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Pro Analysis

Breakingviews: Deere's Wirtgen deal is paved with good intentions

Soft red winter wheat is harvested with a John Deere & Co. combine harvester in aerial photograph taken over Kirkland, Illinois.
Daniel Acker | Bloomberg | Getty Images
Soft red winter wheat is harvested with a John Deere & Co. combine harvester in aerial photograph taken over Kirkland, Illinois.

Deere's bold acquisition is at least paved with good intentions. The $40 billion U.S. agricultural-equipment maker unveiled plans on Thursday to diversify further into road building, paying $5.2 billion for Germany's Wirtgen. It's a big deal and overseas, but the pitch on strategy and price sound reasonable. Of course, so did earth-moving giant Caterpillar's similar bet on Bucyrus.

It's logical that Deere wants to hitch new businesses to its familiar green tractors. Farmers have been hurt by falling crop prices and that has eaten into machinery budgets. Deere's sales tumbled by more than a quarter in the two years through last October. The company said last month it expects agriculture and turf equipment sales to fall 8 percent in the 2017 fiscal year.

By contrast, spending on road-construction apparatus is forecast to grow by 8 percent through 2022, according to Boston Consulting Group, hired by Deere to help with the Wirtgen transaction. The deal values the privately held enterprise churning out milling machines and asphalt pavers at about 9.5 times estimated EBITDA for this year, before accounting for a potential 100 million euros in annual synergies that will take five years to materialize fully. Deere fetches a multiple of nearly 17 times.