The transaction is structured as a reverse takeover that will see Tyco shareholders own 44 per cent of the combined group, while Johnson Controls investors will hold the remainder and receive $3.9bn in cash. It values Tyco shares at $34.88, an 11 per cent premium to its closing price at the end of last week.
The new company will keep Tyco’s Irish domicile and Cork headquarters, allowing Johnson Controls to capture a lower tax rate and create “at least $150m in annual tax synergies”, the companies said. Other synergies will total at least $500m over the first three years, they added.
The deal highlights the inability of the US government to stop its large corporations from fleeing the country’s tax regime and suggests that so-called “inversion” deals remain highly attractive to companies struggling to grow their top line.
The structure of this deal — which avoids the
creation of a new group that then acquires both companies — is similar
to US drugmaker Pfizer’s $160bn combination with an Irish-headquartered competitor Allergan, just weeks ago.
Milwaukee-based Johnson Controls has been seeking to remodel itself as a far more focused group, specialising in energy storage and building systems, such as air conditioning. Tyco’s fire protection expertise will complement Johnson Controls’ building solutions division.
A deal would mark the disappearance of a corporate
name — Tyco — that became infamous in the first years of this century,
when its former chief executive Dennis Kozlowski and its chief financial
officer were convicted of stealing $150m and fraud while at the US conglomerate.
Building solutions businesses have faced unexpected hardship in recent months with the end of the building boom in China, which had generated a high proportion of sector demand.
Johnson Controls is also heavily exposed to China’s slowdown
through its Automotive Experience business. Automotive Experience has a
joint venture with China’s Yanfeng Automotive and produces many of its
seats on the mainland, where the once-rapid growth in the car market has
slowed significantly in recent months.
Shares in both companies have fallen sharply over the past year. Tyco, which has debt of $1.7bn, has slipped 28 per cent in the 12 month period, while Johnson Controls has dropped by a quarter.
But on Monday, Tyco jumped 11 per cent in pre-market US trading to give it an equity value of $14.4bn.
The agreement also points to the continued appetite for multibillion-dollar deals despite the recent market turmoil. In the past, similar periods of volatility have damped chief executives’ appetite for merger and acquisition activity.
The board of the new company will consist of 6 members from Johnson Controls and 5 from Tyco. Alex Molinaroli will be the chairman and chief executive of the group.
George Oliver, Tyco’s current chief executive, will be president and chief operating officer. But after 18 months from the deal closing, Mr Oliver will become chief executive and Mr Molinaroli will become executive chairman from one year. Then Mr Oliver will become chairman and chief executive.
The deal is likely revive a debate in Washington about tax inversion transactions in an election year.
US companies currently pay as much as 35 per cent in tax at home, while in Ireland the rate is below 20 per cent.
Another important issue is the payment of tax when US companies seek to repatriate offshore earnings.
Hillary Clinton, the frontrunner for the Democratic presidential nomination, has said she would introduce an “exit tax” to deter companies from leaving the US.
Donald Trump, who leads the polls among Republican nominees, has promised to lower the corporate tax rate to 15 per cent to keep companies in the US.
The last large tax-driven deal was Pfizer’s $160bn acquisition of rival pharmaceuticals group Allergan, the maker of Botox, which is also based in Ireland.
In November, the US Treasury announced measures to make tax inversions less attractive, but several lawyers said the actions were modest and would do little to stop such deals.
By: James Fontanella-Khan and Robert Wright (New York) and Arash Massoudi (London).
Review: Emerging Market Formulations & Research Unit, Flagship Records.
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