Tyco megamerger transforms Pentair yet again

Pentair CEO Randy Hogan first wistfully uttered the name Tyco Flow Control three years ago.

It was during a board discussion where Hogan spouted off his wish list of far-reaching merger possibilities. His goal: transform Pentair from a fluids-processing firm to a global dynamo that newly supplies the booming energy sector.

"At the time we had no idea how we were going to do this because Tyco [International] wasn't splitting up," said Hogan from his Golden Valley office. The idea was to just plant a seed and imagine possibilities.

Fast-forward three years. Pentair and Tyco's Flow Control unit officially merged Friday in a tax-free deal valued at $5.3 billion. The transaction doubles Pentair's size and creates a Swiss-based behemoth that has broadened its focus far beyond the water treatment and beverage filtration specialties that shaped Pentair over the past eight years.

"We created a new company in just six months," said Hogan last week from his office perch overlooking Interstate 394.

With Tyco in the fold, Pentair is now a force in the oil and gas industries, which offer the company enormous potential as demand for new energy sources grows. Through the merger, Pentair is suddenly a critical supplier of industrial valves to refineries, electric companies and drilling firms around the globe. The deal also complements Pentair's existing water treatment and thermal businesses because Tyco builds entire wastewater treatment systems and heats floors and pipes even at 50 degrees below zero.

The reach of the new, larger Pentair should be extensive, Hogan said last week. One reason: the world's middle-class population is growing exponentially.

Twenty years ago, there were 1.8 billion middle-class consumers worldwide. Today, there are 4 billion. Hogan said this puts huge pressure on water and energy resources -- and creates new sources of revenue for Pentair.

But those who follow the company aren't completely sold. While the deal is transformative, they aren't sure Hogan can pull off his vision.

"This is an area for questioning," said Canaccord Genuity research analyst John Quealy. "Pentair is one of the best companies for strategy. Execution is arguable."

Pentair was largely a power tools business until it sold that unit to Black and Decker in 2004. It quickly reinvented itself as a fluid processing company, buying Wisconsin water technologies firm WICOR and several other small liquid processing firms.

But the transition from a power tools company to one that specialized in water didn't come easily for Pentair.

"The WICOR deal took quite a while to get fully integrated and digested. Why isn't [Tyco] going to be just like WICOR?" Quealy asked.

Analysts at Mairs and Power Inc., which owns 6 percent of the old Pentair, agreed.

"What really made it so tough was the competitors' response [to WICOR]. And that is something we will be keeping an eye open for now," said Mairs and Power Vice President Mark Henneman.

"Are the competitors for the new Pentair going to take advantage of them being focused on integration and try to grab [market] share from them? You see that a lot with mergers, where competitors say, 'Oh, here is my chance.'"

Hogan knows first-hand. In the midst of integrating WICOR, a key supplier turned into a competitor for Pentair. Management said it has learned from those mistakes. Pentair has digested more than 15 companies since that time without major hiccups, Hogan said.

This time around, "I think we will be better. I don't think we will be perfect," but the effort is there, Hogan said. "Our planning is better. Our team is deeper. And our scars remind us."

The entire Pentair corporation will be based in Switzerland, but Hogan and his management team will lead from Pentair's old Golden Valley offices.

Henneman said he is pleased that Pentair is leaving its division executives in place and using a completely separate team to handle integration matters. "That really increases their odds for success."

Investors hope he's right. There is a lot at stake. International sales just expanded from 40 percent of the company's total sales to 60 percent.

Tyco has "more sales outside the country. They are much bigger, particularly in China, in Australia, New Zealand and in the Middle East," Hogan said.

As the 40-member integration team acts on its long-term plans, it has gained efficiencies in the short term. Six offices in Singapore and Indonesia will now become one. Four offices in the United Arab Emirates will become one. Several offices and factories in China will consolidate.

Worldwide that saves millions in rent, Hogan said. "There is some nice cost savings there." Pentair expects to save $250 million a year by 2015 through a combination of tax breaks and job and plant consolidations.

But that's not the real story, Hogan said.

Hogan and CFO John Stauch recently told investors that they expect combined sales will grow from a combined $7.7 billion today to $9.7 billion by 2015.

How?

Hogan sees cross-selling opportunities. The newly integrated Tyco can leverage Pentair's vast relationships in the food and beverage industry, which include Coca-Cola, Pepsi and Starbucks. Meanwhile, Pentair can leverage Tyco's deep relationships with oil, gas and electric power firms. With the right connections, Pentair can sell its branded oil separation, pumps, filtration equipment and electrical enclosures to a whole new audience.

With Tyco on board, officials also are salivating over potential contracts they might win in the Bakken oil fields of North Dakota and Montana.

Hogan, who spent his early days as an oil and gas consultant with the McKinsey Group, said the potential synergies are great.

Dee DePass • 612-673-7725