Deal of the decade22 May 2019
The acquisition of Demag by Tadano looks set to be the deal of the decade, less so for the monetary value of the transaction than its impact on the mobile crane segment. At Bauma, Will North spoke to Terex’s John Garrison and Steve Filipov, and Sotiris Kanaris reported from the two companies’ joint press conference.
Tadano and Terex opened Bauma with a joint press conference to discuss the deal. Koichi Tadano, CEO, explained the motivation for the purchase: “Today Tadano's product line includes rough terrain cranes, all terrain cranes, truck cranes, telescopic boom crawler cranes, truck mounted cranes, aerial work platforms and more.
“Tadano's long-term goal is to become a global leader in the lifting equipment industry and to raise our sales ratio outside Japan to 80%.
"Demag has long produced some of the world's finest all terrain and crawler cranes. With the acquisition, we will be adding lattice boom crawler cranes to our product line, and will build up our all terrain [range] to a full product line up.
“Our expectation is that after the acquisition is complete we will be able to combine the strengths of both Tadano Faun GbmH and Demag to generate tremendous synergies throughout the value chain including design, procurement, production, sales, and support.
“By combining Tadano's pursuit of safety and quality with Demag's innovative technology we can respond to our customers' needs and give them a greater added value.”
At a Terex press conference on the Wednesday of the show, Terex CEO John Garrison explained more about how the deal fits in with Terex strategy. Since taking over as CEO, Garrison has pursued a strategy of ‘Focus. Simplify. Execute to win.’
Reversing the acquisitive approach of his predecessors, Garrison’s first strand—Focus—has seen the company shedding subsidiaries. Now, Terex would consist of two main segments: Genie access products, and minerals processing equipment.
The two Italian crane businesses, towers and rough terrains, would be standalone divisions, under Steve Filipov, while Franna pick and carry cranes would be part of minerals processing, under Kieran Hegarty.
After Bauma, Terex and Custom Truck One Source announced that the latter company would be buying assets of Terex’s Oklahoma City mobile cranes businesses.
The Demag deal most definitely fits into this strategy, although it appears that a sale was not so much planned by Terex, as welcomed when Tadano made its offer.
The transaction was valued at $215m. Given the value of the assets transferred in the deal—the Zweibrücken plant, various elements of Terex’s sales network, its skilled staff, IP, and cranes in the process of production and delivery—this does not seem like very much. That figure, in fact, shows both why Terex will have welcomed the offer, and the challenges—and opportunities—for Tadano as it develops the business.
Garrison told Cranes Today, “Valuation of companies is a lot of science and some art. It's really associated with the operating losses Demag has experienced over the last several years. The valuation is based on future potential, not existing EBITDA.”
Tadano has been careful not to discuss its plans yet; but the new owner will need to look at ways to overcome these operating losses.
Garrison said: “I think it is a good opportunity to combine the two companies in that space. In terms of the amount of business, combining the all terrain cranes and large crawler cranes is very natural.
“When you think about Tadano and Demag, from a subsystem supplier standpoint, it's got both those businesses in a really good position to select. That will create an opportunity for value creation.
“There are a couple of models where they will have to decide what they do from a product strategy, but overall there's very little direct product-to-product competition; it's good overlap in terms of the product lines they'll be able to offer.
“It will be good for customers, it will make both companies stronger, and it will be good for Demag team members who will be joining a global company with aspirations to be a clear leader in the industry.
And, for shareholders, our owners, we believe it's in their best interest.” Some customers have raised concerns about the shrinking over recent years of the all terrain business. This deal will see the segment consolidate further from four suppliers competing globally— Liebherr, Manitowoc, Terex, and Tadano—to three. Some may worry what this means for customer choice.
Garrison makes clear that a shrinking range of choices is better for customers, than buying long term investments like cranes from companies that are struggling. “It's a very global industry, but even though it’s relatively large as an industry, it’s relatively small in terms of the number of players around the world. It’s a very specialised industry, and, as it pertains to larger machines, consolidation is going to be good for everyone, with companies truly focused on that business.
“You want strong players. Companies can't exist at operating losses. For the long-term health of the industry, you need companies that are profitable. You need to be profitable to continue to reinvest in the product. This will create a stronger industry, that ultimately will be better for customers.”
While the deal will see Terex passing to Tadano the challenge of making Demag profitable, and the potential promised by the combined businesses, the US-listed company has kept those segments of its crane division that, it says, have consistently contributed to its bottom line.
Garrison couldn’t be clearer on his plans for the remaining businesses: “The rough terrain business and the tower business are not for sale.” Steve Filipov, speaking to Cranes Today in a joint interview with Garrison, explained why. “The rough terrain business has been profitable since we bought it in 1995. With the exception of 2008–09, the towers business has also been [a source of] positive cash flow, since we bought it in 1998. Franna is a very good business: Danny Black [general manager, Terex Cranes, Australia & New Zealand] and his team do a really nice job, so this was a very natural fit with the MP business.”
While Tadano’s management team will be implementing their plan for Demag this summer, Filipov will be focusing on Terex’s remaining Italian crane businesses. He says, “The RT business is going to take a bit more effort on the front end of the house, because with the sale of Demag we're losing branches and subsidiaries selling that product. We're going to stand up a commercial organisation in that business.
“People ask, can you really compete with Tadano and other competitors in that space? I think we can, we don't need to be the market leader globally, we can have a focused business in rough terrains in some markets. Today in an RT market that's down significantly, we're making money. It's going to come back at some point; oil is up to $70, so we'll see that business grow.
“Towers has always been pretty independent. I think it's [a question of] what investment strategy do we need to accelerate the growth there? As John said, now we're more focused, we have more time and effort to spend on it. It's got potential to double the business: it was double at the last peak.”
Under Hegarty, the Franna cranes will be part of the minerals processing segment. This is a decision that has raised some eyebrows, but Filipov says they will fit well. “The Franna business is really an Australian and South Asian business. There's significant customer overlap between our MP business and our Franna business. It was a natural fit.”
Digging into the Details
While the broad strategic arguments for the deal for both companies are clear—a broader range of heavy mobile cranes for Tadano, a more focused collection of profitable businesses for Terex— some details need addressing too. Back in 2016, Terex and Konecranes had planned a full scale merger. Chinese construction equipment giant Zoomlion then stepped in with an approach to buy Terex, before the two Western firms decided to instead pursue a deal for the Terex MHPS (materials handling and ports solutions) business.
Could the current deal with Tadano see a similar tussle? Garrison says not. “This is a contract such that we do not have an option, and Tadano does not have an option, to exit. There's not an ability for someone else to come in.
“We already have regulatory approvals: the only country where there was a question was Germany, and we already have approval.
So really we're just waiting for US CFIUS [Committee on Foreign Investment in the US, which assesses the national security impact of foreign deals] as we have a small defence contract with the US government on the Demag side.”
The combination of government bureaucracy and national security may take some time. But Terex seem confident that the deal will complete in June as scheduled.
There has been a trend over recent years for crane companies to develop control systems that are similar across their range. Terex’s entrant in this field is its IC-1 control system, developed by Demag. Most of the cranes using this will go with Demag to Tadano. But a couple will remain with Terex.
Filipov says, “We're in the process of doing a lot of transitional services agreements, with the divestiture of the business. One of those is IC-1. Today we have IC-1 on the RT90 and on the AT40 Franna. So for a period to be determined, at least a year, Tadano will license us the technology, and then we'll figure out, do we continue, or do we go and find another provider for that? Just walking around the show, there's a lot of providers that can jump in and give us another solution.”
An American Future
One concern that may be prominent in many customers’ minds is the future of support for their cranes. For Demag cranes, this will become Tadano’s concern; for tower cranes, rough terrains, and Frannas, responsibility for aftersales service will remain with Terex. But what of cranes in the US, where Terex will not have crane production facilities?
Talking to Garrison and Filipov, it’s clear that they and Terex feel a moral duty to customers. But, as executives of a listed company, their ultimate duty is to shareholders. What would happen if future owners and executives decide crane service is not a sector they want to be in?
The bottom line of Terex’s commitment is quite simply the bottom line of its results: service is ‘absolutely’ profitable, Garrison says: “The service and support business covers thousands of installed cranes in the US and North America. We're actually increasing our service and support levels. We're investing in engineering, purchasing, sourcing, and technicians. We understand the importance of taking care of these products for decades. The new product machine sales was actually an operating loss for us, but service is very good business."
And what of Terex’s Oklahoma City business, where it builds truck cranes, and other equipment largely focused on North America users? Shortly after Bauma, rumours of a deal with Blackstone Energy’s Compact Truck One Source were confirmed. The deal will see the equipment sold under the company’s Load King brand, which it acquired from Manitex in 2016.
Custom Truck One Source has its roots in Custom Truck and Equipment (CTE), which has been building truck bodies since the 1990s. Private equity firm Blackstone acquired CTE in 2015, along with Utilities Fleet Sales and Forestry Equipment of Virginia, naming the business Utility One Source (UOS).
Specialised trailer manufacturer Load King joined the group in 2016, from Manitex, as the sixth acquisition since its founding. It has continued to operate under its own brand.
In 2018, the company rebranded as Custom Truck One Source. CEO Fred Ross, founder of CTE, said at the time: “Every day, people look to us for innovative solutions—and clear communication about them. With our focus on custom in the name, it can work for every industry we serve.”
Today, according to Ross, the company aims to be a ‘cradle to grave’ supplier of vocational equipment, building, selling, hiring, and, eventually, buying back and remanufacturing specialised truck bodies.
Innovation without a pause
While Demag may be on the verge of sale to Tadano, its engineers have kept busy developing a new telecrawler line, Julian Champkin reports. They are starting ambitiously with a high capacity machine: their forthcoming TCC 160— the model designation is still to be confi rmed—was announced at Bauma.
The reason for choosing a 160t capacity machine as their entry size, says the company’s Vincent Stenger, is to fill a gap in the market: Sennebogen has a 130t telecrawler, and Liebherr has a 220t one, but there is at present nothing in between. “It is a huge gap” he says, “crying out for someone to fill it.”
The crane will come with a 60m main boom, claimed as the longest reach in its class, with boom extensions of 5m, 11m, 17m and 23m for a maximum system length of 83m.
There will be three pinned positions of track width, from 3.5m up to 6m centre to centre of track, and these can be non-symmetrical. Demag are hoping for load charts for unpinned positions also—this is to be confi rmed. And track widths can even be extended while the crane is travelling, which reduces stress on components. They are proud of its ability to lift on sloping ground: for example it will be able to lift 36.4t at a radius of 12m when working on an inclination of 4° with the main boom at 34m.
The main load weight for transport is 46t (without tracks or counterweight), with an exceptionally narrow width of 3m; transport height is also 3m.
The undercarriage is completely new, more resembling an excavator’s than a traditional crawler crane, and giving manoeuvrability similar to an excavator’s.
The design makes the machine completely self-rigging. All set-up steps are automated and can be operated by remote control. There will be no need for riggers to crawl under the chassis or enter any unsafe area between tracks. Pinning is hydraulic, so there will be no need to hammer pins into place. “All that avoids the need for any loose parts that could be mislaid on a site,” says Stenger.
As well as safety, the company is emphasising the speed and ease of on-site set-up. Ease of access and operation have also been prime considerations.
Hydraulic quick-connect couplings are predominantly used. Foldable ladders are installed; the large grating platforms that give access to the cabin allow access though 360° of slewing and slide in and out automatically with the tracks, so do not need separate adjusting for different settings of track width.
Two prototypes are being assembled now. The machines will be field-tested with selected customers until the end of 2020, and full-scale production and sales will start at the beginning of 2021.