The Golden Valley company plans to merge with a unit of Tyco in a deal valued at $4.5 billion. The headquarters will remain here.
Pentair Inc.'s merger with Tyco International's water pipe and valve business will double Pentair's size and greatly expand its global ambitions in the water business.
The marriage would immerse Pentair, which is based in Golden Valley, in the water treatment segment for the industrial and energy markets and lessen its dependence on residential products like pools, spas and water softeners.
"For Pentair, this is a transformative deal," said Michael Wherley, an analyst at Janney Capital Markets in Philadelphia. "It changes the perception of the company, from a basically North American company tied to housing to a global industrial."
Pentair will go from a $3.5 billion company with 15,000 workers to a $7.7 billion business with about 30,000 employees around the globe.
The deal got a thumbs-up from Wall Street on Wednesday. Shares for both Pentair and Tyco hit 52-week highs after the transaction was announced. Pentair was the No. 1 gainer among all the companies traded on the New York Stock Exchange on Wednesday.
Pentair shares climbed more than 15 percent, closing at $46.32. Tyco shares increased more than 4 percent, closing at $55.81.
"As a highly complementary strategic partner, Pentair has a proven track record that will ensure that this value proposition is delivered. Overall, this combination is a win-win for the shareholders of both companies," Tyco CEO Edward Breen said on a conference call.
Investors, who often take a dim view of blockbuster deals, appeared to embrace the merger's advantages. The pairing of two like-sized companies with complementary product lines has the potential to make Pentair a much larger global player in water technologies, especially in high-growth industrial and energy markets like oil exploration. And by moving away from residential products, Pentair has less exposure to the languishing housing market.
The marriage would accomplish swiftly what Pentair CEO Randall Hogan has been trying to do for years, expanding the company's global reach and increasing its footprint in water treatment and storage products. Brian Drab, an analyst at William Blair in Chicago, said Pentair's business outside the U.S. now accounts for about 40 percent of total sales but will increase to about 60 percent after the deal is complete. Fast-growing developing countries will account for about 25 percent of total sales compared with less than 20 percent now, he said.
In an interview, Hogan said the deal "fits strategically to a T."
"It really extends us to be a leader in the energy and industrial space for both water and fluids," Hogan said. "These are going to be big drivers as 4 billion people in the world demand a better quality of life."
Drab said the two companies appear to have little overlap. Pentair produces water storage, filtration, pumping and treatment systems while Tyco's focus is on valves. "There could be significant cross-selling opportunities," Drab said.
Hogan said his team approached Tyco with the idea of a merger toward the end of last year. The biggest challenge, he said, will be extending Pentair's lean enterprise management philosophy to Tyco's global operations.
"They're years behind us," Hogan said. "We've been on our lean enterprise journey for 12 years. They started on it two years ago."
The merger is expected to add 40 cents per share to Pentair's adjusted earnings in 2013, and result in a one-time charge of about $230 million over the next one to two years. The earnings per share for the new Pentair is expected to be at least $5 by 2015.
While the merged enterprise will be incorporated in Switzerland, where Tyco is based, Pentair's corporate offices will stay in Minnesota. Its senior management team will also remain intact, and Hogan will lead the company. A new board of directors will include Pentair's current members plus two new directors designated by Tyco.
The all-stock deal comes as Tyco, a Swiss manufacturer, breaks itself into three parts. The transaction values Tyco's flow control unit at about $4.9 billion, including the assumption of $275 million of Tyco debt and $94 million of minority interest. Tyco shareholders will own 52.5 percent of the new, combined Pentair company, and Pentair shareholders will own 47.5 percent. It's expected to close at the end of September.
Being domiciled in Switzerland gives the company other tax advantages. The new Pentair's estimated annualized tax rate globally will fall to 24 to 26 percent from the 29 percent Pentair currently pays, the companies said.
The stock-for-stock exchange was done through a "reverse Morris trust" -- a structure companies use when they want to spin off unwanted assets and not pay taxes on capital gains. In it, the company creates a subsidiary that merges with another company, with the shareholders of the spun-off subsidiary owning more than 50 percent of the newly created company.
Critics decry the structure as a major tax dodge and loophole in the U.S. tax code.
"I think the Treasury is losing billions of dollars a year because of these transactions," said Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice.
Tyco's decision last September to split in three parts is the conglomerate's second such breakup. Tyco underwent a similar breakup in 2007 as it tried to move beyond the accounting scandals that routinely made headlines earlier in the decade. Its former CEO, Dennis Kozlowski, was convicted in 2005 of grand larceny, conspiracy and fraud
The Tyco name is familiar in Minnesota. In 2010 Tyco Electronics acquired ADC Telecommunications Inc. for $1.24 billion. However, Tyco Electronics was already a separate company at that point, having broken off from Tyco International in 2007.
Jennifer Bjorhus • 612-673-4683 Susan Feyder• 612-673-1723