Johnson Controls to buy Tyco International in $16.5-bn inversion deal

27 Jan 2016

Johnson Controls Inc, among the largest US car battery manufacturer, yesterday struck a deal to buy fire protection and security company Tyco International Plc for $16.5 billion and move the US manufacturer's base to Ireland where corporate taxes are lower.

Under the financial terms of the friendly deal, Johnson Controls shareholders will receive one share of the combined company or cash equal to $34.88 a share, while Tyco shareholders will receive slightly less than one share of Johnson Controls stock for each of their Tyco shares.

The exchange ratio represents an 11 per cent premium based on share prices as of the close of market on 22 January 2016, assuming that each share of the combined company has a value equal to one Johnson Controls share.

The inversion deal will see will Johnson Controls shareholders owning 56 per cent of the combined company while Tyco shareholders will own approximately 44 per cent.

Johnson Controls said that the merged company will be renamed "Johnson Controls plc" and the shares of the combined company will be listed on the New York Stock Exchange and trade under the "JCI" ticker.

Post closing the combined company will maintain Tyco's Irish legal domicile and global headquarters in Cork, Ireland, while the operational headquarters in North America for the combined company will be in Milwaukee-US, where Johnson is currently based.

The inversion deal, although highly attractive to US companies, has not gone down with American lawmakers who have vehemently criticised such transactions in recently months.

In Ireland corporate taxes are as low as 12.5 per cent, while in the US, companies pay as much as 35 per cent. 

Commenting on the deal, Democratic Presidential hopeful Hillary Clinton sad that she plans to block such transactions and introduce an ''exit tax'' to stop US companies from moving their base to lower tax countries. ''It is outrageous when large multinational corporations game the tax code and shelter money overseas to avoid paying their fair share, including through manoeuvres like inversions.''

Johnson Controls is expects to generate revenues of $32 billion in fiscal year 2016 and $4.5 billion of EBITDA before synergies.

The merged company also expects to generate at least $500 million in operational synergies over the first three years after closing through increasing efficiencies, eliminating redundancies, integrating the global branch networks, and leveraging the combined scale of an over $20 billion buildings business platform, and expects at least $150 million in annual tax synergies.

A completed deal would see Johnson Controls expand from a diversified manufacturer of auto parts, batteries and building controls to fire protection and security products as well

Based in Ireland and run from New Jersey, Tyco International provides commercial fire and security systems and has a market cap of $13 billion.

Tyco was split into multiple companies in 2011 after the tenure of former CEO Dennis Kozlowski, who was convicted in 2005 of securities fraud and other charges.

It spun off its electronics division, now called TE Connectivity, and the healthcare company now called Covidien Plc. (See: Tyco International to split into three public firms)

Tyco combined its commercial security business with fire protection unit to form a standalone commercial fire and security company.

This company designs, manufactures, sells, installs and services security, fire detection and fire suppression systems. The company's commercial security portfolio consists of video and access control products and services for commercial, industrial and governmental customers, as well as anti-theft/electronic article surveillance systems and associated services for retailers.

Founded in 1885 and based in Milwaukee, Johnson Controls is a global diversified technology and industrial leader having customers in more than 150 countries and has a market cap of about $23 billion.

It makes products to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and seating components and systems for automobiles.

Over the years, it had acquired Michigan suppliers or plants, including buying Holland's Prince Automotive in 1996, in a $1.35 billion cash deal, with which it emerged as the world's largest automotive interior parts supplier.

It is now a major parts source to Detroit's Big Three auto companies and has a huge presence in the state. The company's automotive division is a big employer in Michigan - with facilities in Detroit, Lansing, Monroe, Battle Creek, Port Huron, Warren, Holland and Highland Park and a tech centre in Plymouth.

Last June, it announced that it would spin off its auto business by October 2016 as separate company in order to focus on its building efficiency and automotive battery business. (See: Johnson Controls to spin off auto parts business)

Amid concerns over its future growth Johnson Controls stock has fallen by over 20 per cent, while Tyco's has fallen by over 25 per cent in the same period.