Reuters | Caterpillar Inc. agreed to buy a U.S. maker of railroad locomotives
Tuesday for $820 million in cash, expanding its rail business from
service into engine manufacturing.

The world’s largest maker of heavy equipment said it was buying
LaGrange-based Electro-Motive Diesel, which last year generated $1.8
billion in revenue, from private equity firms Berkshire Partners LLC
and Greenbriar Equity Group LLC.

EMD, which General Motors spun-off in 2005, will be part of Caterpillar’s Progress Rail operation and will compete more directly with General Electric Co, another major U.S. maker of locomotives.

The acquisition, the latest in a string of rail-related deals for Peoria, Illinois-based Caterpillar, is expected to close by the year’s end.

EMD’s headquarters, engineering facilities and parts-manufacturing operations are located in LaGrange, just west of Chicago.

Final assembly of the passenger, freight and road-switching locomotives is performed at a plant in London, Ontario, Canada.

Over the past four years Caterpillar, which is also a big maker of diesel engines and gas turbines, has spent about $2 billion in the rail sector.

It was an industry that was viewed as important but dull until last fall, when Warren Buffett’s Berkshire Hathaway Inc bought Burlington Northern Santa Fe Corp for $26 billion. It was Buffett’s biggest acquisition in the 44 years he has run Berkshire and one he characterized as “an all-in wager on the economic future of the United States.”

Demand for railroad locomotives has been weak of late, as the recession lowered demand for transportation of all sorts of bulk commodities.

Eli Lustgarten, an analyst at Longbow Research, said the price Caterpillar paid for EMD — less than half of last year’s revenues — was a sign that demand remains depressed.

“Everything in rail equipment is soft right now,” he said. “Rail car demand has collapsed effectively — from a high of 75,000 units to the low teens. But it has some long-term potential on a global basis and is a good acquisition and what Caterpillar has effectively done is to buy the business at the bottom.”

U.S. railroads including No. 1 Union Pacific in recent months have begun to report rebounding profits as volumes begin to grow after a two-year slump.

Union Pacific last month said it aimed to boost its capital spending budget this year to $2.6 billion, planning to spend that on intermodal equipment, which enables trains to carry equipment that can also travel by ship and truck.