Eaton Powers Up with Cooper Deal
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The management at US industrial components manufacturer Eaton Corp. (NYSE: ETN) has decided to do a complete makeover of the company, moving it away from its roots in the auto parts industry. To help effect this change, it recently launched a $12.6 billion offer for Cooper Industries PLC (NYSE: CBE). Cooper is a leader in the electrical equipment sector and had been the center of a lot of takeover rumors.
The possibility still exists for another bidder to emerge for Cooper Industries, possibly from Europe. The $3.9 billion purchase of Thomas & Betts earlier this year by Swiss-based ABB Limited ADR (NYSE: ABB) left Cooper and Hubbell Inc. (NYSE: HUB-B) as the only two large independent electrical equipment companies in the United States.
If the deal goes through, the combined company (to be called Eaton Corporation) will derive 59 percent of its sales from electrical equipment. Sales of truck and auto parts will drop to 20 percent from 27 percent last year and 43 percent in 1999, the year before current CEO Sandy Cutler took over. It expands Eaton's markets to faster growing ones, such as providing transformers for utilities and LED lighting products for commercial buildings. Other parts of Eaton's manufacturing portfolio include aerospace parts and hydraulic products and 50 percent of its total sales come from the United States.
The deal will be a truly transformative one for Eaton, bringing together two complementary firms in the electrical space, and helping it expand into areas such as the oil and gas industry where Eaton has little exposure. Eaton does make inverters for solar power systems. On the face of it over the long term, the deal should give a boost to Eaton's stock price too as it should be valued more as a multi-industrial company such as ABB instead of simply as a vehicle parts company.
But is it a good deal for Eaton shareholders?
It does seem to make sense if one looks at the projected growth in the global power transmission and distribution market. The International Energy Agency forecasts that the global power transmission and distribution market will top $7 trillion by 2035, with $1 trillion spent in the United States alone, split between replacement (65%) and new build-out (35%).
Utilities, especially in the United States, have little choice except to increase their spending after literally decades of under-investment, benefiting firms like Hubbell, Cooper and other in the sector. Spending on transmission and distribution has already picked up in the United States since Congress passed key energy legislation in 2005. Anti-dumping duties against South Korean manufacturers is also helping American manufacturers selling in the US market.
In the rest of the globe, particularly in the emerging markets, new power plants are being constructed and need to be tied to the power grid. This is positive for the likes of ABB and is the logic behind the recent joint venture announced in the sector by General Electric (NYSE: GE). The venture is with the Chinese electrical grid company XD Electric and will sell equipment, beginning in the fourth quarter of 2012, globally for upgrading and automating electrical grids. The focus of the joint venture will, of course, be China where the government is expected to spend $600 billion on its electrical infrastructure over the next decade. GE is also taking a 15 percent stake in XD Electric.
Based on the macro outlook for the sector, the Cooper purchase looks like a winner for Eaton. The only possible improvement would be a future move giving the company a greater percentage of its sales in the faster growing emerging world.
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