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Tyco International Ltd. (NYSE:TYC)

Merger of Flow Control Business and Pentair Call

March 28, 2012 8:30 am ET

Executives

Sara Zawoyski Vice President, Investor Relations, Pentair

Randall J. Hogan – Chairman and Chief Executive Officer, Pentair

John L. Stauch – Executive Vice President and Chief Financial Officer, Pentair

Edward D. Breen – Chairman and Chief Executive Officer

Antonella Franzen – Vice President, Investor Relations

Mark P. Armstrong – Vice President of Mergers & Acquisitions

Analysts

Deane Dray – Citi Investment Research

Mike Wherley – Janney Capital Markets

Hamzah Mazari – Credit Suisse

Michael Halloran – Robert W. Baird & Company, Inc.

Stephen Tusa – JPMorgan

Christopher Glynn – Oppenheimer & Co.

Ajay Kejriwal – FBR Capital Markets

Gautam Khanna – Cowen and Company

Bhupender Bohra – Jefferies & Co., Inc.

Garik Shmoi – Longbow Research LLC

Neilson Gupta – BofA Merrill Lynch

Doug Carson – BofA Merrill Lynch

Operator

Welcome to the joint Tyco and Pentair Conference Call to discuss the merger of Pentair and Tyco's Flow Control business. At this time all lines are in a listen-only mode (Operator Instructions) Today’s conference is being recorded.

I’d now like to turn the call to Sara Zawoyski, Vice President of Investor Relations for Pentair you may begin.

Sara Zawoyski

Thank you, Shirley. Good morning everyone. Thank you for joining us on such short notice to discuss this morning’s announcement of the Pentair and Tyco Flow Control transaction. I am Sara Zawoyski, Vice President for Investor Relations at Pentair.

With me this morning are Randy Hogan, Chairman and CEO of Pentair, John Stauch CFO of Pentair, Ed Breen, Chairman and CEO of Tyco International, and Tyco’s Vice President of Investor Relations, Antonella Franzen.

This morning Randy, Ed, and John, have prepared remarks regarding the Pentair and Tyco Flow Control transaction, followed by a Q&A session. The entire call is expected to last approximately one hour. And a replay of the call should be available later today.

Before we begin, let me remind you that any statements made about the company’s anticipated financial results are forward-looking statements, subject to future risks and uncertainties. It is therefore possible that actual results may differ materially from any forward-looking statements that we might make today.

The companies undertake no obligation to update publicly such forward-looking statements to reflect subsequent events or circumstances. Please review the cautionary language about forward-looking statements in the press release.

Today’s webcast is accompanied by a presentation, which can be found through the Investor section of both company’s website. A reconciliation of non-GAAP to GAAP measures discussed in this call is contained in the appendix to such presentation.

With that I‘ll now turn the call over to Pentair’s Chairman and CEO, Randy Hogan.

Randall J. Hogan

Thanks Sara, and good morning. I’ll start on page four. I’m excited to be here today with Ed and the Tyco team to discuss what we believe is a powerful combination that will create tremendous value for all our shareholders and our customers. By joining Pentair and Tyco Flow Control together, we will create a leader in the flow, filtration and equipment protection, with annual sales nearing $8 billion.

The combined company will have increased scale, broader geographic reach and greater access to high growth attractive sectors. Building on the strength of both companies, we will be well positioned to benefit from the significant demands in energy, infrastructure, food and beverage, and water, resulting from the growing population of wealth of developing economies, what we refer to as the new, new world.

This transaction presents a unique opportunity to unlock immediate synergies. We have over $90 million in synergies right from the start through one corporate structure and greater tax efficiencies. We expect further cost savings, enhanced growth prospects and a stronger balance sheet to yield even more benefits going forward.

By any measure, the new Pentair will be a stronger company with exciting platforms to future growth, and substantial value creation opportunities for all stakeholders. Let me take a moment to discuss of the transaction, that’s highlighted slide five. It’s roughly $10 billion stock-for-stock merger using a Reverse Morris Trust structure that will be tax free to shareholders of both companies. The combined company, which will be called Pentair will be domiciled in Switzerland, building on our existing presence there, where Tyco International is already incorporated.

Our main offices will be continue to be in Minneapolis where Pentair’s executive team will be lead the new combined company. Financially, this transaction is very compelling. We expect the transaction to be highly accretive to earnings adding $0.40 to 2013 EPS with combined company EPS expected to be greater than $5 a share by 2015. This combined company should also deliver roughly $1.7 billion in EBITDA in 2015 and yield an even stronger balance sheet to continue to support investment in our businesses and return cash to shareholders.

Now, we flip a slide and hand the call over to Ed Breen for few comments. Ed?

Edward D. Breen

Great, thanks Randy, and good morning everyone. I am pleased to be here with Randy and the Pentair team to discuss this transaction that clearly accomplishes what a merger should do, create significant value for the shareholders of both companies.

Let me spend a few minutes telling you a little bit about the benefits it will bring to Tyco shareholders. Based on yesterday’s closing price of Pentair, this transaction values Tyco Flow at approximately $4.9 billion, which represents immediate value to Tyco shareholders. As you can see on slide seven, this value implies a 10.4 times EBITDA multiple for Tyco Flow on a standalone basis, before any additional value uplift from synergies generated from a combination with Pentair. These synergies are expected to provide Tyco shareholders with substantial incremental value immediately and over the longer term.

Now let me give you some background on this transaction. Last September, Tyco announced a plan to separate into three independent public companies through the tax free spin-off of the 80G, North America Residential Security business, and the Flow Control business. We are making very good progress in preparing for these spin-offs and continue to expect to complete these transactions along with the merger of Pentair into Tyco Flow at the end of September.

On slide eight, when we announced our plans for separation, we emphasized the value creation opportunities that this would provide our shareholders. By combining Tyco Flow and Pentair, we now have the opportunity to accelerate this value creation that would not be available to Tyco Flow on its own. The combined company will be a larger, more attractive competitor, with a strong balance sheet. It will be premier global leader in flow, filtration and equipment protection with a comprehensive product portfolio, and a stronger presence in high growth geographies and end markets.

The combination provides a unique opportunity to create significant shareholder value as Randy and John will discuss in a few minutes. In addition to the 52.5% ownership and enhanced multiple for Tyco shareholders, the Day One synergies add more than $1 billion in value to the combined entity, and another $1.4 billion from additional synergies to be achieved over the next few years.

As a highly complementary strategic partner, Pentair has a proven track record that will ensure that this value proposition is delivered. Overall this combination is a win-win for the shareholders of both companies.

And now I will turn the call back over to Randy.

Randall J. Hogan

Thanks Ed. As you can see on slide 10, this merger brings together two global leaders with strong brands and leading positions in attractive growth sectors and highly complementary offerings. Tyco Flow’s highly engineered valves and controls fits perfectly with our rapidly growing industrial fluid processing solutions in water systems.

Flow’s strong regional presence in water transport fits well with our water capabilities and in flow and filtration. And Tyco Flow’s industrial heat management systems and capabilities fits very much into the growth strategies that our technical products business has been focused on in terms of building out thermal management. So, as you can see, all three of Flow Control’s businesses fit strategically with Pentair.

Importantly, our teams share a common vision of lean, efficient operations, which will help facilitate a smoother transition, and enhance our ability to drive greater cash flow over time as we leverage our expanded global presence. Together, we’ll have enhanced opportunities to generate superior returns, and better serve our global customers as we build on these new stronger platforms.

On the left side of slide 11, you can see Pentair’s two segments, water and fluid solutions at roughly two-thirds of current Pentair sales, and technical products at roughly one-third. Also presented is how Tyco Flow is segmented. As combined company, we would anticipate adding Tyco Flow’s water and environmental systems business to our water and fluid solutions segment, thermal controls to our technical products to form the newly named equipment protection solutions segment, and valves and controls would form the basis of a new reporting segment Flow Control.

Looking at the combined company’s total pro forma projected 2012 sales on slide 11, approximately 45% will come from water and fluid solutions, 30% from Flow Control, and 25% from equipment protection solutions. This is an excellent fit and strategically compelling combination.

Pentair and Tyco Flow operate in the same broad areas, and together, we will be one of the few companies with filtration, valves, controls and pump capabilities allowing for our comprehensive solutions offering for our global customers.

We’re particularly excited about the improved exposure to attractive verticals as shown on slide 12. We were already strong in residential and commercial markets in water, and in the industrial vertical with technical products. This combination gives us more exposure to attractive energy and industrial sectors.

Notably our presence in the energy sector doubles to 25% as a combined company. These sectors are where many of our most exciting innovation efforts are aimed. For example, the recent wins we’ve had in fluid separation related to gas production should accelerate. And one of the most exciting early applications, we see for nanofiltration in the power sector, where Tyco Flow has global reach and presence.

Our combined products that will enable us to serve end markets, with exposure to some of the most attractive secular growth trends, in the market today. As our customers across the industrial, energy, water and infrastructure sectors focus on such areas as efficiency, performance, and sustainability, our products are well positioned to help support the development and enhancement of new and existing projects around the world.

Turning to slide 13, you can see our expanded global reach. We immediately become more global with real scale and fast growth regions, positioning us well in the places where we expect the greatest growth to occur. Notably, approximately 25% of our combined sales will come from fast growth regions from the start. And we’ll serve our customers through more than 100 manufacturing facilities and over 90 service centers worldwide.

While the financial aspects of this transaction are compelling, as John will highlight in a moment, slide 14 shows how Tyco Flow Control business really fit with and as an additive to Pentair’s strategy to capitalize on global growth trends. Our strategy to date has been focused on addressing the increasing resource demands of a middle class that's grown to over 4 billion people globally. Combined, our companies will be even better positioned to meet the basic infrastructure needs of this growing population across food, industrial process, energy, and water.

In short, we’ll have the presence, breadth, and expertise to serve the new, new world. In addition, our executive teams share many common values, including a vision and strategy underpinned by a value creation focus and efficient execution as shown on slide 15. At Tyco Flow lean and six sigma activities have started in valves and controls, so the journey has already begun in largest part of Flow Control. At Pentair we have a strong basis in our proven Pentair Integrated Management System, or PIMS tool kits which creates a solid framework to guide the successful integration of our businesses and offers a clear road map forward.

Turning to slide 16, beyond the strategic fit, the structure of the transaction provides immediate cost synergies which will benefit both Pentair shareholders – both companies' shareholders, Pentair's and Tyco's. John will discuss the specifics around the synergies in a minute, but it’s important to note that the integration planning is already underway.

There is a lot of work to be done, but given the depth of our management team and our track record of success in applying the PIMS framework to drive efficiencies within Pentair, we are confident in our ability to realize the value we have identified. Specifically, we will have a dedicated team of proven leaders both from Pentair and Flow Control covering functional and geographic areas driving our integration effort. We will designate a senior integration leader who will spearhead the effort and report directly to me. Our team members from both companies will be assigned specific project areas by function and process and measured against very clear deliverables.

As I noted, we will utilize our proven PIMS framework, which is outlined on slide 18, to drive value. The key tenants include building growth capabilities, prioritizing investments and innovation, attracting and developing top talent and through lean enterprise building a culture focused on safety, quality, delivery, cost and cash.

We also see significant revenue synergy opportunities as shown on slide 19. Our complementary set of products and offerings will enable us to drive further growth through increased customer penetration and greater emerging market presence in addition to our ability to leverage the scale of our organization and technology platforms.

We’ve already mentioned some of the tangible cross selling opportunities. In short, we will get more at bats for our heavy-hitting investments. Also we’re very excited about the service footprint of Tyco Flow. As we successfully sold standard filtration and separation systems, our need to build the service network has become a priority. Utilizing the Flow Control service centers is a base to build upon should accelerate our after-market and replacement revenue for these systems, on top of the existing Flow Control after-market opportunities, which are also attractive.

Importantly, as you will hear from John, this transaction is financially compelling even before factoring in the attractive revenue synergies we’ve already identified. In a significant earnings accretion we will discuss is no wait to these revenue synergies.

Creating value for the company’s shareholders is the top priority. As slide 20 shows, we believe this is a winning combination that will enhance the growth potential of our business and ultimately drive value creation for both Pentair and Tyco’s shareholders. A broader customer base and greater end market reach and diversification will support stronger, more predictable earnings growth as we continue to manage cost and drive operating leverage.

The combination of a strengthened balance sheet and greater financial flexibility with increased cash flow will support efforts to pursue growth as well as return capital to shareholders. The bottom line, this transaction creates an organization with the scale and reach to fully capitalize on the underlying trends driving customer demand and we have a carefully defined plan to maximize cash flow and shareholder value over time.

I’ll come back in a few moments to wrap up and answer questions, but first, I’d like to turn it over to John to discuss the financial details of the transaction. John?

John L. Stauch

Thanks, Randy. Please turn to slide number 22 labeled financially compelling. Building on a clear, strategic rationale, I would like to spend a bit more time discussing the financially compelling nature of this combination. To begin, we are starting with an attractive multiple to the Tyco shareholders, the Pentair shareholders, and obviously the combined shareholders that will ultimately be associated with the long-term value creation opportunities that will be realized with this combination.

The combination is highly accretive, adding an estimated $0.40 to Pentair’s 2013 EPS on a combined company basis. We have identified $200 million of cost synergies to be fully realized by year three and an additional $50 million of tax related savings synergies amounting from the new structure. The ongoing effective tax rate of about 24% to 26% reflects the new company’s structure before any incremental tax planning initiatives.

The nature of the cost reduction items, the organizational structure we intend to mobilize to deliver the synergies and our utilization of our Pentair Integrated Management System to drive the synergies gives us tremendous confidence in achieving our synergy goals. With approximately $1.3 billion in estimated combined 2014 EBITDA, we’ll have sufficient cash flow to grow our presence in high growth areas and return cash to shareholders through expected dividends, potential and planned stock buyback programs and M&A activity. Starting with an estimated combined EBITDA margin in 2013 of approximately 14.5% plus synergies, plus the advantage tax rate, this deal has an attractive ROIC for the new Pentair shareholders as we expect overall Pentair ROIC to still approach 13% by 2015.

Please turn to slide 23 labeled transaction consideration. The $4.9 billion transaction consideration which includes approximately $275 million of Tyco Flow net debt assumed by the combined company and the minority interest represents a range of implied multiples including the 8.8 times Tyco Flow’s SpinCo EBITDA after day one cost synergies of $40 million, which simply reflects the avoidance of $80 million of redundant planned corporate cost net of an estimated $40 million at Pentair corporate adds in integration team cost to deliver the synergies. Obviously, the lower right total enterprise value will change and fluctuate with a change in Pentair’s share price.

Please turn to the next slide, which is called value creation potential. We’ve identified synergies totaling $250 million, which is comprised of $200 million of operational synergies and $50 million of tax synergies mentioned earlier. The cost synergies which are related to direct and indirect sourcing, implementation and acceleration of lean enterprise in Tyco Flow businesses, deployment of best available back office standardization efforts across the entire enterprise and combining and scaling our fast growth capabilities.

We’ve laid out a clear internal path of achieving the synergies that breaks into day one cost avoidance, or simply the opportunity to not add the redundant corporate cost of what it had to be added with the Tyco Flow spend, less the day one investment of $40 million of some further corporate adds required due to the increased scale of the company and the dedicated integration team that will be responsible for driving the synergies. Day one opportunities also include tax synergies as the newly combined company retains Tyco Switzerland domicile adding to our presence there. These amounts net result in a locked in $40 million day one EBITDA synergy plus the $50 million of tax synergies, which drive greater than $1 billion in immediate deal value.

The dedicated integration team will work with our global business presence and functional leaders to prioritize the best opportunities for sourcing, indirect sourcing, operational improvements and frankly de-prioritize investments to ensure results. We are anticipating some revenue synergies over the next several years; however, we have not yet included any benefit from these into our projections. Overall, we’re starting from a strong base, have a motivated and dedicated team and feel confident in our synergy projections.

Please turn to slide 25 labeled cost synergy drivers, which provides some detail and color around our synergy targets by year and the composition of the savings. We’re expecting $90 million of cost synergies in 2013, and as mentioned earlier, we’re targeting $200 million by 2015. We’re expecting about $25 million in sourcing synergies related to key shared commodities and insourcing opportunities, and we think we have line of sight to reduce combined indirect spend by over $30 million related to consulting, freight, global marketing and communications, as well as a scale of negotiations that a larger company enjoys.

These sourcing benefits along with an expected $25 million of targeted savings related to lean enterprise across approximately 50 Tyco Flow facilities provide a very healthy opportunity and gives us high level of confidence for success. We’re targeting a new $150 million of structural cost benefits driven from approximately $40 million of immediate net corporate cost avoidance and $75 million of standardization reduction from back office accounting, finance, HR, payroll, information technology, global office leases, insurance and selling and marketing support and scale. This $75 million represents and enterprise wide effort inclusive of the current Pentair structure, and the best available idea approach to a one Pentair standard for applications and processes.

We’re starting from an overall Pentair operating expense forecast of 20% for 2012; and a Tyco Flow forecast of nearly 23% in operating expenses. Most noteworthy would be Pentair company G&A of around 7.5%; and Tyco Flow G&A of nearly 10.5%, signaling what we believe enormous opportunity for global leverage.

Overall, we believe the opportunities are larger than what our current assessment is, and we are eager to get the teams together and generate a more robust list of opportunities that will drive substantial contingencies against base operations to ensure success.

Please turn to slide number 26, labeled Strong Cash Flow Generation. We’re targeting annual revenue growth from the combined company of 5% to 7% between now and 2015 with significant contribution coming from water scarcity, energy, oil and gas and global industrialization. With nearly 25% of the combined company in fast growth markets, and innovative combined technology to serve customers on a broader scale, we’re excited about the opportunity for accelerated growth.

Combined 2013 EBITDA inclusive of synergies should be $1.3 billion, and is expected to be roughly $1.7 billion by 2015. Free cash flow should be nearly $600 million per year or nearly double the current Pentair projection. Equally exciting to the EBITDA forecast is the deleveraging of the balance sheet that this deal creates.

The combined expected debt-to-EBITDA by 2013 to be less that 1.5 times and around one times by 2015, this gives tremendous flexibility for investments in high growth platforms, M&A or further EPS accretion on top of a powerful starting EPS, and an expectation maintaining the Pentair dividend policy and $400 million of annual stock buybacks included in the base model.

Please turn to my last slide labeled, Exciting Value Creation Potential. The solid top line revenue growth, a robust starting EBITDA, identified synergies, a delevered balance sheet for further EPS expansion, and an expected improvement in investment grade rating, we’re very excited about the value that we can create for shareholders with this new industrial combination.

Right now we are analyzing the expected one time cost to achieve the synergies and desired income and cash targets. However, our current estimate of one-time cost is approximately $230 million with roughly a third relates to the estimated non-cash inventory step up costs.

All in for 2013, we expect the combined company revenues to be greater than $8 billion, certainly more than $1.3 billion and deliver accretion of roughly $0.40 to EPS excluding the estimated one time costs. We believe this is a great strategic combination with clear financial benefits which will result in greater value for shareholders.

Let me now turn it back to Randy for some closing comments, and then we’ll be glad to take your questions.

Randall J. Hogan

Thanks, John. To sum up, the combination of Pentair with Tyco Flow will create a global leader in flow, filtration and equipment protection with the scale across segments geographies and applications to capitalize on the strong secular trends driving demand today.

Slide 30 shows a combined strength to provide unique value creation opportunity not only through cost efficiencies, but in driving revenue synergies as we serve our customers around the world. To the shareholders of both companies, we expect this to be a highly accretive winning combination on day one with substantial upside over the longer term.

With that Ed, John, and I would be happy to take your questions. Operator?

Question-and-Answer Section

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Deane Dray with Citi Investment Research. You may ask your question.

Deane Dray – Citi Investment Research

Thank you. Good morning, everyone and congratulations.

Randall J. Hogan

Thank you, and good morning.

Deane Dray – Citi Investment Research

First question is, maybe give us some little bit of background about the process, when did you first start to talk, was there any part of this, was this negotiated, did it ever go to bid, and a little bit more about the timeline?

John L. Stauch

Deane, your question is mainly with our strategy, and we’ve been looking – our strategy has been consistent to look for ways to expand the company in terms of applications and solutions, and then of course geographically. So we’re always looking at options. After Tyco’s announcement that they were going to spinoff Flow Control, we did a deeper analysis and examine that and saw a compelling fit, approached Tyco by the end of the year, and really began in ernest Ed and I talking in January.

Deane Dray – Citi Investment Research

Great. And then, you laid out the cost synergy assumptions, very clearly that was very helpful, and it’s also clear that you’re not including revenue synergies in any of your numbers, but could you take us through – simply you can today how do you expect to drive some revenue synergies in this go-to-market strategy, because we haven’t seen in the market a full effort of combining pumps and valves and especially with filtration. So not wholly, any numbers there, but just kind of walk us through how you see that value creation on the revenue synergies in this…

John L. Stauch

Sure. Let me start by saying that we’ve had some great early meetings with a few people inside Flow. And we’ve explored some ideas together, and we won’t have a definitive list of plans until we agree on both sides, yeah these are going to work. But the examples I was using for instance, we have very high hit rate on our gas oil separate – our liquid separation on gas streams in the U.S. We don’t have as much reach, for instance, in to the coal gas in Australia, which we believe is a pretty promising example.

There’s a lot of opportunities that we’re not bidding on the pump side outside that Tyco Flow both in the water environmental business and in the valve and control business are engaged in. So I would say that there first step will be, you will, prospecting, and then integration of valves and controls into the systems we sell, and vice versa let’s sell some systems. So those are kind of things we’ll explore once we got their approval to work more intimately together after the government. That’s the process we’ll take, and I’m excited about it.

Deane Dray – Citi Investment Research

Great, thank you.

Operator

Thanks. Your next question comes from Jim Lucas with Janney Capital Markets. You may ask your question.

Mike Wherley – Janney Capital Markets

Hi this is Mike Wherley standing in for, Jim. How are you guys?

Randall J. Hogan

Hi, Mike.

Edward D. Breen

Hi, Mike.

Mike Wherley – Janney Capital Markets

Obviously, after the deal gets done, you’ll be pretty preoccupied with the integration of this large company. But we’re just wondering how this changes that roadmap for what the new Pentair could look like longer term?

Edward D. Breen

Well, Mike, the charts we used today are really, I think descriptive of the kind of vertical market focus we’re going to have. We’re going to continue to drive our investments in fast growth market. I’m expecting, and when John mentioned de-prioritizing we have some redundant investments to take care in the G&A side in the fast growth markets, and as you know, it’s been a depressing aspect to our margins. We’re going to have $2 billion in sales of fast growth market, so we think the back room opportunity is there, are going to allow us to maybe travel back on some of the footprint investments that we’ve been able to make.

But in terms of the priorities, as you know we’ve been building out more in the energy and industrial space. We see higher margins there, we see compelling growth drivers and that’s really helping the Flow Control that’s beginning to see already in the effect of the trend. So I don’t see it as a change, so much as an acceleration of the growth that we were already reaching for.

Mike Wherley – Janney Capital Markets

Okay. And then you list that there will be 100 manufacturing sites and 90 service centers, and you kind of highlighted how you want to take advantage of Tyco’s service, Tyco Flow’s service footprint. But I’m just wondering is that sort of the ideal number, two to three years out for each of those, or do you think that you might be able to…

Randall J. Hogan

Too soon to know that, that Tyco Flow is actually doing some footprint planning right now, but I think those results that will be into May, I think – we’ll have a better sense as we can begin to work more intimately. A deal of this nature was pretty tightly held as the surprise you all have this morning with the support. So there’s only a few people in Flow that were involved up until now.

Mike Wherley – Janney Capital Markets

Okay.

John L. Stauch

I would just add to Randy’s comments that, clearly we’ve admired the Flow business and the operations of Tyco for sometime. So we were pleased that the opportunity came along that we could actually find a way to combine. But also if you look at the nature of their business being a long cycle business or a later cycle business, they are really hitting their strides. And when you look at the capacity that they have today, I don’t think we want to jump to any conclusions about making any capacity reductions in light of the types of programs and projects that will need to be delivered. Though I think we will carefully assess that with the business leaders, but we have not planned any or modeling any plant closures at this time.

Michael Worley – Janney Capital Markets

Okay. Thanks a lot.

Randall J. Hogan

Thank you.

Operator

Thank you. Our next question comes from Hamzah Mazari with Credit Suisse. You may ask your question.

Hamzah Mazari – Credit Suisse

Good morning. Thank you. Maybe if you could comment on, just a little more color around any pre-integration work you guys have done or are doing? And how investors should think about any risk of integration here? It seems like it’s minimal, but if you could just comment there?

Randall J. Hogan

Well, we see integration and certainly as Tyco team and we have been talking even in the limited number of people that we have engaged, we’ve seen integration as the key and I would say it was certainly a big focus of our discussions and our Board’s discussions as the sources of those synergies. So, we see it as the number one focus, which is why we are going to put senior talent from both teams on it.

We are going to manage – we see there is three GBUs in Flow Control and we see them coming in wholly as they stand. And as John described, a lot of the back room opportunities on the G&A side is really from standardization. And I would say Tyco Flow has a similar vision, they are just a little bit further back in the progress in terms of standardization and their launch is lean. So, we know how hard that is. We have been at it for eight years. So, we see it as the number one focus for us and we will resource it accordingly.

Edward D. Breen

Randy, I would just – I would also add maybe to go to the numbers again at least the way we looked at it from a Tyco perspective. As John had mentioned in his comments, we are going to get $90 million of synergies day one that are given because we don’t have duplicate headquarter costs that are going to be imbedded and we get the tax benefit right away.

So, $90 million of the synergy is in the bag. So, what’s left is $160 million of synergies to work over the next couple few years and that’s only 2% of sales. That’s a very low cost number to achieve, but I think that just shows that it’s a very doable number to get to. So, I think that’s why we all have extremely high confidence in getting to the $250 million number.

Hamzah Mazari – Credit Suisse

That’s very helpful. And Randy, if you could just comment on, how folks should think about some of your other businesses here, particularly those levered to resi market, particularly those that are not as highly engineered, especially given the mixed change post the Tyco deal?

Randall J. Hogan

Well, combining with Tyco Flow is, as I said, a nice, a huge step forward in terms of getting more exposure to those more attractive industrial energy markets. Our view is that residential recovery is still upside. We are – our base assumption here is, as we said before, no meaningful recovery in residential markets in the U.S. and, as you know, Europe actually residential markets have gone down again. So I view this as taking control of our destiny for growth and not waiting for that. But it’s upside when it happened.

Hamzah Mazari – Credit Suisse

That makes sense. And just a last question. Any restrictions with the Reverse Morris Trust transaction structure that investors should know about? Thank you.

Edward D. Breen

No. This is Ed. No, there’s really is not. It really just continues the process, we were on to get the separation and as soon as we separate, this transaction will simultaneously happen. So it’s the same process we were on and then immediately following our separation the move to Pentair Tyco Flow together happens simultaneously. There is really nothing more to it.

Hamzah Mazari – Credit Suisse

Got you. Thank you very much.

Edward D. Breen

Thank you.

Operator

Thank you. Our next question comes from Mike Halloran with Robert W. Baird. You may ask your question.

Michael Halloran – Robert W. Baird & Company, Inc.

Good morning, everyone.

Edward D. Breen

Good morning.

Randall J. Hogan

Hi, Mike.

Michael Halloran – Robert W. Baird & Company, Inc.

So, could you talk about the percent of overlap and with these revenue synergies, I mean what percentage of Pentair’s current portfolio do you guys think has some level of overlap with Tyco’s portfolio?

Randall J. Hogan

We’d have to get deeper into the numbers to give you a precise answer. But we do about $250 million in valves and controls today, yet, we don’t compete head-up with anything materially in the Flow Control side – I mean in the valves and controls at Tyco. And that’s because it’s actually a pretty fragmented industry even still.

Michael Halloran – Robert W. Baird & Company, Inc.

Absolutely.

Randall J. Hogan

And lots of high value activities and – but for instance, in the food and beverage business, we are both in the food and beverage business, different applications in food and beverage. We were both in energy, different applications in energy. So, we buy valves. If you walk through the CPT factory where we do systems you will see Tyco valves in the systems, but you don’t just see Tyco valves, you see some other valves too. So I would say it’s too early to give you a definitive answer on that, but it’s more complementary cross selling than there is what I would call product line redundancy.

Edward D. Breen

Mike, I think that that’s the key and Randy mentioned this in his prepared comments. We have great reach at Flow in a lot of the emerging markets and customers that Randy could sell his products to, but as he said, I like his term. He is going to get more hits now because if we are in a big application somewhere with our valves, Randy has got products and a gas application, for instance as he mentioned that can be sold there and, by the way, vice versa Tyco’s products into some of the Pentair customer base. So I kind of liked it, it’s not 100% overlapped company, but it’s very complementary to the end markets that we serve and we should get a bigger share of wallet done right over time.

Randall J. Hogan

Right, right. If you take a look at our end market mix before and our end market mix after the combination, you will see a much stronger end market diversity that applying a really coherent product set to those end markets.

Michael Halloran – Robert W. Baird & Company, Inc.

Would it be fair to look at your pre – your current mix of end markets and look at the industrial excluding maybe pieces of the tech product, but the industrial pieces in your water is the biggest opportunity at this point or do you see the opportunity trending towards some of your commercial applications or maybe even your muni applications?

Randall J. Hogan

Yeah. I would say its industrial and energy.

Michael Halloran – Robert W. Baird & Company, Inc.

Okay, okay. And then just to make sure I understood from John’s comments, you guys mentioned $400 million of annual buyback. Is that assumed in the $5 plus revised 2015 earnings targets?

Randall J. Hogan

Yes. It is.

Michael Halloran – Robert W. Baird & Company, Inc.

Okay. And then just from a timing standpoint, I know Tyco spin is supposed to be completed by the end of September, what are some of the next big benchmarks along the way? When do you guys suspect you will be going out to the shareholder bases to get approval? Things like that.

Edward D. Breen

Well, let me give you the timeline. I think it’s important because as we obviously have to hit our timeline for this to happen at the end of September and as we have told our shareholders we are highly confident in that. We were going to be actually filing our forms with the SEC kind of as we sit here. We will delay just a little bit because we have to redo some of the documents because of the Flow spin now with the Pentair transaction, but that delay will not be significant, it will be by the end of April, which clearly keeps us on a timeline to hit the end of September with some cushion in our schedule. So, we are very confident in that.

And for our shareholders, there is the possibility that we would get the forms out even earlier on the ADT transaction. We might not do them all at once because they are kind of completed. But we will look at that over the next couple of days and see if that’s possible. But you might see the ADT form first and then the Flow form towards the end of April, but we will be sticking to that end of September timeline.

Michael Halloran – Robert W. Baird & Company, Inc.

Great. Congratulations and I appreciate the time.

Edward D. Breen

Thanks Mike.

Randall J. Hogan

Thank you.

Operator

Thank you. Our next question comes from Steve Tusa with JPMorgan. You may ask you question.

Stephen Tusa – JPMorgan

Hi, good morning.

Edward D. Breen

Hi, good morning, Steve.

Randall J. Hogan

Good morning.

Stephen Tusa – JPMorgan

Just a question on – so this valuation is based on, and I’m not sure if somebody asked this already, I was kind of running around this morning. I got on late. The value for Tyco Flow based on the Pentair stock price, what is kind of the leverage in that valuation based on Pentair stock price? I haven’t done the math this morning so maybe if you could explain how that works?

John L. Stauch

Yeah.

Edward D. Breen

Let me take a cut at that. John, if you want to jump in, certainly. If you look at it – let me give you kind of how we looked at this financially and, by the way, financially was not just the number one consideration. It was strategic fit, what we can do in the future together as the leader in the flow filtration space. But putting all those goodies aside, the way we looked at it from Tyco was we get 52.5% ownership in the company. So you do that math.

Steve, I think, your multiple was close to where the average of all of the analysts was at where they were saying Tyco Flow would go out at, which was about 8.3 times. Pentair is a 9.5 to a 9.6 and I think the combo of these companies certainly solidifies the multiple and this company should have going forward. So you can pick whatever you want that you would think it’s going to be, but if you just do the math there is about a 16% immediate lift in value to Tyco as well.

And then what we did is, we looked at the synergies, the day one synergies which are kind of in the bag that’s the corporate cost. And the tax efficiency which is the $90 million and that’s about another $1 billion as John mentioned on value. And if you do the math because we get 52.5% of that, so we get additional lift there of about 14% in value creation. And then if you take the synergies we get over the next couple few years. When you do the math with 52.5% for our shareholder base that’s another 19% lift in value now. We don’t get that on day one but you are approaching a 50% value lift if we hit all the targets that we are talking about. So we love the strategic fit but or when you did the math financially on how this could agree to our shareholders, it’s extremely attractive.

Stephen Tusa – JPMorgan

Right. But I guess, you are basing that value on a Pentair stock price that's $40 in the stocks 15% plus pre-market, I’m just wondering what the leverage is on that?

Edward D. Breen

Yeah, I didn’t even do that math yet.

Randall J. Hogan

Ed that’s actually fairly significant and Steve let me just remind you because all your multiples you have a flow is also above Tyco, Tyco traded 7.5 times. So I think this is certainly validating that the flow companies obviously traded higher multiples and we should trade it, at the high end of that with this combination and then Pentair already does. So when you actually look at from a day Tyco shareholder, our multiples right now 7.5.

Stephen Tusa – JPMorgan

Right. And I guess the bottom line is that the 4.9 doesn’t really reflect your fair share of the synergies going to be which is apparently being reflected today in Pentair stock price?

Edward D. Breen

Yeah, and that’s right I don’t know whether it’s going to trade today or closed yesterday, it is up above from what we just talked about.

Stephen Tusa – JPMorgan

Right. Right. Okay. And just another question around the timing of the filings, I think. The plan was to get the rest of them in by the end of March. Is that still the target?

Edward D. Breen

Yeah, I just mentioned Steve, yeah, just to update you. We will be delayed some, most likely still the end of April, simply because we have to re-work the filings for the Flow Control company because of the transaction announced today, but and we might get ADT out earlier, as I mentioned a moment ago, we are doing in two steps but we haven’t made that decision because the ADT filing is basically down because we’re going to file this week. So we’ll address that in next couple of days. But having said that, it does not change the end date that the spins would happen end of September. We had cushion in our schedule, we are comfortably in target to do that.

Stephen Tusa – JPMorgan

And then one final question the SpinCo adjusted EBITDA of $515 million includes the $80 million of standalone cost. I think that’s a little bit higher than we had, is there – is that being in line with what you guys have talked about for flow this year or is flow doing a little bit better how is kind of our flow fundamentals kind of tracking quarter to date?

Edward D. Breen

Well, let me I don’t want to get into this quarter because we are at the end of it but…

Stephen Tusa – JPMorgan

(Inaudible).

Edward D. Breen

As you saw last quarter you could expect the same this quarter, our end markets are coming back nicely. We are feeling very good about our order rates that we’re seeing. So I think our forecast that we have out to you guys Steve is very solid at this point in time.

Sara Zawoyski

Steve, one thing I’ll add to that is if you take a look at the slide worth noted, that’s a calendarized number.

Edward D. Breen

Right.

Sara Zawoyski

Well controlled, so its not of fiscal September year-end calendarized.

Stephen Tusa – JPMorgan

I got you. Okay, thanks a lot. I appreciate it.

Edward D. Breen

Thanks, Steve.

Operator

Thank you, your next question comes from Christopher Glynn with Oppenheimer. You may ask your question.

Christopher Glynn – Oppenheimer & Co.

Thanks, good morning, congratulations.

Edward D. Breen

Hi, Chris.

Christopher Glynn – Oppenheimer & Co.

Looking at the (inaudible) the repurchase was targeted $400 million year one or repeating annually but just and your thoughts on budgeting that kind of curious Randy, you have ever really guided to share repurchase plans in the past?

Randall J. Hogan

We have it but and it will be done under Swiss law so it has to be approved per process but this is going to have a enormous cash flow potential from this business. So we believe it was right to think about it in terms of delivering that cash back to shareholders in a consistent manner. We still feel strongly about our 36-year in a row increase in dividends and we anticipate that as well I guess in our strategy. But it also has to be approved by the new board and in time in place but that’s what we – including them all.

Edward D. Breen

Chris, if you think about the cash flow generation on the annual basis the combined company even inclusive of the roughly $1.0 million of share buyback and dividends, we are planning to distribute, there is still another $3.5 billion of M&A potential that this combined entity has. And we clearly expect that it will be pretty busy integrating for the first couple of years. So I mean the easier choice is to think of that buyback in that period.

Christopher Glynn – Oppenheimer & Co.

Got you. And on the cash flow John with the amortization incrementally $9 million annually. You have a pretty good line of – free cash flow and excessive net income pretty consistently?

John L. Stauch

Yeah, I think as we mentioned just because of the working capital and the nature of the valves and controls business and the project nature of that I think you guys are I’m sorry the Tyco Flow is usually 80% of net income in the growth years. So we’ve averaged about 90% of net income from our assumptions what that cash flow is over the cash flow horizon and that’s an average of the two company, Chris.

Christopher Glynn – Oppenheimer & Co.

Okay, great thank you.

Operator

Thank you, our next question comes from Ajay Kejriwal with FBR Capital Markets. You may ask you question.

Ajay Kejriwal – FBR Capital Markets

Thank you, good morning. And congratulations, it sounds like win for shareholders of both companies from our view. I just wanted to start with Randy maybe on the balance sheet flexibility, it sounds like it have lots of that in the next couple of years and I know you talked about buybacks. But maybe any thoughts on acquisitions and going through some of these platforms, any thoughts on what would be more attractive end markets or businesses that you are looking to go through acquisition?

Randall J. Hogan

Ajay you are going to give my board a heart attack. Our strategy remains, this is so what can exit our strategy overall. As I mentioned earlier, we’ll be the biggest player in flow filtration and equipment protection. And it’s still a fragmented industry. So I think acquisition will remain part of our strategy where I got nothing to say about specifics, the job owners’ integration and really combining these companies into one company. And getting another team well and letting them getting to intimate with their strategies and their top line growth. So I wouldn’t increase the post and logo yet, but I’m exited to get the logo.

Ajay Kejriwal – FBR Capital Markets

And then the divestitures, I know the [heat tracing] business at Flow Control Tyco is a great business. Where would that reside and maybe any thoughts on the long-term fit and the early thoughts on the…?

Randall J. Hogan

Yeah. That’s one of the thing that I don’t know when they were talking about this, one of the unique aspect was as you know Ajay, our technical products business is our jewel. It’s our proof of concept on lean enterprise and it’s still got a lot of room for growth, its high margin. Thermal management was the space that we are already looking at and exploring, this tracing space was something we’re thinking about already. So we view it has strategically fitting our technical products. And so it will stand-alone as its own GBU and that margin wise it’s very similar, it’s a nice margin business. And in a lot of ways the two are going to complement each other because there is some lumpiness in the trace business and as you know our technical products business is mostly short cycle, so we will have a nice balance in short and long cycle there. And there is slightly out of cycle with each other, like I characterize them both as I look at them is similar in terms of end market, similar in terms of strategy opportunities and complimentary in terms of long, short and cycle. So I viewed as a nice add.

Ajay Kejriwal – FBR Capital Markets

Excellent, and then Ed maybe just on that the Reverse Morris Trust structure. I guess one of the requirements that the two companies have to be nearly equal size and that is the case here. Are there any other things that need to be clear from a regulatory perspective for it to be offered to go through and that tax nature to kind of old maybe should we keep in the mind?

Edward D. Breen

There is really nothing else, just a customary approval that we have to go through, there is nothing new because of the Reverse Morris Trust. And by the way you’re right, there is somewhat unique, I think it’s only been about 20 done, because you made the key point, yeah, you of course really have that strategic fit which means you’re in the same industries. And you almost have to be almost identical size each other they kind of get the fit over 50% ownership to work. So it’s just was kind of one of those unique moments in time where, it just works out perfectly for both types of shareholders. I don’t think it’s going to happen often, a deal like that.

Ajay Kejriwal – FBR Capital Markets

Yes, excellent. Thank you.

Edward D. Breen

Okay.

Operator

Thanks. Your next question comes from Gautam Khanna with Cowen. You may ask your question.

Gautam Khanna – Cowen and Company

Yes, for Ed Breen, hey congratulations.

Edward D. Breen

Thank you, Gautam.

Gautam Khanna – Cowen and Company

No, problem. But I just wanted to ask if you can just update us on two things, your share buyback plans ahead of the spin? And secondly, you've mentioned this transaction doesn't affect kind of the tax – free nature of the spins. I'm just curious, if you kind of preserve the process for the other two businesses, CSMs and ADT, so that those wouldn't be – there would be no, nothing that would preclude an acquisition or anything soon after the spin. Thanks.

Edward D. Breen

No. There is nothing that changes there at all. We are always very careful about that type of thing, so no issue there. And, on the share buyback Gautham, obviously we haven't been able to be on the market I guess this quarter, I think we did a $100 million towards the beginning of the quarter, but we told you guys about that I think on our last earnings call. So we haven't been in the market since because of these negotiations going on. And we will really look at the share buyback over the next couple of weeks and probably talk

about it on the earnings call. We just had all our meetings with the rating agencies. So we have to take that into account, so we're going through analysis right now.

And by the way, we also obviously have some things sitting on the docket on the M&A which we are not going to do anymore, the rest of this year because of our filings. But we want to make sure we have the flexible for the companies when they go out. So taking that into account, the rating agencies into account, we’ll look at what that program is for the rest of the year, and will talk about it in the earnings call.

Gautam Khanna – Cowen and Company

Thanks.

Edward D. Breen

Thank you.

Operator

Thanks. Your next questions comes from Bhupender Bohra with Jefferies. You may ask your question.

Bhupender Bohra – Jefferies & Co., Inc.

Hey, good morning, congratulations guys. This is, I'm sitting in for here with Jefferies. I just have few questions and I'm looking at your cost synergy slide, slide 25. Just wanted to get a sense of – I see that with 50% of your cost synergies that actually come in 2013 and the remaining 50% over the next two years. If you can just give us some of your big buckets, what’s actually driving that cost synergies in the 2013 (inaudible)?

Edward D. Breen

Yeah, as we mentioned in the comments, we get a nice kick from the start of not have the planned corporate cost in the Tyco Flow side. And then we’re adding back, that’s $80 million and we're assuming a $40 million add from what we have to put in our corporate adds at Pentair to absorb that scale. As well as what we are addressing as the integration and standardization team, which will be a full time team working for three years to drive these synergies. So bigger portion of that synergy comes in 2013, and then we’re also getting those tax synergies of $50 million a year, right out of the gate. So a big proportion of the synergies in ‘13 and then as we ramp into ‘14 or ’15, we’re starting to see the benefits of what we're doing with operations and lean, and we're also starting to benefit from what we think will be the share commodity, spend savings and the indirect sourcing savings and that is going to ramp up.

Bhupender Bohra – Jefferies & Co., Inc.

Okay.

Edward D. Breen

Yeah, so the math is you still really get $90 million of synergies day one on that $140 million that’s expected in 2013, then there is another $50 million yet during the year.

Bhupender Bohra – Jefferies & Co., Inc.

Okay. And is the facility of rationalization, is that a big portion of your cost synergies and how? Will you be consolidating like facilities or not?

Edward D. Breen

No.

Bhupender Bohra – Jefferies & Co., Inc.

Okay. And your second question, I believe you guys can give any number on like revenue synergies maybe you’re still looking into it, but just wanted to get a sense of at what point in time you will be able to give that to the street?

Edward D. Breen

Well, we have to – reflecting the process we have to get the proper approvals before our teams can work eminently together and it will be until after that that we would have – we’re excited about the revenue synergies in terms of having a really well dimensionalized, you will have to wait until we can work as a team.

Bhupender Bohra – Jefferies & Co., Inc.

So that will be like early 2013, I guess, once the things?

Edward D. Breen

No, I would expect it before that.

Bhupender Bohra – Jefferies & Co., Inc.

Okay. And the last question, I don’t know if you guys gave out the number, amortization of intangible expense for 2013 or if you guys close like end of September, maybe the last quarter of 2012?

Edward D. Breen

Yeah, it’s a guess at the moment, but it’s in the upper $90 million, right now $95 million a year is the assumption. That’s obviously the assumption and then we mentioned you’re looking at about $90 million, $95 million of one time inventory step up assumed.

Bhupender Bohra – Jefferies & Co., Inc.

Okay, okay, thanks a lot guys.

Edward D. Breen

Thank you.

Operator

Thanks. Your next question comes from Garik Shmois with Longbow Research. You may ask your question.

Garik Shmoi – Longbow Research LLC

I just have a question for Randy. I was just wondering how the merger fits with CBT, if you can provide some more color there and if there is any impact on the integration of that business?

Randall J. Hogan

Well, it doesn’t impact us. CPT is well-contained inside our fluid process segment, our water and fluid process segment and the specific GBU of fluid process. So it’s well contained, it’s well in hand. This is the bigger integration of bringing these larger GBU’s which are actually larger than CPT, in a long side if you will looking at that overall GA structure. The examples I used are in terms of cost selling opportunities where the flow control contacts are going to be useful to help us accelerate growth. Those are applications that come out of the same GBU, CPT, although only one of the examples I used was those CPT based, the other ones where other parts of that filtration business. So also there will be some cross selling opportunities, but it doesn’t really impact the integration.

Garik Shmoi – Longbow Research LLC

Okay. Maybe I missed this, but I was wondering if you could talk a little bit more on the SG&A longer-term. I think you mentioned that Pentair does some 5% SG&A to sales, Tyco Flow…

Randall J. Hogan

Yeah.

Garik Shmoi – Longbow Research LLC

Is there anything or maybe 2015 what the percentage might end up looking like for the combined company?

Randall J. Hogan

Yeah, I’ll give you the target goals, that the combined number should be slightly less than 7. I still would say that that’s on the upper end of the (inaudible) benchmark data, but I mean the real opportunity the difference is we are little farther ahead in the standardization efforts on the Pentair side, as far as the ERP consolidations and back office consolidations. And so, we’re excited to take the process that we’d engage and which really is a simple process of going to the GBU President or leader and saying chose a system, chose a way and chose a best practice, and less standardize around it. So there is an opportunity there and that’s what we’re are assuming.

Edward D. Breen

It’s also consistent with what Flow Control is planning do on their own – in terms of still driving standardization process.

Garik Shmoi – Longbow Research LLC

Okay, thank you very much and congratulations.

Edward D. Breen

Thank you.

Sara Zawoyski

And operator just given the time, it looks like we have time for one more question.

Operator

Thank you. Then our final question comes from Doug Carson with Bank of America. You may ask your question.

Neilson Gupta – BofA Merrill Lynch

This is Neilson Gupta calling on behalf of Doug. We’re just wondering, is there any color as to how you’re sizing this $75 million in net debt for the new entity from the parent co, was it looking operating or something and is there going to be any bond holder approval required moving forward for Andy’s plans?

Mark P. Armstrong

This is Mark Armstrong from Tyco. We’re going to – we’re looking to do is basically put a bridge financing in place, that would, we would just use to bridge the time period from so we can close that and then go out and pull down the bridge or refinance the bridge post closing. And we’ll be doing all that plans within our existing capacity, within our existing revolvers.

Doug Carson – BofA Merrill Lynch

Hey guys, this is Doug, I just jumped on here, from B of A Merrill. The plan was to take out some debt at the commercial Tyco. And the 275 number seems a little bit low relative to the EBITDA for that business. Are we still on track to have the heritage parent Tyco with all the bonds outstanding, maintain a similar radian and take out a significant amount of debt there?

Edward D. Breen

Yes we are. I mean there is obviously the ADT residential piece will have a fair amount of debt going forward. But we will still maintain the credit rating at the remaining fire and security portion of the Tyco business.

Doug Carson – BofA Merrill Lynch

Great. Having done all the risk, but that 275 is a net tax figure?

Edward D. Breen

That’s correct.

Doug Carson – BofA Merrill Lynch

Okay. That makes a little more sense. Okay, thank you.

Edward D. Breen

Great.

Operator

Thank you. At this time, I will turn the call back over to the speakers for closing comments.

Randall J. Hogan

Thanks all, Randy here. Thanks all for listening in. We have a busy day and follow up calls.

Edward D. Breen

We are excited and look forward to talk to a lot of you during the day or so. Thanks.

Randall J. Hogan

Thank you.

Operator

Thank you. And this does conclude today’s conference. We thank you for your participation. At this time you may disconnect your lines.

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