3rd UPDATE: Caterpillar Expands Rail Unit With Locomotive Buy

Caterpillar Inc. (CAT) announced plans Tuesday to expand its rail business by paying $820 million in cash for U.S. locomotive maker Electro-Motive Diesel.

The planned deal would double the size of Caterpillar's rail franchise and pit the company against General Electric Co. (GE) in the locomotive sector at a time when global demand is recovering with the help of government-led stimulus efforts.

Retiring Caterpillar CEO Jim Owens steered the company into rail with the 2006 acquisition of U.S. repair specialist Progress Rail, a year after union opposition blocked its efforts to acquire Electro-Motive Diesel, or EMD, from General Motors.

Caterpillar plans to retain the EMD brand, which it is buying from Berkshire Partners LLC and Greenbriar Equity Group LLC. It aims to close by year-end, but it offered no guidance on how it will finance the purchase or its impact on earnings.

Berkshire and Greenbriar bought the business from General Motors Corp. in 2005, paying $201 million, and say they have helped it bring in new management, renegotiate labor deals, upgrade manufacturing facilities, and increase its focus on its international business. They said that prior to the unsolicited approach from Caterpillar, they had been considering a dividend recapitalization of the company.

"Caterpillar is a very logical buyer," said Berkshire Managing Director Larry Hamelsky. "EMD will benefit from partnering with a large, global industrial company to support its next stage of growth."

EMD had sales of $1.8 billion last year, up from $800 million at the time of its buyout, and claims to have the largest installed base of locomotives in the world with 33,000, including an expanding presence in China and India. GE has 15,000 locomotives operating worldwide.

Global locomotive sales have been highly cyclical but are starting to recover and offer higher-margin streams from servicing trains and associated equipment.

The latest acquisition takes Caterpillar's spending on rail to $2 billion, including recent small bolt-on deals for a U.S. leasing company, and an equipment business acquired from GE.

"This acquisition represents the latest step in our strategic plan to aggressively grow our presence in the global rail industry," said Caterpillar Vice Chairman and CEO-elect Doug Oberhelman in a statement.

Oberhelman, who takes over as chief executive in July, was instrumental in the acquisition of Progress Rail.

EMD provides Caterpillar with a new market for its diesel engines in the aftermath of the company's exit from the highway-truck-engine market this year.

Shares of Caterpillar on Tuesday closed about 2.5% lower at $59.27.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; Robert.tita@dowjones.com

(Doug Cameron, Matt Jarzemsky and Daniel Hausmann contributed to this article.)

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