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Pentair Inc. (NYSE: PNR), one of the three stocks we highlighted Tuesday in our report on investing in water , has reached a deal with Tyco International (NYSE: TYC) to create a major water solutions company with annual revenue of $8 billion.
Pentair, which specializes in filter and pump manufacturing, will buy Tyco's flow control business for $4.6 billion in an all-stock deal. Tyco's flow business sells valves and thermal controls.
Pentair Inc. Price History
Tyco's flow control business is one of the three parts it divided into last year in an attempt to rebuild its image, tarnished by a fraud scandal in 2002. Tyco will spin off its flow unit to shareholders and then immediately merge with Pentair. Tyco investors will own 52.5% of the combined company's shares.
The news shot PNR stock up 19% to $47.85 in early morning trading.
Pentair is already poised to profit from the world's growing need for clean water, as we detailed Tuesday. Investors who bought in to Pentair at Tuesday's closing price could have netted a double-digit gain today.
Now Pentair's merger with Tyco will give it an even bigger market share in the growing water solutions industry. Pentair will expand its product offering to include pipes, valves, and control products, and increase its industrial exposure and global reach.
"The new Pentair will be well positioned to benefit from the increased demands on energy, water, infrastructure and industrial process resulting from the growing population and wealth of developing economies," Pentair CEO Randall Hogan said Wednesday in a conference call. "The combined company will have increased scale, broader geographic reach and greater access to high-growth attractive sectors."
Why Pentair Inc. (NYSE: PNR) Is so Valuable to Investors
According to the United Nations, in the last century water use has increased at more than twice the rate of population growth.
Water has become so critical that Willem Buiter, chief economist at Citigroup, believes it will soon become "the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals."
On average, each person in the U.S. uses 100 to 150 gallons of water every day, according to the Environmental Protection Agency. But in places like China and India, the average is closer to 20 gallons per day.
In fact, China and India already have the two largest water footprints of any country on the planet. And they're about to get even bigger as their consumption of commodities skyrockets – water included.
The surging demand for water in emerging markets is going to require better "water solutions," or innovative ways of filtering and treating water to make it drinkable.
Better infrastructure to deliver fresh, clean drinking water to billions of new middle class citizens is also going to be needed, including filters, pumps, pipelines, and new processing plants.
That makes the growth in water stocks inevitable as billions of dollars is spent to meet demand.
That's where Pentair benefits; it operates as a global water solutions company. It creates solutions to the problems of tapping, pumping, filtering, and delivering water to millions. Pentair not only makes filters but also irrigation and crop spray equipment, marine pumps and accessories, filtration, softener, and deionization products and systems, and mid-to-large fluid management products and applications.
Basically, PNR is solving the problem of delivering drinkable water to customers around the world.
Pentair expects the Tyco deal to boost earnings per share by 40 cents in 2013 and earn more than $5 per share by 2015. It plans to pay an annual dividend of 88 cents after the deal and could have $400 million available per year for stock buybacks.
PNR's revenue grew by 14.83% during the most recent quarter, from $753.86 million to $865.69 million. And the company's expanding in the right places, with revenues in Latin America and China jumping 18% and 26%, respectively in 2010. With the coming growth in developing economies, PNR could go sky high.
Pentair was up 14.16% to $45.96 by 3 p.m. Wednesday.
But Chief Investment Strategist Keith Fitz-Gerald actually recommended Pentair Inc. to subscribers of our premium service Private Briefing back in early September. The stock is up 42% since then.
Private Briefing "cherry picks" high-profit-potential stock recommendations from our top trading services, and costs only $5 a month. If you'd like to receive early recommendations like Pentair from our experts – and receive $26,000 worth of our best trading-service advice for just $5 in the process – check out Private Briefing by clicking here. ]
News and Related Story Links:
- Money Morning:
Why Investors Relish Corporate Spin-offs
- Money Morning:
7 Dividend-Paying Water Company Stocks Bound to Make a Splash
- Bloomberg News:
Pentair, Tyco's Flow Unit Plan $4.53 Billion Combination
Pentair to absorb Tyco Flow, form $8 billion business