accounting misconduct.
A Caterpillar spokesman declined to comment on the settlement on Friday, citing "pending litigation" - a reference to the shareholder lawsuits over the charge.
Eli Lustgarten, an analyst at Longbow Securities, said the dispute overshadowed ERA's real importance to Caterpillar: giving it the product line and distribution it desperately wants in China, which produces and consumes more coal than any other country in the world.
Caterpillar, long the world's largest maker of construction equipment, has also become the world's largest mining equipment maker in recent years.
One question that remains is how Caterpillar will account for the $135 million, which - potentially - could lift its earnings as a noncash, nonrecurring item.
"From an economic standpoint, for Caterpillar's business and for Caterpillar's shareholders, it's rather de minimus," said Morningstar analyst Adam Fleck. "But it's real savings."
In its most recent quarterly earnings report, Caterpillar told investors it was gaining market share in China despite a slowdown in economic growth there. Sales of its distinctive yellow construction and mining machines were up in the first quarter of 2013 over the same period of 2012 even as its inventories there declined.
(Reporting by James B. Kelleher; editing by Matthew Lewis)