U.S. industrial conglomerate Ingersoll-Rand said it would sell its Bobcat machinery business and two other units to Doosan Infracore for $4.9 billion cash, the biggest ever overseas acquisition by a South Korean firm.
Shares in Doosan, formerly known as Daewoo Heavy Industries & Machinery, surged 14.9% on the move, which the company said will nearly double its sales and make it the world's seventh largest construction equipment maker.
For Ingersoll, the deal will cut the diversified manufacturer's exposure to the highly cyclical division which has been hit by a downturn in U.S. home construction and help its shift toward climate control, industrial and security businesses.
"The acquisition will help Doosan become a global heavy machinery maker as it can add models which it could not (previously) produce, with technologies from the U.S. company," said Song Jae-hak, an analyst at Woori Investment & Securities.
Ingersoll signed a definitive agreement to sell Bobcat, the world's top compact construction equipment firm, and its utility equipment and attachment units, which in 2006 together generated $2.6 billion in sales and $370 million in operating profits, the two companies said on Monday.
Doosan Infracore is South Korea's top construction and machinery equipment company with sales of 3.7 trillion won ($4.02 billion). It competes with market leaders Caterpillar of the United States and Japan's Komatsu.
Doosan said a majority of the financing for the acquisition would be in the form of non-recourse debt and the company itself would spend only $700 million in cash. Debt financing will be arranged by state-run Korea Development Bank.
"A cost of $700 million for the M&A is of little concern, given the company's long-term growth potential. But the effect of the acquisition may be small if the global construction market deteriorates further," said Song.
Ingersoll's compact vehicle segment, which includes Bobcat machines, posted an 18% slide in profit in the first quarter following a 60% slump in the fourth quarter of 2006, as contraction in U.S. home construction hurt demand.
Market leader Caterpillar missed quarterly profit forecasts earlier this month, blaming in part a sluggish U.S. construction market. However, Japanese rivals Komatsu and Hitachi Construction Machinery have fared much better as strong demand from Asia and Europe offset the fall in U.S. demand.
Shares in Doosan Infracore ended up 14.9% at 37,000 won -- their biggest daily gain in more than three years -- compared with the wider market's 1.25% rise.
"Upon completion of this transaction, Doosan Infracore will have...20 manufacturing plants in countries such as the U.S., China, Belgium, France and the Czech Republic. Sales will be approximately $7.4 billion," Doosan said in a statement.
Ingersoll-Rand, whose portfolio ranges from refrigerated trailers used to transport food, to air compressors, golf carts and Schlage locks, said in May it was reviewing the sale of machines and construction-related businesses including Bobcat.
The latest sale comes after it agreed to sell its road construction machinery business to truck maker Volvo in February.
Both the deal to Volvo and the Bobcat sale were completed at around 13 times operating earnings. Caterpillar trades at 15.4 times net earnings, while Komatsu trades at 22 times.
"The prospective transaction reflects a fair price that recognizes the value of the businesses' assets," Chief Executive Herbert Henkel said in a statement.
Ingersoll and Doosan aim to close the deal in the fourth quarter.
Credit Suisse Securities and Goldman Sachs acted as financial advisers to Ingersoll and Doosan was advised by Citigroup.