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Eaton Buys Cooper in 2012's Biggest U.S. Merger (Update 1)

Updated to reflect analyst comments and additional data throughout

NEW YORK ( TheStreet) -- Engineering giant Eaton (ETN - Get Report) is buying electrical equipment supplier Cooper Industries (CBE) for $11.8 billion, making the industrial merger the largest U.S. acquisition of 2012, and bolstering expectations for additional M&A in the sector.

The deal values Cooper Industries at $72 per share, a 29% premium to its Friday close. It is expected to add to Eaton's earnings per share and bolster the Cleveland-based company's revenue by roughly a third through an expansion of its power systems and electrical products businesses and geographic reach.

Under the terms of the cash and stock buyout offer, Cooper shareholders will receive $39.15 in cash and 0.77479 shares of Eaton for each Cooper share. The prospective merger is the largest U.S. deal of 2012, beating out Pfizer's (PFE) $11.85 billion sale of its baby foods unit to Nestle, based on Bloomberg data that currently values Eaton's cash and stock bid at $12.83 billion.

If the deal closes, which is expected in the second half of 2012, the combined company's 2011 revenue would have reached $21.5 billion and earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.1 billion. The deal is also expected to generate $535 million in cost synergies by 2016, while expanding both companies' market reach and product offerings.

The merger also strengthens a revival in M&A among diversified engineering conglomerates. A near $4 billion acquisition of Thomas & Betts (TNB) by European giant ABB (ABB) in January signaled that after a post-crisis focus on bolstering capital, bets on a cyclical upturn in industrial spending could spark more deals. In fact, M&A appetite could generate competing bids for Cooper Industries, and lead to other deals within the sector.

"In the past, it has been speculated in the media that Schneider Electric had an interest in Cooper and given ongoing industry consolidation and shrinking pool of available quality electrical equipment assets, we would not be surprised to see additional acquirer interest in Cooper," wrote analyst Ajay Kejriwal of FBR Capital Markets in a note to clients on Monday.

When ABB bought Thomas & Betts, analysts speculated that outside of a Cooper Industries acquisition, Hubbell (HUB.B - Get Report), General Cable Corp. (BGC - Get Report), LittleFuse (LFUS), Rockwell Automation (ROC) and Acuity Brands (AYI) could be targets for a strategic acquirer as valuations and balance sheets in the engineering sector recover. On Monday, General Cable said it was buying aluminum cable manufacturer and energy distribution specialist Alcan Cable for $185 million in cash from mining giant Rio Tinto (RTP).

Potential acquirers in the electrical engineering space include General Electric (GE), Dover (DOV) and Danaher (DHR - Get Report), noted Credit Suisse analyst Julian Mitchell in a January note to clients reacting to ABB's acquisition of Thomas & Betts.
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