* Deal cuts $135 million from purchase price
* Real value is eliminating embarrassing distraction
* Caterpillar now needs to show how ERA advances China
By James B. Kelleher
CHICAGO, May 17 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.