Cost to walk from Johnson Controls-Tyco deal would be $500 million

SEC filing also details negotiations on Molinaroli as CEO

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Walking away from a proposed merger with Tyco International plc because of a change in law would cost Johnson Controls $500 million, according to documents filed with the U.S. Securities and Exchange Commission.

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

The two companies announced a deal in January that would move Johnson Controls’ legal domicile to Ireland while keeping operational headquarters in Milwaukee. Known as a tax inversion, Johnson Controls has said the move could save it $150 million a year in taxes. The two companies also believe they will be able to find $500 million in cost savings through the merger.

The U.S. Department of the Treasury and the Internal Revenue Service announced temporary and proposed regulations this week that aim to make inversions less attractive. One of the regulations would eliminate the tax deductible status of interest payments on intercompany loans, which can be used to reduce the taxes paid in the U.S. by a foreign company in a practice known as earnings stripping.

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In announcing the regulations, Treasury Secretary Jacob Lew noted the department had taken action three times to make it harder for companies to invert. He also encouraged Congress to pass legislation to address the practice by adjusting the business tax code.

The filing by Tyco and Johnson Controls indicates that if either company’s board were to change its recommendation on the deal because of “a change in or issuance of, or proposed change in or issuance of, applicable law” that company would have to pay $500 million. The deal also includes termination fees of $375 million for a number of other factors.

As part of their filing, Johnson Controls and Tyco said they “are conducting a review of these announced actions and are not making any statements regarding the possible impact of these announced actions prior to their completion of this review.”

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The decision by Johnson Controls and Tyco to have the combined headquarters of the new company in Ireland has repeatedly come under fire from politicians. Democratic presidential candidate Hillary Clinton filmed a commercial outside Johnson Control’s Glendale headquarters and has said the company was avoiding its responsibilities after benefiting from the auto bailout.

For his part, Johnson Controls chief executive officer Alex Molinaroli has said the merger is about more than the tax benefits.

The filing also indicates that both companies were actively looking for strategic transactions during the summer of 2015. Johnson Controls considered a number of possible agreements for one or more of its business divisions, but discussions ceased by the end of September.

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According to the filing, Tyco CEO George Oliver contacted Molinaroli on Oct. 7 to discuss a possible deal involving the Johnson Controls building efficiency business. The two agreed to have their teams work on a possible deal.

Johnson Controls officials informed Tyco on Oct. 19 they would continue discussions on the conditions that Tyco shareholders receive “a modest market premium” and the announced spin-off of Johnson Controls’ automotive experience be treated as a separate transaction and would not be a condition of the deal.

Tyco agreed to continue with discussions on Oct. 26.

In total, the two companies, their boards and firms representing them held over 55 meetings, phone calls and discussions on the deal, which was finalized on Jan. 24 and announced the next day.

The filing details much of the back-and-forth negotiations. The discussion includes:

  • Leadership of the combined company. Tyco initially proposed that Molinaroli stay on as CEO for 12 months. Johnson Controls wanted him to serve in that role for 24 months. The sides eventually agreed he would be CEO for 18 months after closing, followed by 12 months as executive chairman.
  • The headquarters of the combined company. Johnson Controls proposed having global headquarters in Ireland with operational headquarters in Milwaukee. Tyco agreed to the proposal.
  • Exchange ratio. Johnson Controls initially proposed a 10 to 15 percent premium for Tyco shareholders, while Tyco wanted something near 20 percent. The negotiations were complicated as JCI stock lost value relative to Tyco during the negotiations. The companies ultimately settled on  a fixed exchange ratio of 0.9550 shares for each of their existing Tyco shares, which is at a 13 percent premium on 30-day volume-weighted average prices. Johnson Controls shareholders will have one of two options: exchange each Johnson Controls Inc. share for a Johnson Controls plc share; or receive $34.88 per share of Johnson Controls Inc. stock.
  • Other deals. Just over two weeks before the deal was finalized, Johnson Controls was contacted by one of the companies it had worked with over the summer about resuming discussions. Johnson Controls ultimately determined that deal “was less likely to be completed than the proposed business combination with Tyco and would likely adversely affect the ongoing work on the spin-off of the Automotive Experience business.” The two companies did not recommence discussions.


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