--Eaton says Cooper shareholders would receive $72 in cash and stock for each Cooper share
--Deal is subject to approval of shareholders from both companies
--Eaton forecasts cost savings of $375 million a year by 2016
(Updates with comment from analyst beginning in the seventh paragraph and details about debt and Moody's Investors Service putting the Eaton and Cooper under review.)
By Bob Tita
Of DOW JONES NEWSWIRES
Eaton Corp. (ETN) plans to acquire electrical equipment maker Cooper Industries PLC (CBE) in an $11.8 billion cash-and-stock deal that will expand Eaton's power management and electrical products businesses.
Cooper shareholders would receive $72 a share in cash and stock, a 29% premium to Friday's closing price. The stock, which has never traded above the offer price, surged 26% in recent trading to $70.32.
The deal received the backing of both boards, but the tie-up faces approval from shareholders of both companies as well as regulators. Eaton expects the deal to close this fall.
"The combination of these two businesses creates an enterprise of real size and capability," said Eaton Chairman and Chief Executive Alexander Cutler on conference call Monday. "We've known one another as companies for many, many years. We're all convinced this is a very, very powerful combination."
Cutler will led the combined company, which will be known called Eaton Global Corp. and headquartered in Ireland, where Cooper is based.
Based on the companies' 2011 results, the new company would have sales of $21.5 billion and earnings before taxes and interest of $3.1 billion. Eaton projects the deal will yield $375 million a year in cost savings, mostly by 2016, and contribute to Eaton's earnings starting in 2014. Eaton also forecast tax savings and cash management benefits of $160 million a year.
Cleveland-based Eaton operates a diversified portfolio of businesses that includes manufacturing components for the aerospace industry, commercial truck transmissions, hydraulic components, automotive parts and products and systems for managing and distributing electric power. Cooper is expected to strengthen Eaton's product lineup against competitors such as Schneider Electric S.A. (SU-PAR), Emerson Electric Co. (EMR) and ABB Ltd. (ABB), which recently acquired electrical products manufacturer Thomas & Betts Corp. for $3.9 billion.
Cooper also is expected to reduce Eaton's exposure to highly cyclical markets for capital equipment, such as commercial trucks, that make Eaton's earnings volatile and difficult to forecast.
In anticipation of capital goods markets reaching peak levels, investors lately have been reluctant to move up the price of Eaton's stock. Eaton's stock trades at less than 10 times its projected 2012 earnings. That's at least a 20% discount, according to Nicholas Heymann, an analyst for brokerage firm William Blair & Co.
Cooper "solves Eaton's problem as a cyclical, capital goods intensive company," said Mr. Heymann.
After the deal is completed, 59% of Eaton's sales will come from its electrical business, compared with 45% last year. Cooper's two business groups are electrical products, such as Bussmann-brand circuit breakers and energy-efficient lighting fixtures, and its power safety and distribution business group, which supplies equipment such as medium-voltage transformers used in power grids.
"There are number of products that really complement each other," Mr. Cutler said. "The key issue here is complementary, not overlap. That's why this is so powerful."
Demand for Cooper's products lately has come from the energy industry, industrial expansion projects and energy efficiency upgrades for commercial buildings. Meanwhile, the slump in commercial and residential construction in the U.S. and the weakness in European economies have been a drag on sales.
News of the acquisition prompted Moody's Investors Service to place its ratings on Eaton and Cooper under review for possible downgrade. Both companies' senior unsecured ratings are currently rated A3, four notches into investment grade. The ratings firm said the deal will involve a significant amount of new debt, which would lead to a deterioration in Eaton's financial metrics.
Eaton said it has secured $6.75 billion in underwritten bridge financing from Morgan Stanley and Citibank to cover the cash portion of the deal. Eaton said it will later refinance these bridge loans by issuing new term debt.
Earlier this month, Cooper reported a profit of $160.7 million, or $1 a share, down from $346.1 million, or $2.07 a share, a year earlier. The year-earlier period included a contribution of $190.3 million from discontinued operations. Excluding special items, earnings were $1.06 per share, up from 93 cents a year earlier. Revenue from the quarter grew 9.9% to $1.4 billion
Eaton in April reported a first-quarter profit of $311 million, or 91 cents a share, compared with a year-earlier profit of $287 million, or 83 cents a share. Sales rose 4.1% to $3.96 billion.
Shares of Eaton were recently trading up 0.6% at $42.66 a share.
-By Bob Tita, Dow Jones Newswires; 312-750-4129; firstname.lastname@example.org
--Nathalie Tadena and Mia Lamar contributed to this article.
(END) Dow Jones Newswires
May 21, 2012 14:39 ET (18:39 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.