Caterpillar Inc, the world's biggest maker of earthmoving equipment, yesterday offered to buy China's manufacturer of underground coal-mining equipment ERA Mining Machinery Ltd, in a deal worth $885 million (HK$6.89 billion).

The offer will be made by Caterpillar (Luxembourg) Investment Co. S.A., a wholly owned subsidiary of Caterpillar Inc.

The proposed deal comes after Caterpillar made a $8.6-billion in cash acquisition of mining equipment maker Bucyrus International Inc last November, which transformed it into the world's biggest supplier of large mining equipment. (See: Caterpillar to acquire mining equipment maker Bucyrus for $8.6 billion)

Illinois-based Caterpillar, a Fortune 500 company, will pay 88 Hong Kong cents a share or a loan note that can be redeemed for 75 cents to HK$1.15. The offer, which values ERA between HK$4.49 billion to HK$6.89 billion, is 33 per cent more than ERA Machinery's last traded price.

The proposed acquisition is subject to regulatory approval by Chinese antitrust authorities.

Hong Kong-based ERA primarily designs, manufactures, sells and supports underground coal mining equipment in mainland China through its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co., Ltd, better known as "Siwei".

Siwei possesses a manufacturing base of 600,000 square meters in Zhengzhou, Henan province, where it manufactures and sells roof support equipment to underground mining in China.

It is the third-largest maker of hydraulic roof supports for underground mines in China based on sales.

For the six months ended June 30, ERA posted sales of HK$787.2 million ($101.3 million), up 86 per cent from the year-earlier period and net income of HK$20.9 million. Caterpillar expects that acquisition to add $5 billion to the company's sales in 2012.

The proposed deal comes after Caterpillar's domestic rival Milwaukee-based Joy Global Inc, strengthened its presence in China in July this year by raising its stake by 10.5 per cent to 51.6 per cent in China's International Mining Machinery Holdings Ltd (IMM), a maker of coal-mining equipment. (See: Joy Global raises stake in China's coal-mining equipment maker IMM)  
 
But Joy Global has yet to receive approval for its purchase of International Mining as Chinese regulators have a history of endlessly delaying or even blocking foreign companies mergers and buyouts of local firms.

Caterpillar's proposed deal with ERA suggests that it is confident that Chinese regulators will approve the acquisition.

Acquisitions of Chinese firms by overseas companies are have recently increased, with 694 deals valued at around $42.4 billion so far this year, according to data providers Dealogic.

If Caterpillar succeeds in closing the deal, it can expect stiff competition in China from Japanese rivals like Komatsu Ltd and Hitachi Construction Machinery Co, both of whom are seeking to increase revenues from their operations in China, the world's largest market for mining equipment.

Hitachi Construction, the world's biggest maker of giant excavators, is planning to build its third mining-equipment plant in Japan by 2013 with an eye on the rising demand for thermal-coal rises in Asia.

Caterpillar has a long history in China and, during the past three decades, it has grown from a single sales office in Beijing to 16 manufacturing plants, four research and development facilities, three logistics and parts centers and other offices. 

In addition, Caterpillar has made significant investments in China and announced a wide range of new facilities, with a total of nine new facilities under construction.

With the aggressive expansion of coal-fired power-generating plants, demand for coal in China has been surging as electricity production in China rose 12 per cent in the first five months of 2011, compared with the same period in 2010.

For Caterpillar, this will be the fourth acquisition in the past 18 months after it acquired in May 2010 Electro-Motive Diesel (EMD), a maker of railroad locomotives for $820 million in cash in order to expand its rail and transit business, it then went on to buy German engine maker Motoren-Werke Mannheim Holding (MWM), from private equity firm 3i in October for $810 million, and Bucyrus for $8.6 billion in November.

"Our announcement today underscores Caterpillar's long-term commitment to continue to invest in China in order to support our growing base of Chinese customers," said Steve Wunning, Caterpillar group president with responsibility for Resource Industries. 

Wunning said, "We intend to build on Siwei's strong reputation and relationships in China, further investing in its mining roof support business and operations, while utilizing Caterpillar's global reach and organization to help bring Siwei's products to more customers outside of China."