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March 28, 2012 6:46 PM

Six Firms Advise on Tyco Flow Control Sale Valued at $10 Billion

Posted by Victor Li

UPDATE: March 29, 2012, 2:00 p.m. EDT. The eleventh paragraph of the story has been revised to include additional information about the Freshfields Bruckhaus Deringer team involved in the Tyco-Pentair transaction.

Golden Valley, Minnesota–based water pump and filter company Pentair, Inc. announced Wednesday that it has agreed to acquire Tyco International Ltd.'s Flow Control business, known as Tyco Flow Control, in an all-stock transaction valued at $10 billion.

The deal comes some six months after Tyco International announced plans to split into three independent, publicly traded companies, each focusing on one of the conglomerate's three main products: home security systems, flow control equipment, and commercial fire and security systems. According to a joint press release, the transaction—which is designed to be tax-free—is expected to be completed by September, pending regulatory and shareholder approval.

In order to qualify as tax-free, the deal was structured as a so-called reverse Morris Trust, with Tyco International first spinning off Tyco Flow. Once complete, the entity will immediately merge with Pentair into a subsidiary of Tyco Flow.

According to the press release announcing the transaction, Tyco shareholders will control 52.5 percent of the merged company, with Pentair shareholders controlling the balance. The new company will be incorporated in Switzerland, where Tyco International is incorporated, but will operate under the Pentair name. Pentair's current chairman and chief executive officer, Randall Hogan, will remain in that role, according to the press release. 

"The new Pentair will be well positioned to benefit from the increased demands on energy, water, infrastructure and industrial process resulting from the growing population and wealth of developing economies," Hogan said in the press release.

Cravath, Swaine & Moore and Foley & Lardner are representing Pentair in the transaction. The Cravath team is being led by corporate partners Faiza Saeed and Thomas Dunn, who worked alongside tax partner Stephen Gordon, executive compensation and benefits partner Eric Hilfers and environmental partner Matthew Morreale.

Transactions and securities partners Benjamin Garmer III and John Wilson are leading Foley & Lardner's team, which also includes antitrust partners Howard Fogt and Alan Rutenberg.

Tyco, meanwhile, is relying on Simpson Thacher & Bartlett and McDermott Will & Emery as its outside counsel on the deal. Corporate partner Alan Klein is leading the way for Simpson Thacher, with partner Gregory Grogan advising on employee benefits and executive compensation matters and partner Aimee Goldstein consulting on antitrust issues.

Klein advised Tyco when it decided to split into three companies last September, and also represented the conglomerate when it sold a 51 percent stake in its electrical and metal products business to buyout firm Clayton, Dubilier & Rice for $720 million in November 2010.

McDermott tax partner Matthew White is leading his firm's team on tax matters, working alongside tax partners Timothy Shuman, Barry Quirke, and Kristen Hazel.

Freshfields Bruckhaus Deringer corporate partner Matthew Herman and tax partner Claude Stansbury represent Goldman, Sachs & Co., which is acting as financial adviser to Tyco. Skadden, Arps, Slate, Meagher & Flom corporate partner Eileen Nugent and tax partner Dean Shulman are advising Deutsche Bank Securities Inc., which is serving as Pentair's financial adviser, as well as Greenhill & Co., which provided a fairness opinion to the Pentair board.

While somewhat rare, reverse Morris Trusts have become more common in recent years as companies become more willing to spin off subsidiaries. Last December, for instance, ITC Holdings Corp. agreed to acquire Entergy Corporation's electricity transmission business in a reverse Morris Trust transaction valued at $6 billion. Such deals don't always pan out. Consider Procter & Gamble's April 2011 sale of its Pringles brand to Diamond Foods, Inc., which was structured as a Reverse Morris Trust but fell apart, opening the door for Kellogg Co. to swoop in last month and buy Pringles in a traditional cash deal worth $2.7 billion.

According to Kirkland & Ellis M&A partner Daniel Wolf, reverse Morris Trusts are extremely complicated but provide a tremendous benefit.

In a February 22 blog post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wolf explained that reverse Morris Trusts must meet a number of requirements in order to succeed. Among them: the acquiring company must have a minority share in the new entity.

In the blog post, Wolf added that "the parties do have some greater flexibility in allocating between the two merger partners the initial composition of the combined company's board of directors and management team." According to the press release, Pentair's board will remain intact while Tyco will be allowed to appoint two new directors to the board.

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