ETN Eaton Corp New

Eaton Corp. (ETN) plans to acquire electrical equipment maker Cooper Industries PLC (CBE) in an $11.8 billion cash-and-stock deal that will expand Eaton's power management and electrical products businesses.

Cooper shareholders would receive $72 a share in cash and stock, a 29% premium to Friday's closing price. The stock, which has never traded above the offer price, ended Monday's regular trading session up 25% at $69.88 a share.

The deal received the backing of both boards, but the tie-up faces approval from shareholders of both companies as well as regulators. Eaton expects the deal to close this fall.

"The combination of these two businesses creates an enterprise of real size and capability," said Eaton Chairman and Chief Executive Alexander Cutler on conference call Monday. "We've known one another as companies for many, many years. We're all convinced this is a very, very powerful combination."

Cutler will led the combined company, which will be called Eaton Global Corp. and incorporated in Ireland, where Cooper is based. Eaton said it will continued to operate the new company from its Cleveland offices.

Based on the companies' 2011 results, the new company would have sales of $21.5 billion and earnings before taxes and interest of $3.1 billion. Eaton projects the deal will yield $375 million a year in cost savings, mostly by 2016, and contribute to Eaton's earnings starting in 2014. Eaton also forecast tax savings and cash management benefits of $160 million a year, mostly as a result of relocating to Ireland, which has lower corporate tax rates than the U.S. where the rate is as high as 35%.

Eaton has managed to keep its effective U.S. tax rate below 20%, but investors increasingly view Eaton's tax advantages as temporary, analysts say, particularly if the federal government attempts to close corporate tax loopholes in the coming years.

"Instead of viewing their low tax rate as a positive, investors view it as something that's going to go away," said Jeff Sprague, an analyst for Vertical Research Partners Inc. Moving to Ireland, "helps dispel those concerns."

Eaton operates a diversified portfolio of businesses that includes manufacturing components for the aerospace industry, commercial truck transmissions, hydraulic components, automotive parts and products and systems for managing and distributing electric power. Cooper is expected to reduce Eaton's exposure to highly cyclical markets for capital equipment, such as commercial trucks, that make Eaton's earnings volatile and difficult to forecast and cause investors to be reluctant about moving up Eaton's stock price.

Eaton's stock trades at less than 10 times its projected 2012 earnings. That's at least a 20% discount, according to Nicholas Heymann, an analyst for brokerage firm William Blair & Co.

Cooper "solves Eaton's problem as a cyclical, capital goods intensive company," said Heymann.

After the deal is completed, 59% of Eaton's sales will come from its electrical business, compared with 45% last year. Cooper is expected to strengthen Eaton's product lineup against competitors such as Schneider Electric SA (SU.FR), Emerson Electric Co. (EMR) and ABB Ltd. (ABB), which recently acquired electrical products manufacturer Thomas & Betts Corp. for $3.9 billion.

Cooper's two business groups are electrical products, such as Bussmann-brand circuit breakers and energy-efficient lighting fixtures, and its power safety and distribution business group, which supplies equipment such as medium-voltage transformers used in power grids.

"There are number of products that really complement each other," Mr. Cutler said. "The key issue here is complementary, not overlap. That's why this is so powerful."

Demand for Cooper's products lately has come from the energy industry, industrial expansion projects and energy efficiency upgrades for commercial buildings. Meanwhile, a slump in commercial and residential construction in the U.S. and weakness in European economies have been a drag on sales.

News of the acquisition prompted both Moody's Investors Service to place its ratings on Eaton and Cooper under review for possible downgrade. Meanwhile, Standard & Poor's lowered its outlook on Eaton to negative from stable and placed its ratings on Cooper on review for a downgrade.

Moody's currently rates both companies A3, four notches into investment grade. S&P rates Eaton at A-minus, four notches into investment grade, and rates Cooper at A, five notches into investment grade. Moody's said the deal will involve a significant amount of new debt, which would lead to a deterioration in Eaton's financial metrics. S&P said its outlook revision reflects the potential for a lower rating if weak market conditions, deterioration in operating performance or a less conservative policy delays Eaton's expected operating improvements.

Eaton said it has secured $6.75 billion in underwritten bridge financing from Morgan Stanley and Citibank to cover the cash portion of the deal. Eaton said it will later refinance these bridge loans by issuing new term debt.

Shares of Eaton closed down 0.73% at $42.09 apiece.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

--Nathalie Tadena and Mia Lamar contributed to this article

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