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

In Feb. 2011, Danaher bought Beckman Coulter for $5.87 billion, but it may now be able to absorb a new deal, noted Mitchell, who lists industrial products conglomerate SPW (SPX) and Invensys (ISYS) as other names to watch in the industrial sector M&A game.

Cooper Industries was founded in 1833 and Eaton was founded in 1911. While Eaton has key businesses related to automation and power monitoring, Cooper Industries adds to the company's power transmission and distribution offerings.

"This compelling combination of Eaton's power distribution and power quality equipment and systems with Cooper's diversified component brands, global reach and international distribution creates a game changer to serve the electrical industry," said Eaton CEO Alexander Cutler in a statement.

By acquiring Cooper Industries, Wells Fargo analysts note that Eaton's business mix will tilt toward electrical products. After the deal, the new company's proforma 2012 revenue will be roughly $23 billion, with 58% of revenue coming from electrical products and 42% from industrial products servicing the auto, transportation and aerospace sectors.

Although Eaton's acquisition of Cooper Industries does not come cheap and is at the upper end of valuations paid in sector, the deal is expected to eventually add significantly to earnings through a mix of growth, cost synergies and tax benefits, notes Jefferies analyst Stephen Volkmann.

Roughly 30% of Cooper Industries' revenue comes from its lighting and fire & security business that has no overlap with Eaton, notes Volkmann. Meanwhile, Cooper Industries' exposure to residential construction and commercial construction end markets may be hitting a trough, with upside in a recovery, adds Volkmann, who rates Eaton a buy with a $60 price target. Still there are overlaps in the merger, including Cooper Industries' power systems unit where it specializes in small transformers, and its Bussman unit that makes circuit protection products and vehicle power distribution.

"While the multiples are towards the upper end of the range for historical transactions within the space there is an argument to be made for acquiring a premier market participant such as Cooper," Volkmann argued in a Monday note to clients.

The deal is expected to added 35 cents to Eaton's operating earnings per share by 2014 and by 45 cents in 2015. Eaton shareholders are expected to own approximately 73% of the combined company while legacy Cooper shareholders are expected to own approximately 27%.

In midday trading on Monday, Cooper Industries shares rose over 26% to over $70, a little below Eaton's offer price. Eaton shares were up 1%.

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