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Johnson Controls to buy Ireland-based Tyco for $16.5 billion

By Greg Roumeliotis and Bernie Woodall

(Reuters) - Johnson Controls Inc (JCI.N), a U.S. maker of car batteries and heating and ventilation equipment, agreed to acquire Ireland-based peer Tyco International Plc (TYC.N) in a $16.5 billion deal that will lower its tax bill, the companies said on Monday.

By moving its headquarters to Cork, Ireland, Johnson Controls would become the latest major U.S. company to carry out a so-called tax-inversion after drug giant Pfizer Inc (PFE.N) structured such a deal with Irish peer Allergan Plc (AGN.N) last November.

The merger will combine Johnson Controls' commercial buildings business with Tyco's fire security offerings, accelerating Johnson Controls' transformation following its decision to spin off its automotive parts unit.

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Milwaukee-based Johnson Controls, which has a market value $23 billion, makes heating and ventilation systems and car batteries, while Cork, Ireland-based Tyco, valued at $13 billion, specializes in fire protection systems.

The merger will create savings of at least $500 million in the first three years, the companies said. They expect to save an additional $150 million a year through tax synergies.

"The move would be consistent with Johnson Control's strategy of transforming from an auto supplier into a multi-industry leader," UBS analyst Colin Langan said in a client note.

Johnson Controls' shares were down 2.7 percent at $34.63 in afternoon trading in New York, while Tyco's were up 11 percent at $33.94.

Tyco was ahead of many big U.S. industrial companies in seeking tax relief by moving its legal residence offshore. The company moved its headquarters to Bermuda from Exeter, New Hampshire in 2007, then to Switzerland in 2009, and to Cork in 2014.

Tyco said in 2014 that its move to Cork was tax-neutral and that the it occurred because of Swiss laws capping executive pay and tighter immigration rules.

TREASURY THRESHOLD

Johnson Controls' shareholders will own about 56 percent of the combined company, with Tyco shareholders owning the remainder, thanks in part to a cash consideration of about $3.9 billion that Johnson Controls shareholders will receive.

Keeping Johnson Controls' shareholders ownership of the combined company below 60 percent was important for the company because the latest U.S. Treasury rules, in a bid to limit inversions, placed some restrictions on deals that cross this threshold.

"The cash consideration is supplied by Tyco very much with the tax inversion in mind. This way you can engage unrestricted in strategies that free up your undistributed foreign earnings," said Robert Willens, a corporate tax and accounting consultant.

While the tax benefits are not as profound as is the case of Pfizer's deal with Allergan - Johnson Controls and Tyco have effective tax rates of close to 20 percent and 18 percent, respectively - the news was enough to stir controversy among politicians in a U.S. presidential election year.

"U.S. businesses are continuing to defect to Ireland, stranding honest taxpayers. Congress needs to act now," said United States Senator Ron Wyden, a Democrat from Oregon.

Kevin Brady, a Republican from Texas and chairman of the tax-writing Ways and Means Committee in the U.S. Congress, said the JCI-Tyco move shows U.S. tax laws need to change to keep companies from fleeing.

"This news is yet another reminder that America's tax code is an outdated relic that is keeping America at a disadvantage," Brady said.

The new company, Johnson Controls Plc, will be initially headed by Johnson Controls Chief Executive Alex Molinaroli and will continue to trade on the New York Stock Exchange. After 18 months, Tyco's George Oliver will become CEO and Molinaroli will become executive chair for one year, after which Oliver will become chairman and CEO.

Johnson Controls has been preparing to spin off its automotive seating and interiors business and said on Monday the spinoff was on track for early first fiscal quarter of 2017.

Shares of Johnson Controls have lost more than a quarter of their value since the start of 2015, while Tyco's shares have fallen over 30 percent.

Tyco was broken up into three companies after turnaround expert Edward Breen took the helm from former CEO Dennis Kozlowski, who was convicted in 2005 of grand larceny, securities fraud and other charges.

Under Breen, Tyco spun off its electronics and healthcare businesses in 2007. He expanded Tyco's security business with the $1.9 billion acquisition of Broadview Security in 2010.

In 2012, Tyco was again broken up into three pieces - one selling valves and controls for the energy market that merged with Pentair Inc (PNR.N), while its commercial fire and security businesses combined into "New Tyco" and traded under Tyco's symbol. The third piece consisted of the ADT North American residential security business, now ADT Corp (ADT.N).

Breen is CEO of U.S. chemical giant DuPont (DD.N), which last month agreed to combine with Dow Chemical (DD.N) in a $120 billion merger. Tax savings were seen as a primary driver of that deal.

Centerview Partners and Barclays were financial advisers to Johnson Controls, while Lazard and Goldman Sachs advised Tyco. Citigroup Inc (C.N) provided financing for the transaction.

(Reporting by Greg Roumeliotis in New York and Bernie Woodall in Detroit; Additional reporting by Ankit Ajmera and Sayantani Ghosh in Bengaluru and Susan Cornwell in Washington, D.C.; Editing by Nick Zieminski)