Acquisitions and Divestitures

Material acquisitions

Pentair Ltd. took its current form on September 28, 2012 as a result of a reverse acquisition (the "Merger") involving Pentair, Inc. and an indirect, wholly-owned subsidiary of Flow Control (defined below), with Pentair, Inc. surviving as an indirect, wholly-owned subsidiary of Pentair Ltd. "Flow Control" refers to Pentair Ltd. prior the Merger. Prior to the Merger, Tyco International Ltd. ("Tyco") engaged in an internal restructuring whereby it transferred to Flow Control certain assets related to the flow control business of Tyco, and Flow Control assumed from Tyco certain liabilities related to the flow control business of Tyco. On September 28, 2012 prior to the Merger, Tyco effected a spin-off of Flow Control through the pro-rata distribution of 100% of the outstanding common shares of Flow Control to Tyco’s shareholders (the “Distribution”), resulting in the distribution of approximately 110.9 million of our common shares to Tyco’s shareholders. The Merger was accounted for as a reverse acquisition under the purchase method of accounting with Pentair, Inc. treated as the acquirer. Our business units comprising the legacy Flow Control business had net sales of $964.4 million and $1,852.5 million and net income of $68.8 million and $90.7 million for the three and six months ended June 29, 2013, respectively.

Based on the price of Pentair, Inc. common stock and our common shares issued on the date of the Merger, the purchase price was composed of the following:



In millions
Value of common shares issued to Tyco shareholders ⁽¹⁾	$	4,811.4
Value of replacement equity-based awards to holders of Tyco equity-based awards ⁽²⁾	111.2
Cash paid to Tyco in settlement of the working capital and net indebtedness adjustment	84.4
Cash paid to Tyco shareholders in lieu of fractional common shares ⁽³⁾	0.5
	$	5,007.5


(1)	Equals 110.9 million Pentair Ltd. shares distributed to Tyco shareholders multiplied by the Merger date share price of $43.39.

(2)

In accordance with applicable accounting guidance, the fair value of replacement equity-based awards attributable to pre-combination service is recorded as part of the consideration transferred in the Merger, while the fair value of replacement equity-based awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The fair value of our equivalent stock options was estimated using the Black-Scholes valuation model utilizing various assumptions.


(3)	Equals cash paid to Tyco shareholders in lieu of less than 0.1 million Pentair Ltd. fractional shares multiplied by the Merger date share price of $43.39.

During the six months ended June 29, 2013, the Company recorded an increase of $84.4 million to its preliminary purchase price related to cash paid to Tyco in settlement of the working capital and net indebtedness adjustment.

The purchase price has been preliminarily allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the Merger. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to accounts receivable, inventories, certain contingent liabilities and income tax-related items. The purchase price allocation will be completed in the third quarter of 2013. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation.

During the six months ended June 29, 2013, the Company recorded fair value adjustments to its preliminary allocation of purchase price. These adjustments were applied retrospectively back to the date of the Merger.

The following table summarizes our preliminary fair values of the assets acquired and liabilities assumed in the Merger as reported at December 31, 2012 and as adjusted at June 29, 2013:



	Preliminary purchase price allocation as of acquisition date
In millions	December 31, 2012			June 29, 2013
Cash and cash equivalents	$	691.7		$	691.7
Accounts and notes receivable	771.6			772.8
Inventories	1,046.2			1,044.8
Other current assets	98.2			98.2
Property, plant and equipment	822.0			807.3
Goodwill	2,520.1			2,614.1
Intangibles	1,425.1			1,441.9
Other non-current assets	275.1			275.1
Current liabilities	(856.3		)	(867.3		)
Long-term debt	(914.5		)	(914.5		)
Income taxes, including current and deferred	(364.6		)	(360.3		)
Other liabilities and redeemable noncontrolling interest	(591.5		)	(596.3		)
Total purchase price	$	4,923.1		$	5,007.5

The excess of purchase price over tangible net assets and identified intangible assets acquired was allocated to goodwill in the amount of $2,614.1 million. Goodwill has been preliminarily allocated to our reporting segments as follows: $336.1 million to Water & Fluid Solutions, $1,389.9 million to Valves & Controls and $888.1 million to Technical Solutions. None of the goodwill recognized from the Merger is expected to be deductible for income tax purposes. Goodwill recognized from the Merger reflects the current value of the expected future income resulting from synergies of our combined operations. Identifiable intangible assets acquired as part of the Merger were $1,441.9 million and include $362.3 million of indefinite life trade name intangibles and the following definite-lived intangibles: $920.0 million of customer relationships with a weighted average useful life of 14.2 years, $115.9 million of proprietary technology with a weighted average useful life of 13.7 years and $43.7 million of customer backlog with a weighted average useful life of less than one year.

Pro forma results of material acquisitions

The following unaudited pro forma condensed consolidated financial results of operations are presented as if the Merger had been completed on January 1, 2011:



	Three months ended		Six months ended
In millions, except per-share data	June 30, 2012		June 30, 2012
Pro forma net sales	$	1,924.8	$	3,781.3
Pro forma net income attributable to Pentair Ltd.	108.7		215.9
Diluted earnings per common share attributable to Pentair Ltd.	0.51		1.02

The 2012 unaudited pro forma net income excludes the impact of $6.6 million and $18.3 million, respectively, of transaction related costs associated with the Merger for the three and six months ended June 30, 2012.

The pro forma consolidated financial information was prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may have differed materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of Flow Control. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the business combination occurred at the beginning of the period presented or of future results of the consolidated entities.

Other acquisitions

On October 4, 2012, we acquired, as part of Valves & Controls, the remaining 25% equity interest in Pentair Middle East Holding S.a.r.l. (“KEF”), a privately held company, for $100.0 million in cash. Prior to the acquisition, we held a 75% equity interest in KEF, a vertically integrated valve manufacturer in the Middle East. There was no pro forma impact from this acquisition as the results of KEF were consolidated into Flow Control’s financial statements prior to acquiring the remaining 25% interest in KEF.

Additionally, during the year ended December 31, 2012, we completed other small acquisitions as part of Water & Fluid Solutions with purchase prices totaling $121.2 million in cash, net of cash acquired. Total goodwill recorded as part of the purchase price allocations was $80.9 million, $67.1 million of which is tax deductible.

Divestitures

During the first quarter of 2013, we sold a business that was part of Technical Solutions for cash of $30.0 million, net of transaction costs, resulting in a gain of $16.7 million. Goodwill of $5.3 million was included in the assets of the business sold. The sales price is subject to a working capital adjustment.