Johnson Controls Merger Will Give Its Spinoff a U.K. Home

A handler gathers car-seat frames from various containers and racks for production at Bridgewater Interiors, a Johnson Controls joint venture, in April in Lansing, Mich. PHOTO: NICK KING FOR THE WALL STREET JOURNAL

5/15/16

By Bob Tita
The Wall Street Journal

Filing reveals Adient shares “will be treated as a taxable dividend” for recipients

When Johnson Controls Inc. spins off its big auto-parts business in October, shareholders won’t get the tax breaks they expected. Instead, they receive something that might be even better: a company with a London address and even lower taxes.

Milwaukee-based Johnson Controls recently disclosed in a regulatory filing that the auto-parts company, which will be known as Adient, will be based in London, and shares in the new company “will be treated as a taxable dividend” for recipients.

Johnson Controls, which also makes heating and air-conditioning equipment and auto batteries, had to rejig the spinoff plan unveiled last summer after opting in January to merge with Tyco International PLC, one of the latest in a series of so-called tax-driven inversion deals.

The merger is effectively blocking the tax-free spin off of the auto business Adient that Johnson Controls first envisaged, but the deal is expected make it easier for Johnson Controls to relocate the new company to London.

It will also cut the tax bill of Adient by more than a third.

The merger with Tyco will make Johnson Controls an Irish company. Spinning off Adient afterward will allow it to be immediately recognized as a foreign-based scion of Johnson Controls.

If Adient was spun off as a U.S.-based company, it would have to pursue an inversion on its own or with a foreign-based merger partner to relocate to a low-tax country.

“Even though there’s some tax costs [for shareholders] going on up front, they’ll easily recoup those going forward because Adient will have such a low tax rate,” said Robert Willens, a corporate tax consultant.

Adient will incorporate the world’s largest maker of car seats, as well as other interior parts and last year generated $20 billion of sales.

With a London headquarters and most of Adient’s seating operations already in Europe, such as German seat maker Recaro, the new company will have a corporate tax rate of 10% to 12% compared with the 17% levied on Johnson Controls in the U.S. in its latest quarter.

The prospective tax wrinkles emerged during merger talks between Johnson Controls and Tyco, which was once one of the world’s largest industrial conglomerates before shrinking through a series of spin offs to focus on security and fire-protection systems.

“We discussed that at length as we were going through the deal process so we knew about this,” Tyco Chief Financial Officer Robert Olson said on an investor call last month.

As part of the merger, Johnson Controls will own 56% of the new company, while Tyco—the smaller partner—will be the purchaser and surviving company.

It will keep the Johnson Controls name, but maintain Tyco’s corporate headquarters in Cork, Ireland. Johnson Controls projects the merger will save about $150 million in taxes over three years.

Under the U.S. tax code, Tyco would have had to operate Johnson Controls’ automotive business for at least five years for Adient shares to qualify for tax-free treatment in the U.S., according to analysts.

“This case boils down to the fact that Tyco, as the acquiring corporation, has not been actively engaged in the seating and interiors business,” said Brian Sponheimer, a research analyst for Gabelli & Co.

Adient’s low-tax London address though could become an attractive asset for future mergers in an automotive components sector notorious for thin margins.

Tyco, which was one of the first high-profile U.S. companies to move to a low-tax haven in Bermuda when it merged with security alarm company ADT during the 1990s, later sold or spun off foreign-based businesses that eventually became partners in inversion deals with U.S. companies.

Meanwhile, Tyco switched its corporate registry from Bermuda to Switzerland before moving to Ireland in 2014.

The distribution of Adient shares is scheduled for Oct. 31. Shareholders will receive one Adient share for every 10 shares of Johnson Controls they own. The merger with Tyco is scheduled to be completed on Oct. 3.

Write to Bob Tita at robert.tita@wsj.com.

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