Shani Wallis, Editor

"I'm over the moon!" is how Rick Lovat described acquisition last week by Caterpillar. "This secures our future without compromising our legacy." The move (announced 2 April, 2008) changes significantly the dynamic in the TBM supply business. TunnelTalk spoke with Rick and Richard Lovat about the motivation and mutual benefits of a strategic move designed to serve more effectively a booming tunneling industry.

"As President and CEO of the company, I could see that within five-ten years we would need to be twice as big, if not bigger, to keep pace with demand, in terms of capacity, resources and staff. This was going to be difficult from our footprint here in Toronto, and would take substantial capital. With Caterpillar we gain these resources while retaining our identity. We remain exactly as we are Ð the name stays; our identity is unchanged; we stay operating out of Toronto; we remain in charge of our own operating strategy; we retain all our own people; there is no change of our management Ð all these were agreed in negotiations. The difference is that, with us going forward, instead of an amorphous venture capitalist or bank, interested primarily in asset stripping or maximizing profit without investment, we have a like-minded partner. One that has the same international interest; is in the heavy civil construction industry; has like- minded goals; and understands the nature of the business. What is there not to like about this deal?"

Richard Lovat, founder of the family business in 1972, is also well pleased with the change. From humble beginnings after emigrating as a mechanical engineer from Italy to Canada, Richard, and his son Rick, have built the company to a world-recognized name with a loyal customer base and a reputation for sticking with the toughest of projects to a successful end. Lovat Senior said: "I could see things coming for the market, for the company, and to be selected by the industry leader as their tunneling partner is the highest recognition of our efforts. They are not going to compromise their reputation and we neither. They wanted the best and we have joined with the best."

The news hit the tunneling industry like a bombshell last week and is a clear indicator of industry direction. Market data is closely guarded but by rough estimates, the global TBM supply business, with all the necessary support equipment, must be in the $US 1 billion plus per year at present. With no slow down in sight, this could double over the next five years and remain elevated thereafter. The amount of infrastructure to be built underground in developing countries, and the amount of rehabilitation, replacement and expansion needed in developed countries, is in the multi-billions to trillions. A substantial majority of this is needed in cities and through soft or mixed ground Ð the market sector in which Lovat is centered. Getting a slice of this lucrative action prompted Caterpillar to begin investigations about how to enter the market and become an all-round supplier to its expansive international customer base.

According to Lovat, Caterpillar initiated negotiations. "They approached us about 18 months ago saying that, of the investigations they had made, it was us they wanted to partner with." And there is much to credit the union. The two companies are North American based and therefore operate under the same basic ethos and business management model; they are under similar legal systems; they speak the same language; they will operate their international efforts from the world's leading economy; they have the same experiences and evidently share a common goal.

"As with others in the market, we needed money and resources to be able to meet rapidly growing demand and we get this in the best possible way with Caterpillar," said Lovat. "We get to partner with one of the biggest construction equipment manufacturers with manufacturing facilities around the world. We can draw on the company's dynamic R&D department; on its purchasing power; and on its international servicing network."

Other manufacturers have made alliances with banks and financial backers, have set up joint venture manufacturing in other countries, and have found partners among industry leaders. But where other high profile takeovers and partnerships have failed, the CAT-Lovat combination has more going for it for the benefit of the market. Supply of components in this heated market for example, has become a critical pinch point for delivery of TBMs. Main bearings in particular are on long lead times amid increased competition from the military and wind farm industries. With Caterpillar, Lovat aligns itself with one of the largest purchasers of industrial bearings and the pricing and delivery guarantees that brings.

As a private company, Lovat doesn't publish annual accounts, but with more than 250 TBMs delivered globally and support companies in Europe and China, Lovat employs today more than 450 and "our order book through 2008 reflects the demanding state of the business", said the CEO. Publicly-traded CAT's accounts reported sales and revenues of $45 billion for 2007 with expectations to increase that by 5-10% in 2008 and increase profit per share by 5-15% on 2007. The report doesn't make mention of potential acquisitions, but Chairman and CEO Jim Owens said in the report; "we expect the world's robust investment in infrastructure to continue well into the next decade, and we'll need more capacity to serve our customers." In last week's statement, Mining and Underground Products Vice President Chris Curfman said; "we intend to leverage our global business with continued investment in the Lovat product line".

Together with its renowned yellow-branded construction, earth-moving and mining equipment, including a large belt conveyor interest, the 80-year-old CAT corporation also manufactures diesel and natural gas engines and industrial gas turbines. It also runs its own financial, remanufacturing and logistics divisions and a railway maintenance business in North America. While Caterpillar has a broad global reach, Lovat has a long and stronger presence in several countries including Russia, and will facilitate introductions for CAT.

The 100% acquisition of Lovat by CAT is a boulder into the pond. The ripples have only just begun to radiate.

www.lovat.com
www.cat.com