Eaton to buy Cooper Industries for $11.8 billion

(Reuters) - Diversified industrial manufacturer Eaton Corp agreed to buy electrical equipment maker Cooper Industries Plc for $11.8 billion in cash and stock, its biggest-ever acquisition, a move that will lower Eton's taxes by shifting its incorporation to Ireland.

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.

Cooper shares were up 27 percent at $70.89 in morning trading, the day's biggest gainer on the New York Stock Exchange, while Eaton stock was up 1.1 percent at $42.88.

The Eton-Cooper agreement would be the biggest deal of several mergers announced on Monday. Analysts said this was 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. Overall I wouldn't say that it necessarily means anything strategically for other companies in the space, other than more of the same consolidation is likely," Collins said.

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

The deal will allow Eaton to better participate in an electrical market that is expected to benefit from investment to modernize aging power grids in both mature and developing economies. It will also allow Eaton to expand into lighting and lighting controls, a market poised to benefit from a rebound in commercial construction.

Eaton also cited expected growth from the oil and gas industry, which both Cooper and Eaton serve.

Incorporating in Ireland will shave about $160 million a year from Eaton's tax bill, said Eaton Chief Executive Sandy Cutler, who will lead the combined company. "It's our confidence in the synergies in this particular deal that gave both our boards the conviction (to do this)."

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 taxes.

Re-incorporation is a legal move that rarely has any bearing on where a company's headquarters are actually located. U.S. companies have been reincorporating 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.

CONSOLIDATION

The deal could spur more consolidation in the electrical equipment industry as increased need for electronics and retrofits to improve energy efficiency across the sector prompts 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 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 cited Emerson Electric and Schneider as potential buyers.

COST SAVINGS

The 100-year-old, Cleveland-based Eaton makes power systems for data centers, hydraulics used in machinery, and truck transmissions. It recorded 2011 sales of $16 billion. The company 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 company estimated annual tax savings of $160 million.

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," Avery 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 but add to earnings from 2014.

"We are not anticipating any substantial additional change to the portfolio," CEO Cutler said. Nothing in the deal prevents the company from divesting businesses.

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 planned 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 a negative 27.2 percent tax rate in 2009, according to a filing with the U.S. Securities and Exchange Commission.

The company's current federal income taxes in 2011 was $85 million, with an additional $2 million in U.S. state and local taxes, on $375 million in U.S. profits. Its current foreign taxes in 2011 came to $186 million on $1.18 billion in foreign profits.

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 Co stock was up 1.9 percent at $46.78 and General Electric Co was up 1.1 percent at $19.15. Shares of electrical and electronics products maker Hubbell Inc were up 4.7 percent at $76.49.

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)