Analyst: Treasury rules won’t stop Johnson Controls-Tyco deal

Regulations address serial inverting, earnings stripping

Johnson Controls Inc. headquarters
The Johnson Controls Inc. operational headquarters in Glendale.

The proposed merger between Johnson Controls and Tyco International will still take place, despite new proposed new rules from the U.S. Treasury Department aimed at limiting corporate inversions, according to Morningstar equity strategist David Whiston.

Solar panels at the Johnson Controls’ headquarters campus in Glendale.
Solar panels at the Johnson Controls headquarters campus in Glendale.

“The two key proposals from the government center on serial inverters and earnings stripping,” Whiston wrote in a post on Morningstar’s website. “We think neither applies to the JCI-Tyco deal.”

Glendale-based Johnson Controls Inc. and Tyco International announced a merger in January that would move Johnson Controls’ legal domicile to Ireland, where Tyco is currently headquartered, to take advantage of lower corporate taxes. The move would save $150 million in taxes, in addition to $500 million in cost savings from the deal, according to the companies.

The Treasury Department and IRS issued proposed rules last week  that would eliminate the tax deductible status of interest payments on intercompany loans, which could be used to reduce the taxes paid in the U.S. by a foreign company in a practice known as earnings stripping. Another part of the proposal would limit the benefits of “serial inverting,” or buying up several U.S. companies and using the subsequent growth in size to avoid the existing inversion thresholds for another acquisition in the U.S.

In a filing with the Securities and Exchange Commission last week, Johnson Controls and Tyco indicated they were reviewing the potential impact of the new rules. Fraser Engerman, director of global media relations for Johnson Controls, said in an email Wednesday the companies are still reviewing the regulations and he couldn’t speculate on any potential impact.

Whiston says Morningstar’s review of Tyco’s filings over the past three years shows there was no stock issuance to make acquisitions and the large deals the company did make were paid in all cash.

“We continue to believe that tax inversion was not the main reason for the merger, unlike the Pfizer deal,” Whiston wrote, referencing a proposed merger between Pfizer and Allergan that was called off after the new rules were announced. “We think combining JCI’s HVAC products with Tyco’s fire and security offerings for a smart-buildings world makes a lot of sense.”

The Johnson Controls-Tyco filing last week also revealed it would cost either company $500 million to walk away from the deal because of a change in the law.

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Arthur Thomas
Arthur covers manufacturing for BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.