The planned merger of a significant portion of Milwaukee-based
Rexnord into Beloit-based
Regal Beloit received a significant boost recently as the companies received a private IRS ruling on how to handle overlapping shareholders in the deal.
“We appreciate the timely and thorough response from the IRS and look forward to closing the transaction early in the fourth quarter,” said Todd Adams, chairman, president and chief executive officer of Rexnord.
The two companies said they would file additional information with regulators in the next week with details on how the ruling will impact certain elements of the deal.
Louis Pinkham, CEO of Regal Beloit, said the letter is a “crucial milestone” for the deal and the companies are excited about receiving it.
“In addition, it was good to see that terms of the ruling related to how we may treat the shareholder overlap that exists between Regal and Rexnord are broadly in line with our initial assumptions,” Pinkham said, adding the companies are now waiting on shareholder approval votes scheduled for Sept. 1.
Originally announced in February, the deal calls for Rexnord to spin-off its process and motion control business, which would then merge into Regal Beloit. The nearly $3.7 billion deal called for Rexnord shareholders to receive $3.32 billion in Regal Beloit stock and Regal to assume $370 million in debt.
The share exchange would leave Rexnord shareholders with around 38.6% ownership of the combined company and Regal shareholders would own the other 61.4%.
However, the two companies opted to structure the deal as a Reverse Morris Trust transaction, allowing it to be tax-free for Rexnord. An RMT deal would require Rexnord shareholders to own more than 50% of the combined company to qualify for the tax benefit. While the transaction appears to fall short of that threshold on its face, the two companies said they have a number overlapping shareholders, allowing it to move forward.
When they announced the deal, the companies said they would seek a letter from the IRS to develop a method of identifying the exact amount of overlap in shareholders. Executives originally said any adjustment needed to meet the threshold would be made by issuing Regal Beloit stock to Rexnord shareholders and a potential $100 million to $500 million dividend to existing Regal shareholders.
