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 continue to operate the 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 worth of operating efficiencies, mostly by 2016. Of this
amount, $260 million would come from cost savings with $115 million
a year in additional sales from the combination. The deal would
begin contributing contribute to Eaton's earnings 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," 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 0.7% 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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