Terex CEO wants deals but prices too high

By James B. Kelleher

CHICAGO (BestGrowthStock) – The top executive of Terex Corp (TEX.N: ) said on Thursday he is willing to use most of the $1.35 billion in cash on his company’s books to pay for the right acquisition in the heavy equipment business.

“It all depends on the candidate,” Ron DeFeo, the company’s chairman and chief executive, said in an interview with Reuters.

“We could use most of it. We have said, and I’ll restate it, that we have been targeting $500 million to $1 billion size deals. But you can’t always fit everything nicely into what you’re targeting.”

But DeFeo said that finding attractively priced targets was harder than he expected — despite the continued weakness in Europe and North America. Part of the problem, he said, was Terex’s own expectations.

“We believe we should be able to earn, within a reasonable timeframe of a couple of years, probably two-X what we would be earning by paying down debt,” he said.

“So for me, if I pay down debt … it’s a 6 to 7 percent fixed return. So unless I see my way clearly to get to a 12 to 15 percent return, it’s hard to make the decision to make an acquisition, which by definition has more risk to it than to simply pay down the debt.”

But he said that even when Terex, which makes cranes, earth-moving equipment and aerial work platforms used in the construction industry, found a target it believed could deliver those returns, bargaining with management at the target company was proving to be an exasperating exercise.

The trouble, he said, were corporate boards with what DeFeo called “unreasonable expectations” regarding price.

He said some “management teams today are living in a world that’s still based upon expectations of a few years back.” He said “those management teams need to shape up or ship out.”

Last week, there were reports that Terex was interested in making a bid for Demag Cranes (D9CGn.DE: ), the largest global manufacturer of harbor and port cranes — a market that Terex entered last year when it bought Fantuzzi Industries.

Last week, Demag confirmed it had received informal takeover approaches from companies based in foreign countries, adding it had no interest in pursuing talks.

Asked if Terex had been one of the bidders, DeFeo said: “I just won’t comment on anything related to a particular company.”

When Terex reported earnings earlier this week, it said Fantuzzi would not have a positive impact on its bottom line until 2012. Any future deals, DeFeo told Reuters, will have to pay off faster.

“The issue with Fantuzzi is we bought a broken business, and when you buy a broken business, you’ve got to put the foundation back in before you can really get it working completely,” he said.

“But If I’m going to do a larger transaction at this stage in the economic cycle, I’m going to want a business that immediately contributes to my bottom line.”

Although equipment companies exposed to the commodities markets are now trading like growth stocks, DeFeo said he had no regrets about selling Terex’s mining business to Bucyrus International (BUCY.O: ) earlier this year for $1 billion in cash and 5.8 million shares of Bucyrus.

“Frankly we knew the business would be very attractive to several potential buyers,” he said. “That’s why the price that was paid was paid. We retained the 25 percent of the purchase price in the buyer’s equity, which when we sold the business their stock was $51 … Today it’s $70 to $75 per share, so that piece of the strategy seems to be logical and working.”

He said Terex did not have the ability to grow the mining business as fast as it needed in places like Chile, Brazil and Canada. Just as important, Caterpillar’s recent decision to expand its range of mining products would have brought the industry’s biggest player into the market in an even bigger way — a prospect DeFeo admitted he did not relish.

“We were a good business but we were going to get squeezed,” he said.

“So I think we’ve made a great decision. And mining is going to trade as growth stocks in the next few years but there is another side to the door, it will not always be this way. What I’m trying to do is to build the business for tomorrow.”

(Additional reporting by Soyoung Kim in New York; Editing by Gary Hill)

Terex CEO wants deals but prices too high