Eaton Close to CBE Takeover - Analyst Blog

By Zacks | September 26, 2012 AAA

Eaton Corporation (ETN) has received approvals for its proposed Cooper Industries plc (CBE) acquisition from South Korea's Korean Fair Trade Commission and the Turkish Competition Authority. This clearance is a part of the acquisition procedure. A few days ago, the company received acquisition-clearance from the Competition Bureau of Canada. The closure of this transaction is subject to some other regulatory clearances and approvals from shareholders of both companies.

Per the agreement, Eaton shareholders will acquire ownership of 73% of the combined entity while Cooper shareholders will own 27% of the same. The shareholders of Cooper are expected to receive $72.00 per share based on the closing price of Eaton common stock as of May 18, 2012. This includes a cash consideration of $39.15 per share and 0.77479 shares of the newly formed company for each Cooper share. On the other hand, the shareholders of Eaton will obtain one share of the new company in exchange of each share of Eaton common stock.

Cooper is an electrical-equipment supplier, dealing in electrical protection, power transmission and distribution, lighting and wiring components. These products improve energy efficiency and safety.

Following regulatory and shareholder approvals, the new organization will be named Eaton Global Corporation Plc and will be based in Ireland. The shares of the new entity will be registered with the U.S. Securities and Exchange Commission and trade under the symbol of ETN on the New York Stock Exchange.

The acquisition will be financed with a combination of cash, debt, and equity. As of June 30, 2012, Eaton had a cash balance of $525 million. In addition, the company has already secured $6.75 billion fully underwritten bridge financing commitments from several multinational institutions to finance a part of this acquisition.

Eaton expects this deal to generate a cost synergy of $535 million by 2016. The acquisition is expected to be accretive to the company's earnings by 35 cents and 45 cents in 2014 and 2015, respectively. Excluding non-cash expense associated with amortization of intangible assets owing to purchase accounting, the acquisition is expected to increase operating earnings per share by 65 cents and 75 cents in 2014 and 2015, respectively.

In view of Eaton's last few acquisitions, it is evident that the company intends to diversify its portfolio while expanding its line of businesses as well as its global footprint. After second-quarter 2012, the company acquired South Korean firm Jeil Hydraulics Co., Ltd. and intends to buy Chilean electrical manufacturer Rolec Comercial e Industrial S.A.

As of June 30, 2012, Eaton had cash and short-term investments of $1.18 billion compared with $1.08 billion as of December 31, 2011. We believe the company's strong cash position enables it to pursue a steady inorganic growth approach.

Following an aggressive acquisition strategy, Eaton already experienced positive results in second-quarter 2012. In the last couple of quarters, the company inked some significant deals, which include the acquisition of IE Power, Inc. and E.A. Pedersen Company. Riding on these acquisitions, sales of the company's Electrical Americas segment improved 1% year over year.

However, we are skeptical about slow economic growth rate in the emerging countries and volatile currency market conditions, which might have a negative impact on Eaton's forthcoming performance.

Cleveland, Ohio-based Eaton Corporation offers an array of products, such as powertrain, truck and automotive systems, electrical components and systems, hydraulics and pneumatic systems for commercial and military use. Eaton Corporation currently retains a short term Zacks #4 Rank (Sell Rating).

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