Johnson Controls, Tyco to Merge in Inversion Deal--4th Update

By Bob Tita and Dana Mattioli 

Johnson Controls Inc. and Tyco International PLC agreed to merge in a $14 billion deal that creates a new giant provider of commercial-building systems and reflects a growing push by some executives and shareholders toward companies that are bigger but more focused.

The deal, announced Monday, would combine Johnson Controls' business selling heating and air-conditioning equipment for skyscrapers, schools, hospitals and other structures with Tyco's lines of security and fire-suppression gear into a company with more than $30 billion a year in sales.

Johnson Controls shareholders will own about 56% of the new company, which will be renamed Johnson Controls PLC but will maintain Tyco's Irish legal domicile--making the deal the latest in a string of so-called inversions that bring shareholders tax benefits but have stirred controversy.

Both Tyco and Johnson Controls in recent years have made moves to unstitch businesses that had grown sprawling and unwieldy from previous acquisitions. Tyco, which today has about $10 billion in annual revenue, shrank itself from a conglomerate with some $41 billion in sales and segments that made electronics components and surgical equipment. Johnson Controls has moved to shed automotive-parts units that once accounted for more than two-thirds of its revenue as Chief Executive Alex Molinaroli has sought to focus on higher-margin businesses.

Those changes reflect, in part, a broader dissatisfaction among shareholders--especially some activist investors--with the concept of sprawling conglomerates that have tentacles in widely arrayed industries. At the same time, executives still see value in combining businesses in the same or similar industries to give them greater market clout.

Similar dynamics have been evident in some other big recent deals. In November, Pfizer Inc. and Allergan PLC agreed to combine in a $155 billion deal, then promptly announced that it was considering splitting the final company. Last month, Dow Chemical Co. and DuPont Co. agreed to combine into a chemical giant worth more than $120 billion before splitting up into three companies focused on three separate sectors. DuPont CEO Edward Breen was Tyco's CEO when it did much of splitting, and remains its chairman.

Monday's deal, which The Wall Street Journal reported on Sunday was imminent, comes as both companies look to boost their stock prices in the face of slowing industrial activity. It represents a watershed for two industrial companies with long and distinct corporate histories. For Tyco, the merger would be the final chapter of a decadelong dismantling of a holding company that was once one of the largest industrial conglomerates in the U.S. under former CEO L. Dennis Kozlowski.

The combination would allow Johnson Controls to offer building owners and managers a more complete suite of equipment along with data-collection services to analyze and manage power consumption and predict maintenance requirements.

The companies said the merged entity would save at least $150 million a year on taxes and at least $500 million in costs over the first three years after the completion of the deal.

The merger "will create a better company," Mr. Molinaroli said on a conference call, "that will transform our ability to capture opportunities in a fast-moving market place."

Mr. Molinaroli will lead the new company for 18 months after the tie-up is complete. Tyco CEO George Oliver will then become CEO and Mr. Molinaroli will become executive chairman for a year, before ceding that title to Mr. Oliver as well. Mr. Breen will give up his chairmanship of Tyco.

As a result of Johnson Controls' inversion, the company's effective tax rate will be 18% or 19%, said people familiar with tax structure. Tyco paid 12% of its profit in taxes over the past three years, versus an average 29% by Johnson Controls, according to S&P Capital IQ. Johnson Controls said its effective tax rate before certain items was around 19% over the past two years ended Sept. 30.

The deal started to take shape in late summer when Tyco's Mr. Oliver approached Mr. Molinaroli about a smaller deal involving the Johnson Controls' system controls business. As talks progressed, Mr. Oliver in the past few months broached the idea of a full merger, according to the companies.

The two sides had to negotiate the final details with an impending snowstorm which made air travel difficult.

Mr. Molinaroli was at last week's World Economic Forum in Davos, Switzerland, and managed to make it out of Switzerland on Friday night before airports closed, said a person familiar with the matter. Mr. Molinaroli said the time difference between Davos and the U.S. made for long days of conference calls with executives in the U.S.

Over the weekend, Johnson Controls' board met in Milwaukee. Meanwhile, Tyco's board met in Ireland where they are required to meet on major strategic decisions because of its Irish domicile, people familiar with the matter said.

Under the deal, Johnson Controls shareholders will receive one share of the combined company or cash equal to $34.88 a share, a weighted average of the price of Johnson Controls' shares over the past five trading days. Company representatives didn't immediately respond to requests for comment on the deal's overall value.

Tyco shareholders will receive slightly less than one share of Johnson Controls stock for each of their Tyco shares.

Johnson Controls paid an 11% premium for Tyco, which is lower than typical premiums in deals billed as "merger of equals." The average premium paid in a merger of equals last year was 20%, according to data provider Dealogic.

A large portion of the deal is structured in stock, which made recent market volatility easier to deal with than if it would have been a cash deal with a set premium, said some of the people.

Michael Siconolfi and Joann S. Lublin contributed to this article.

Write to Bob Tita at [e-mail] and Dana Mattioli at [e-mail]

(END) Dow Jones Newswires

January 25, 2016 20:02 ET (01:02 GMT)

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