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Eaton Completes Cooper Acquisition

Zacks Equity Research

Eaton Corporation (ETN) has completed its proposed acquisition of Irish electrical equipment supplier Cooper Industries plc (:CBE). The deal was valued at $13 billion.

Post acquisition, Eaton Corporation including the newly acquired entity will be identified as Eaton Corporation plc. Shares of Eaton and Cooper were traded, for the last time, on the New York Stock Exchange (“NYSE”) on November 30, 2012. The new company’s shares will start trading on the NYSE under Eaton’s earlier symbol of ETN from today.

In May 2012, Eaton entered into an agreement to acquire Cooper. Per the agreement, the Eaton shareholders owned 73% of the combined entity while Cooper shareholders enjoyed 27% ownership 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 received one share of the new company in exchange of each share of Eaton’s common stock.

This acquisition was financed with a combination of cash, debt, and equity. As of September 30, 2012, Eaton had a cash balance of $425 million along with secured fully underwritten bridge financing commitments of $6.75 billion. In addition, Eaton issued senior notes worth $4.9 billion and intended to utilize a portion of the consideration for this acquisition.

Eaton expects this transaction to create cost synergy of $535 million by 2016. Additionally, this acquisition is expected to be accretive to the company’s earnings and lead to operating earnings of 35 cents in 2014 and by 45 cents in 2015. Excluding non-cash expense related to amortization of intangible assets due to purchase accounting, this acquisition is expected to result in operating earnings per share of 65 cents and 75 cents in 2014 and 2015, respectively.

The newly formed entity, Eaton Corporation plc will create a wide array of products including lighting, power grids, and hydraulic and transmission systems for aerospace and defense companies.  

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. As of September 30, 2012, the company had cash and short-term investments of $1.05 billion.

We believe Eaton’s strong liquidity position enables it to pursue strategic acquisitions. In the first nine months of 2012, the company completed a number of significant acquisitions including Chilean electrical manufacturer Rolec Comercial e Industrial S.A. and South Korean firm Jeil Hydraulics Co., Ltd.

Following an aggressive acquisition strategy, Eaton already experienced positive results in first nine months of 2012. Riding on these acquisitions, sales of the company’s Electrical Americas and Hydraulics segments improved 6.4% year over year in both cases.

However, we are concerned 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 plc, earlier known as 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. With a market capitalization of $17.62 billion, the company has 74,000 full-time employees. Eaton currently retains a short term Zacks #4 Rank (Sell Rating).

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