LONDON - Pentair Inc. and Tyco International Ltd. reported a definitive agreement to combine Tyco’s Flow Control business with Pentair in a tax-free, all-stock merger.
The transaction values Tyco Flow at $4.58 billion, including assumed debt and minority interest. That’s about 11 times the Tyco unit’s 2011 Ebitda, excluding nonrecurring items, the companies said.
Tyco will spin off its flow unit to shareholders and the business will immediately merge with the operations of Pentair, the two companies said in a joint statement Wednesday.
Tyco shareholders will own 52.5 percent of the combined company’s approximately 214 million shares, with Pentair investors controlling the remainder.
“The new Pentair will be well positioned to benefit from the increased demands on energy, water, infrastructure and industrial process resulting from the growing population and wealth of developing economies,” Pentair CEO Randall Hogan, who will lead the enlarged company, said in the statement.
Pentair surged 18 percent to $47.32 at 9:36 a.m. in New York trading after gaining 21 percent, the biggest intraday increase since at least 1984. Tyco climbed 3.6 percent to $55.45.
The flow-control merger, still subject to investor and regulatory approvals, will create a business with $7.7 billion in combined sales and the potential for $250 million in annual savings, according to the two companies.
The merger will add to Pentair’s profit immediately, contributing an extra 40 cents a share to adjusted earnings next year, they said. The manufacturers plan to complete the transaction by the end of September along with Tyco’s move announced last year to divide into three companies.
As part of the transaction, the new Pentair will assume approximately $275 million of Tyco Flow debt, net of cash. The transaction is structured as a “Reverse Morris Trust,” which allows Tyco to preserve the tax-free nature of the planned spinoff while also getting the benefit of potential cost reductions from merging the business with that of Pentair.
In a Reverse Morris Trust, the buyer typically needs to be smaller than the division it’s acquiring.
Deutsche Bank AG provided financial advice to Pentair, and the firms of Cravath, Swaine & Moore and Foley & Lardner were legal counsel. Greenhill & Co. supplied an additional fairness opinion to Pentair’s board.
Tyco’s financial adviser was Goldman Sachs Group Inc., and the firms of Simpson Thacher & Bartlett and McDermott Will & Emery provided legal counsel. Lazard was financial adviser to Tyco’s board.
The new company will be headquartered in Switzerland, and its main offices will be in Minneapolis, where Pentair is based.