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Johnson Controls Inc., a U.S. maker of car batteries and heating and ventilation equipment, said on Monday it had agreed to acquire Ireland-based peer Tyco International Plc in a $16.5 billion deal aimed at lowering its tax bill.
By redomiciling to Tyco's headquarters in Cork, Ireland, Johnson Controls would become the latest major U.S. company to carry out a so-called tax-inversion after drug giant Pfizer Inc. structured such a deal with Irish peer Allergan Plc.
The merger will combine Johnson Controls' commercial buildings business with Tyco's fire security offerings, accelerating Johnson Controls' transformation following its decision to spin off its automotive parts unit.
Milwaukee-based Johnson Controls, which has a market value $23 billion, makes heating and ventilation systems and car batteries, while Cork, Ireland-based Tyco, valued at $13 billion, specializes in fire protection systems.
The merger will create savings of at least $500 million in the first three years, the companies said. They will save about $150 million a year in tax by basing in Tyco's legal domicile, Ireland.
"The move would be consistent with Johnson Control's strategy of transforming from an auto supplier into a multi-industry leader," UBS analyst Colin Langan said in a client note.
Johnson Controls' shares were down 3.1 percent at $34.51 in morning trading in New York, while Tyco's were up 7.3 percent at $32.83.
Johnson Controls' shareholders will own about 56 percent of the combined company, with Tyco shareholders owning the remainder, thanks in part to a cash consideration of about $3.9 billion that Johnson Controls shareholders will receive.
Keeping Johnson Controls' shareholders ownership of the combined company below 60 percent was important for the company because the latest U.S. Treasury rules, in a bid to limit inversions, placed some restrictions on deals that cross this threshold.
"The cash consideration is supplied by Tyco very much with the tax inversion in mind. This way you can engage unrestricted in strategies that free up your undistributed foreign earnings," said Robert Willens, a corporate tax and accounting consultant.
The new company, Johnson Controls Plc, will be initially headed by Johnson Controls CEO Alex Molinaroli and will continue to trade on the New York Stock Exchange. After 18 months, Tyco's George Oliver will become CEO and Molinaroli will become executive chair for one year, after which Oliver will become chairman and CEO.
Johnson Controls has been preparing to spin off its automotive seating and interiors business and said on Monday the spinoff was on track for early first fiscal quarter of 2017.
Shares of Johnson Controls have lost more than a quarter of their value since the start of 2015, while Tyco's shares have fallen by over 30 percent.
Tyco was broken up into three companies after turnaround expert Edward Breen took the helm from former CEO Dennis Kozlowski, who was convicted in 2005 of grand larceny, securities fraud and other charges.
Under Breen, Tyco spun off its electronics and health-care businesses in 2007. He expanded Tyco's security business with the $1.9 billion acquisition of Broadview Security in 2010.
In 2012, Tyco was again broken up into three pieces - one selling valves and controls for the energy market that merged with Pentair Inc., while its commercial fire and security businesses combined into "New Tyco" and traded under Tyco's symbol. The third piece consisted of the ADT North American residential security business, now ADT Corp.
Centerview Partners and Barclays were financial advisers to Johnson Controls, while Lazard and Goldman Sachs advised Tyco. Citigroup Inc provided financing for the transaction.