The announcement this morning that Johnson Controls will acquire Irish company Tyco International is expected to accelerate growth and innovation for the global multi-industrial firm.
“This is a transformational transaction that will help us both serve our customers comprehensively and innovatively,” said Johnson Controls chairman and chief executive officer Alex Molinaroli this morning in a call with analysts. “The new Johnson Controls will be a highly attractive industrial leader.”
Molinaroli has undertaken a dramatic transformation of the company since he began leading the firm in 2013, the details of which are laid out in a recent BizTimes Milwaukee cover story. The company is in the process of spinning off its automotive seating and interiors business into a separate company, Adient.
Over the past three years, Tyco has also transformed, from a holding company into an operating company with about $10 billion in annual revenues, Tyco CEO George Oliver said in this morning’s call. Its main offerings are security and fire systems integration, commercial security monitoring, and fire, security and life safety products.
While the combined company, to be named Johnson Controls plc, will have its global headquarters in Ireland, Johnson Controls will remain committed to investing in its U.S. operations, Molinaroli said. Johnson Controls plc’s primary operational headquarters will be in the Milwaukee area. Both Tyco and Johnson Controls have a strong U.S. presence, and their international operations are expected to be complementary. The companies said the expanded geographic reach and cross-selling opportunities presented by the transaction made strategic sense.
The new company will offer comprehensive building solutions and a large energy storage platform, and will be able to harness advanced innovation in areas such as “smart” building technology, the companies said.
Leadership
Molinaroli will serve as chairman and CEO of the merged company for the first 18 months. After that, he will serve a one-year term as executive chair.
Oliver will serve as president and chief operating officer for the first 18 months, then will become chief executive officer. After another 12 months, he will become chairman and chief executive officer.
The board of directors of the combined firm will be composed of six Johnson Controls directors and five Tyco directors. Oliver will serve as a director until he takes over the chairman role.
Cost savings
By locating its global headquarters in Ireland, Johnson Controls plc is expected to save $150 million annually in taxes.
It also expects to achieve $650 million in operational synergies. About $500 million of the operational cost savings are expected to be realized in the first three years of the combination, which will be driven by increased efficiencies, elimination of redundancies, integration of global branch networks and economies of scale.
“We’ve done this (integration) before with Johnson Controls when we acquired York (International for $3.2 billion in 2005),” Molinaroli said in this morning’s call. “You get a good sense of what needs to happen and the planning needed to go forward.”
In its announcement, Johnson Controls revised its expected 2016 revenue down to $32 billion, coupled with $4.5 billion of EBITDA before synergies. Adient is expected to have approximately $16.6 billion of revenue in fiscal year 2016 and $1.6 billion of EBITDA. Adient is also expected to distribute $2.5 to $3.5 billion to the combined company through the spinoff.
The timeline of that spinoff has been pushed back from October 3, 2016 to early 2017. Under the new merger deal, shares of Adient will be distributed to Johnson Controls and Tyco shareholders.
Molinaroli explained the reasoning for the plan to delay the spinoff this morning:
“From the standpoint of the opportunity that was in front of us, we wanted to make sure we could capitalize on the opportunity to get this done,” Molinaroli said. “Based on where we were in the process and what was going on, it was best for us to go ahead and get this done.”
Nuts and bolts
Tyco has secured a $3.9 billion bank facility to finance the cash portion of the transaction. The total transaction price was not revealed, but was estimated at $16.5 billion in a Reuters report.
Immediately prior to the merger, Tyco will effect a reverse stock split and its shareholders will receive 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. The transaction will be tax-free to Tyco shareholders.
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. This transaction will be taxable to Johnson Controls shareholders.
The merger is still subject to shareholder approval and regulatory review. Additional information about the transaction is expected in Johnson Controls’ quarterly earnings conference call on Jan. 28.
“This combination of Johnson Controls and Tyco, it will create a better company and I cannot be more excited about this new company and the opportunities that lie ahead,” Molinaroli said.
