Tyco To Merge Pipe, Valve Business With Pentair
03/28/2012| 04:54pm US/Eastern
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--New company will take Pentair name
--Tyco shareholders would own 52.5% of the new company
--Pentair CEO Randall Hogan would continue to lead the company
(Updates with analyst comment beginning in the fifth paragraph.)
By Bob Tita
Of
Tyco International Ltd. (>> Tyco International Ltd.) intends to merge its pipe and valve business with pump and filter manufacturer Pentair Inc. (PNR) in a deal that values the Tyco unit around $4.5 billion.
Under the all-stock transaction, Tyco shareholders would own roughly 52.5% of the combined company and Pentair shareholders would own about 47.5%. The new company would take the Pentair name and would be led by Randall Hogan, Pentair's current chairman and chief executive. A majority of the new company's directors also would come from Pentair.
"This is a winning combination," Hogan said Wednesday.
The merger is subject to the approval of the two companies' shareholders and adds a wrinkle to Tyco's plan to dismantle itself into three public companies focused on home security systems; pipes and valves; and fire-protection and safety equipment. Completion of the breakup is expected in September. The spinoff of Tyco's pipe and valve unit to shareholders and its merger with Pentair would take place simultaneously, the companies said.
The deal reduces some of the uncertainty about the performance of the companies being created by the breakup, which Tyco embarked on after deciding the industrial conglomerate would be worth more as separate companies than in its current configuration.
The pipe and valve company "would have been have been an undersized and competitively disadvantaged stand alone entity," said Scott Davis, an analyst for Barclays Capital, in a note to investors on Wednesday. "The deal appears solid for all involved and gives [Tyco] equity holders upside in an overall higher-quality" company in Pentair.
To maintain shareholders' tax-free benefits from the Tyco breakup, the companies are deploying a complex and rarely used merger structure known as a Reverse Morris Trust, under which Tyco shareholders will end up with a majority of the shares in Pentair even though Pentair will be the surviving company from the deal.
"It just works out perfectly for both sets of shareholders," Tyco Chairman and Chief Executive Ed Breen said.
The new company, which will be headquartered in Switzerland where Tyco is now based and managed from Pentair's offices in Minnesota, is expected to generate annual revenue of about $8 billion a year. The company anticipates earnings per share of more than $5 by 2015, which will be largely derived from cost-reduction synergies of about $200 million a year from the elimination of duplicate public-company costs and more efficient operations. The deal is projected to add 40 cents to Pentair's per-share profit in 2013.
The merger will expand Pentair's business beyond pumps and filtration equipment to include, pipes, valves and control products. The Tyco flow-control business also will provide Pentair with greater exposure to industrial customers and the energy sector. Following the merger, Pentair will have 100 manufacturing plants world-wide and 30,000 employees.
Hogan said Pentair executives began eyeing the deal last fall when Tyco announced its breakup. Pentair approached the company late last year, and Hogan and Breen initiated talks in January.
"We all know each other very well, so I already understood the strategic fit," said Breen, noting that the negotiations mostly focused on the valuation and the technical issues of the merger.
The deal values the Tyco flow-control business at roughly $4.5 billion, not including the debt from Tyco that Pentair will assume. That's about 11 times the business's earnings last year before taxes, interest expenses, depreciation and amortization.
Pentair's results lately have been enhanced by increased sales in emerging markets overseas, though it recently warned that higher costs and softer-than-expected sales would weaken profit. In May, the company completed its acquisition of Clean Process Technologies for about $705 million, a move that was expected to increase Pentair's presence in emerging markets.
About a quarter of the new company's business will come from fast-growing regions of the world where rapid industrialization and urbanization are driving demand for water and fluid treatment equipment. The U.S. and Canada will account for about 40% of annual sales.
Pentair closed Wednesday's regular trading session up 15% at $46.32 a share. Tyco, meanwhile, ended up 4.3% at $55.81 a share.
-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com
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