Eaton to buy Cooper Industries for $11.8 billion

(Reuters) - Diversified industrial manufacturer Eaton Corp struck a deal to buy electrical equipment maker Cooper Industries Plc for $11.8 billion in cash and stock and said it would shift its incorporation to Ireland to save on taxes.

The deal, Eaton's biggest ever, will allow the company to offer a broader range of electrical products, such as lighting and wiring devices, to markets ranging from mining to oil and gas and utilities, and help it expand in emerging markets while cutting costs, Eaton said.

The deal was the biggest of several announced on Monday. Analysts said acquisitions are one way for companies to grow in a sluggish global economy.

"It drives the point home that acquisitions are an increasingly important growth avenue in a slow-growth world," said analyst Matt Collins of Edward Jones. "Record low interest rates and solid balance sheets make it that much easier to get deals done."

Cleveland, Ohio-based Eaton will pay $72 per share for Cooper - $39.15 in cash and the rest in stock. Eaton shareholders will control almost three-quarters of the new Eaton Global Corp Plc, and administrative headquarters will remain in Ohio.

The pricing appears to be fair or "slightly expensive," valuing Cooper at 11.5 times projected earnings, JPMorgan analyst Ann Duignan said.

Cooper shares were up 26 percent at $70.24 in afternoon trading, the day's biggest gainer on the New York Stock Exchange. Eaton stock inched up 7 cents to $42.47.

Incorporating in Ireland will shave about $160 million off Eaton's annual tax bill, said Chief Executive Sandy Cutler, who will lead the combined company. But he said synergies, not tax reduction, were the primary motivation for the deal.

"It does afford us some global cash management and associated tax benefits, but (Irish incorporation) is really a byproduct of this transaction," Cutler told Reuters in an interview.

When Cooper incorporated in Ireland last decade, it was one of several U.S. industrial companies, including Ingersoll Rand and Tyco International , that picked either Ireland or Switzerland to help lower their taxes.

Re-incorporation is a legal move that rarely has any bearing on where a company's headquarters are located. U.S. companies have been re-incorporating in Ireland and Switzerland in recent years, instead of the offshore tax havens of Bermuda and the Cayman Islands, reasoning that Ireland and Switzerland offer better protection from U.S. tax claims than small countries that are more dependent on U.S. goodwill.

The tax component of the Eaton-Cooper deal is unique and is unlikely to be replicated by other companies, said Nicholas Heymann, co-group head of global industrial infrastructure at William Blair & Co in New York.

He said Cooper moved its incorporation to Ireland ahead of a change in U.S. tax laws that would have left it liable for a large tax bill.

Heymann said the deal sets up Cooper CEO Kirk Hachigian as a likely successor to Eaton's Cutler.

Cutler, in the interview, said it was not yet clear what role Hachigian would have in the combined company.

CONSOLIDATION

The deal could spur more consolidation in the electrical equipment industry. Increased demand for electronics and retrofits to improve energy efficiency is prompting multi-industry companies such as Eaton and ABB Ltd to expand their electrical equipment offerings.

Swiss engineering group ABB bought U.S. electrical components maker Thomas & Betts in January for $3.9 billion to ramp up its presence in the world's largest market for low-voltage products.

Analysts have said electrical products makers Hubbell Inc and Acuity Brands Inc could be attractive targets for industrial conglomerates such as France's Schneider Electric and Germany's Siemens AG .

More room for consolidation remains in the industry, said Shawn Severson, an analyst with JMP Securities. "The obvious one everyone is looking to is Hubbell. Hubbell is a mini Cooper - it's got a similar business mix."

Severson named Emerson Electric and Schneider as potential buyers.

COST SAVINGS

Century-old Eaton makes power systems for data centers, hydraulics used in machinery, and truck transmissions. It recorded 2011 sales of $16 billion. It has stepped up acquisitions in recent years, closing nine deals last year.

Cooper, based in Dublin, had 2011 sales of $5.4 billion, with most of its sales to utilities and industrial markets. Its products include safety systems, lighting, circuit protectors and wiring devices used in homes and commercial buildings.

The Cooper acquisition will reduce Eaton's costs by $260 million a year by 2016, while adding $115 million a year to revenue, Eaton said.

The deal is expected to close in late 2012, Cutler said. The new company will generate some 59 percent of its sales from electrical businesses, with hydraulic, aerospace and truck markets together making up the rest.

The deal will also help Eaton diversify geographically, said Catherine Avery, chief executive officer of CAIM LLC, which holds shares of the company.

"They're going to dominate that electrical power equipment segment," she said. "It's taking a long-term point of view and saying, 'There are areas of the globe that are expanding and when we do get into a better economic environment, we're going to be there.'"

Eaton said the deal is expected to reduce 2013 operating earnings by 10 cents a share but add to earnings thereafter.

Eaton has secured a $6.75 billion bridge financing commitment from Morgan Stanley and Citibank to pay for the cash portion of the deal. It said it plans to issue new debt, use cash on hand and possibly sell some assets to pay down the loan.

Eaton last year had an effective worldwide tax rate of 12.9 percent, up from 9.5 percent in 2010, and had a tax credit in 2009, according to a filing with the U.S. Securities and Exchange Commission.

The company's U.S. federal income taxes in 2011 totaled $85 million, with an additional $2 million in U.S. state and local taxes, on U.S. profits of $375 million.

Its foreign taxes in 2011 came to $186 million on foreign profits of $1.18 billion.

Other large U.S.-listed industrial stocks were higher across the board on Monday. Parker Hannifin Corp shares were up 3 percent at $82.99, Emerson Electric stock was up 1.9 percent at $46.78, and General Electric Co was up 1.1 percent at $19.15. Hubbell was up 4.7 percent at $76.49, and Acuity jumped 6.8 percent to $53.10.

Citi and Morgan Stanley advised Eaton on the deal, while Goldman Sachs advised Cooper.

(Additional reporting by A. Ananthalakshmi in Bangalore, Scott Malone in Boston and Soyoung Kim in New York; Editing by Saumyadeb Chakrabarty, John Wallace, Lisa Von Ahn and Matthew Lewis)

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