CHICAGO: 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 $580m impairment related to the ERA deal after discovering what it characterised 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 $135m from the $886m purchase price — a move welcomed by analysts even if the money involved was, in the words of one, “a blip” in the US 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 realising 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 realises 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 $29.5m. Caterpillar still owed the four about $164m.
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 $135m, which — potentially — could lift its earnings as a noncash, nonrecurring item.
Reuters
