Pentair Inc (PNR.N) reached a deal to absorb Tyco International Ltd's TYC.N flow-control business, roughly doubling Pentair's size to $7.7 billion and making it the largest player in its sector, majority-owned by Tyco shareholders.
The deal will greatly expand the Minneapolis-based company's lineup of valves and control systems and boost its presence in Asia, Pentair Chief Executive Randall Hogan said on Wednesday.
"In the fast-growth markets, there's a lot happening. If you go over there and spend any time in any of the markets, China, India, Indonesia, it's full of opportunity and optimism. And this is going to let us reach those markets and participate in those markets more successfully," Hogan, who will remain CEO of the combined companies, said in an interview. "I view this as a growth play."
The all-stock deal views Tyco's flow business at $4.6 billion, based on Pentair's Tuesday closing stock price. Last year Tyco announced plans to split off the business in a three-way breakup of the conglomerate.
Pentair shares were up 13.6 percent at $45.75 in midday trading after earlier hitting a lifetime high of $48.77 on the New York Stock Exchange. Tyco shares were up 3.5 percent at $55.39, also on the NYSE.
Tyco shareholders will own 52.5 percent of the new company; Pentair shareholders will own the rest. Pentair will keep its executive offices in its home city of Minneapolis but be incorporated in Switzerland, where Tyco is incorporated.
The deal uses an unusual structure called a reverse Morris trust that makes the transaction tax-free.
"This is a unique structure that has only been used perhaps a couple dozen times over the years," Vertical Research Partners analyst Jeff Sprague wrote in a note to clients. "The net effect is Tyco Flow is actually buying (Pentair), which preserves the Swiss tax structure and avoids triggering any tax liability to Tyco or its shareholders."
Procter & Gamble (PG.N) earlier this year tried to use the reverse Morris trust structure to sell its Pringles potato-chip business to Diamond Foods Inc DMND.O before Diamond got caught up in a financial scandal. P&G wound up agreeing to sell Pringles to Kellogg Co (K.N) in a more traditional cash deal.
END OF AN ERA
Tyco once had aspirations of being a conglomerate on a par with GE before a financial scandal under CEO Dennis Kozlowski, who in 2005 was found guilty of stealing more than $150 million from the company.
His successor, Ed Breen, has spent the past decade paying down Tyco's debt load -- which stood at more than $20 billion when he took the reins in 2002 -- and dismantling the conglomerate.
Last year, the company said it would break into three pieces: Tyco Flow, Tyco Fire & Security and ADT home security. Breen said on Wednesday the other two spinoffs are on track to happen by September. Following those deals, only Tyco Fire & Security, with about $10 billion in revenue and 69,000 employees, will use the "Tyco" name.
Vertical Research's Sprague said the Pentair deal could be a sign that Tyco will sell its two remaining operations rather than spin them off.
"Tyco management is being very creative and serious about maximizing shareholder value," Sprague said.
Breen played down talk of other unit sales.
"If someone ever approaches us we always listen, it's the right thing to do from a fiduciary standpoint," he said in an interview. "But I really would stress that I'm confident that we're going to go to spin," Breen said, adding that the ADT and Tyco Fire & Security businesses "will be on their own."
The Tyco-Pentair deal had its roots in Tyco's last major break-up, in 2007. At that time, Hogan joined the board of directors of Covidien Plc COV.N, Tyco's former healthcare arm, and first met Breen.
Hogan said he'd had his eye on Tyco's flow unit for some time but it hadn't seemed a realistic target until the company announced its spin-off plans in September. At that point he began researching the business more seriously, and he and Breen began discussions in January.
Tyco's shares have risen 30 percent since the company announced plans to split in three.
Prior to the U.S. housing crisis, Pentair had been reliant on residential pool filters. Following that downturn, which took a toll on its profit, Hogan worked to diversify the company, which today makes pumps and filters used in everything from municipal water systems to beverage production.
Pentair's rivals range from industrial giants General Electric Co (GE.N) and Siemens AG (SIEGn.DE) to more specialized companies including SPX Corp SPW.N, Flowserve Corp (FLS.N) and Xylem Inc (XYL.N).
Pentair expects a profit boost of 40 cents per share in 2013 as a result of the deal, and targets earnings of more than $5 per share by 2015, Hogan said.
Analysts, on average, had expected Pentair to earn $3.02 per share in 2013.
Pentair plans to pay an annual dividend of 88 cents per share following the deal, and could have $400 million per year available for share buybacks, said Pentair Chief Financial Officer John Stauch on a conference call with investors.
(Reporting by Scott Malone in Boston and A. Ananthalakshmi in Bangalore; Editing by Unnikrishnan Nair, Sriraj Kalluvila and John Wallace)