Welcome to the conference call to discuss the strategic benefits and details of the merger between Johnson Controls and Tyco. Your lines have been placed on listen only until the question and answer session. This conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Glenn Ponczak, Vice President, Investor Relations for Johnson Controls.
Well, welcome and good morning, everyone. Thanks for joining us on such short notice to discuss this morning's announcement of the merger of Johnson Controls and Tycho. As the operator said, I'm Glenn Ponczak, Vice President of Investor Relations for Johnson Controls. With me today here in New York are Alex Molina Rolle, Chairman and Chief Executive Officer of Johnson Controls George Oliver, Chief Officer of Tyco Robert Olson, Chief Financial Officer of Tyco and Antonella Franzen, Vice President of Investor Relations for Tyco. Joining us on the phone remotely from Milwaukee is Brian Stief, the Chief Financial Officer of Johnson Controls.
The slides being discussed on this call are on the Investor Relations sections of both Johnson Controls and Tycho websites. And before we start, I'd like to remind you that our discussion during the call will include forward looking statements and that actual results could differ materially from those projected in those statements. The factors could cause actual results to differ, and they are discussed in the cautionary statement regarding forward looking statements that are included in the slide deck as well as in the joint press release issued today. Today's call is not intended and does constitute an offer to sell or the solicitation of an offer to subscribe for or buy securities of Tyco or Johnson Controls. The matter subject matter of today's call will be addressed in a joint proxy statement and prospectus that will be filed with the SEC.
We urge investors to read it in its entirety when it becomes available. Information regarding the participants in the proxy solicitation is contained in each company's annual proxy materials filed with the SEC. And with that, I'll turn
it over to Alex. Thanks, Glenn, and good morning, everyone. I'm excited to be here today. We'll start on Slide 6. And I'm excited to be here today with George and the rest of the Tyco team to announce the merger of 2 great companies.
We both have a long history of high performance, delivering outstanding products and services and commercial excellence and with customer centric values. And this is a transformational transaction that will help us both serve our customers more comprehensively and innovatively. It brings opportunity to our employees and creates a significant amount of value for our shareholders. And this combination creates a new global industrial leader with $32,000,000,000 in annual revenue, and it uniquely positions us to provide the most comprehensive portfolio of building and energy solutions. It's a highly strategic combination.
It creates a leading full building products and services company, bringing together best in class technology and service capabilities across fire, security controls, HVAC and energy storage. This new company will also benefit by combining innovative capabilities and a new pipeline for devices, controls, sensors, data analytics and VAD solutions and will help us better capture the enormous smart market opportunity that's evolving. Johnson Controls and Tyco have highly complementary businesses and our geographic footprints are complementary and it enables the new Johnson Controls to offer a comprehensive and innovative solutions to various end markets globally. Includes large institutions, commercial buildings, retail, industrial small businesses and residential. They bring together our buildings platform and creates immediate opportunities for the near term growth through cross selling, complementary branch and channel networks and expands our reach for our existing businesses.
In addition, the new company will be able to better partner with its customers to help improve their overall performance and operation and enhance the experience for their customers in areas around comfort, safety and accessibility. And lastly, the merger of the 2 companies creates compelling value operational synergies, some tax efficiencies and revenue growth opportunities. This new company will be highly attractive global industrial leader and be a partner of choice for our customers and an employer of choice for our talented people and the investment choice for our shareholders. Please turn to Slide 7. Let me spend a few minutes truly on the complementary nature of this combination.
In the terms of expertise and core capabilities, Johnson Controls is the leader in building controls, HVAC equipment and energy storage technology and services. And Tyco is a global leader in fire and security products and services. 2 companies have highly complementary business models. Our Our go to market approach includes a global branch network that will be the leader in delivering building equipment and services worldwide. In addition, each company brings unique strengths across the global geographies.
For example, Johnson Controls has a strong and growing position in China and across Asia and Taika has a stronger business than we do in the European markets. Both companies have a great large presence in North America. Now George and the entire Tyco team have built a strong track record of success across a variety of businesses. It complements our strengths at Johnson Controls. We've spent a substantial amount of time discussing the combination in ways in which we'll advance the position of our combined company.
And we really believe we can achieve more together than either company could on a stand alone basis. I'll spend a couple of minutes to talk about the transaction highlights on Slide 8. Under the terms of the merger agreement, Johnson Controls and Tyco will combine under the existing Tyco entity and the combined company will be called Johnson Controls PLC. In the terms of the mechanics immediately prior to the merger, Tyco will effect a reverse stock split so that Tyco shareholders will receive 0.9550 shares for each of their existing Tyco shares. The Johnson Controls shareholders may elect to receive either one share of the combined company for each of their Johnson Control shares or cash equal to $34.88 per share.
The Johnson Controls shareholders will own approximately 56% of the combined company the company's shares and receive an aggregate cash consideration of $3,900,000,000 The Tyco shareholders will own approximately 44% of the combined company shares. We will remain listed on the New York Stock Exchange and trade under the JCI ticker. The combined company will maintain Tyco's global headquarters in Cork, Ireland and the primary operational headquarters, America, will be in Milwaukee, Wisconsin, where Johnson Controls is currently based. Tyco and Johnson Controls have deep roots in the United States and we're strongly committed to investing in our business in the U. S, which remain critical to our success.
The Board of Directors of the combined company will consist of 11 directors, 6 directors from Johnson Controls and 5 directors from Tyco and that includes George and myself. Upon closing of the transaction, I will serve as Chairman and CEO for a term of 18 months. During that time, George will serve as President and Chief Operating Officer with responsibility for the operating businesses and leading the integration. After the 18 months, George will become CEO and I will become Executive Chair for 1 year, after which time George will also become the Chairman and CEO. Of course, we both will share in the accountability for the successful integration of this transaction, both in terms of planning and execution and to deliver our commitments and the opportunity, our philosophy is to focus on the best of both across our businesses with respect to both talent and processes.
The closing of the transaction is expected by the end of fiscal year of 2016 is subject to customary closing conditions, including our shareholders' approval and regulatory approvals. Lastly, our plan at Johnson Controls to spin off Adient, which is our automotive experience business, remains unchanged. The spin off of Adient will occur post merger and is expected to be completed at the beginning of fiscal year 2017. All of our work together has confirmed that this transaction greatly enhances our ability to serve our customers, creates compelling value for our respective shareholders. The Johnson Controls and Tyco teams have been deeply engaged in analyzing estimates around synergies, which was laid out on Slide 9.
Go to Slide 9, you see that the new company will deliver at least $500,000,000 in operational synergies within the 1st 3 years after closing, and these operational cost synergies will be achieved by increasing efficiencies in integrating our global branch networks and taking advantage of the combined scale of over $20,000,000,000 building business In addition, the transaction will yield at least $150,000,000 in annual tax synergies and the combined company is expected to have a pro form a adjusted effective tax rate similar to that of Tyco's. In addition, the structure of the combined company will allow us to utilize our global cash holdings more effectively for improved capital allocation to invest in our business as well as to return value to our shareholders. While we've not quantified them yet, we believe there are tremendous revenue synergies for the combined company. These opportunities are largely driven by our ability to cross sell new products and services within the same markets that we're in and as well as introducing Tyco services and geographies where Johnson Controls is strong and vice versa. Our senior leadership teams have engaged in discussing and assessing our combined prospects and the ways in which we can expand our relationships with current and future customers.
Go to Slide 10, illustrates the mechanics of the deal for our shareholders, which I've already laid out. If you move on to Slide 11, this transaction is a key milestone for 2 companies who've been on each have been on a path of transformation. Johnson Controls has focused on our core platforms of buildings and energy with significant portfolio changes over the past few years. This transaction represents the next phase of Johnson Controls' transformation. With its world class fire and security businesses, Tyco aligns with and enhances our buildings platform and further positions all of our businesses for global growth.
It's precisely the deliberate actions that both companies took over the last few years that put us in a position to take advantage and be ideal partners today. As shown on Slide 12, as a part of this transaction, following the Adient spin, shareholders will own 2 focused highly valued companies. The new Johnson Controls will a highly attractive industrial leader with a pro form a revenue of $32,000,000,000 $4,500,000,000 in EBITDA and that's before the $600,000,000 in synergies in annual synergies. In addition, both sets of shareholders receive Adient shares, which is a global leader in automotive seating and interiors. So let me give you a quick overview of Adient on Slide 13 for those of you that are unfamiliar with this sector.
With 16 point $5,000,000,000 in annual revenue in fiscal 2015, Adient supports all major automakers globally and the differentiation of their vehicles. Adient has the broadest and most complete set of seating and interiors in the market. Let's turn to Slide 14 talk about the substantial value creation for our shareholders. First, I'll talk about the benefits to the Johnson Controls shareholders, and I'll pass it over to George, and he can discuss the benefits to Tyco shareholders as well as George will handle the next few slides. The strategic and financial benefits of this combination are going to greatly benefit both sets of shareholders.
As to the benefit of Johnson Controls shareholders, we feel that this transaction greatly enhances our multi industrial portfolio by strengthening our building platform. Our shareholders will receive approximately 56% equity ownership in the value creation of this combined company, including the capitalized value of $650,000,000 of synergies. Our shareholders will also receive an aggregate cash consideration of $3,900,000,000 With a strong pro form a balance sheet, the new Johnson Controls will have enhanced flexible financial balance sheet to invest in our businesses as well as return capital to our shareholders with the ability to access global cash flows and take advantage of tax synergies. Additionally, stronger financial metrics of growth and profit are expected to drive multiple expansion over time. Let me pass it over to George.
Thanks, Alex, and good morning, everyone. I am pleased to be here with Alex and the Johnson Controls team to discuss this combination that clearly accomplishes what opportunity to expand our ability to serve our customers while offering a compelling value creation opportunity for our shareholders. Given the structure of the transaction, both Johnson Controls and Tyco shareholders will participate in the future growth of the combined company. Let me give you some background on how this transaction came about. Over the last 3 years, Tyco has transformed from a holding company to an operating company and has made significant progress in streamlining operations and processes and preparing for our transformation through a growth and innovation company.
Today, with approximately $10,000,000,000 in annual revenues, Tyco is the world's largest pure play fire protection and security company with an 11% share of a 100 and $20,000,000,000 fragmented market. We have made phenomenal progress, and I am very thankful to the Tyco employees all of their hard work and dedication during this transformation process. As I have said, Tyco no longer sees its addressable market to be limited to the fire and security industry when developing new products and services. This transaction allows us to more completely address the total customer problem and to combine Johnson Controls' strong product portfolio with our resources, devices and our factories in the field to create solutions to better solve these problems. Combining with Johnson Controls, peers are leading established businesses with robust innovation pipelines and extensive global footprints.
Let me spend some time telling you a little bit about the benefits it will bring to Tyco shareholders. Based on the 30 day volume weighted share price, this transaction represents a premium to Tyco shareholders of 13%. However, the true value creation is embedded in the power of the combined company as we expect at least $650,000,000 in synergies over the next few years. With approximate 44% interest in the combined company, including the auto spin, we believe the value creation for the Tyco shareholders will be substantial and we estimate it to be north of 30%. In short, Tyco shareholders will be able to participate in the upside of the combined company, a highly attractive industrial global leader with strong growth prospects and opportunities across the globe in various end markets.
Both Johnson Controls and Tyco have a proven track record that make us highly confident that this value proposition will be delivered. Overall, this combination is a win win for the shareholders of both companies. As you can see on Slide 15, our pro form a revenue mix will be balanced across products and geographies with a strong service revenue base yielding consistent sustainable growth. Turning to Slide 16. We have leading brands across our comprehensive portfolio of building controls, HVAC, energy and power, integrated solutions and services and fire and security products.
We both have very strong brands that are recognized for innovation, quality and reliability by our customers. And with the investments that both companies have made over the years in new products and new solutions, we are uniquely positioned to strengthen these global brands. Moving to Slide 17. We are uniquely positioned to capitalize on current trends by taking the very strong position that we each have in technology and combining our investments to leverage that expertise with enterprise software. Not only can we support what we do for our customers today, but leverage that in a much bigger way to bring unique solutions to the end markets that we serve.
The Internet of Things is driving market convergence. Senses and networks, along with the development of intelligent edge devices, provide visibility to assets, people and the environment. In a connected world, the solutions that we deploy enable us to extract a lot more data, mine that data with data analytics and provide new customer insights. For example, let's take a look at the Connected Building on Slide 18. We provide some of the most critical building systems, building automation and energy management, the fire protection and security systems as well as HVAC.
As a combined company, we have the depth and expertise to create new business models to optimize the performance of the building systems throughout the life cycle. We believe this capability is extremely compelling and demonstrates our ability as a combined company to own the building. Customers will be able to come to us and we'll be the one stop shop in building products, services and technology that can serve their needs holistically. In addition, we will be in advantaged position for building automation and system integration to deliver on the vision for buildings of the future. With what we are doing in buildings, we will also be able to capitalize on megatrends with smart cities and global urbanization growth.
As we show on Slide 19, the world is headed towards a more connected future. Together, we will be strongly positioned to leverage the Internet of Things and connectivity for a smarter customer offering in a more integrated and data rich future. It will allow us to better capture opportunities created by increasing connectivity and integration in homes, buildings and cities. This combination is not only about serving our customer needs today, but being able to look ahead, see where the industry is headed and being able to define and deliver the customer needs of tomorrow. To ensure we realize this vision and achieve our operating synergies, we will leverage our world class operating systems, which you can see on Slide 20.
Johnson Controls' strengths in manufacturing, procurement and commercial capabilities are highly complementary of Tyco's strengths in standardizing and optimizing processes to drive growth and margin expansion. By applying a simple set of tools and practices to our most important enterprise processes, these business systems will enable us to achieve the operational synergies Alex discussed earlier. Combination of these operating systems together will drive synergy realization and our transformation to the next level. Now let me turn it back to Alex. Thanks, George.
For a few financial details, let's go to Slide 21. The combined company will have an accelerated top line growth profile. You can give our products and service portfolio opportunity plus the margin improvement and through the realization of the synergies. Tyco has secured a committed bank facility to finance of this transaction totaling $3,900,000,000 and we are committed to retaining our strong investment grade balance sheet. We also plan to maintain a strong and growing dividend.
We have a balanced capital allocation strategy, including the return of capital to our shareholders and growth investments. On Slide 22, you can see that both companies will provide an update to our fiscal Q1 earnings and we're providing additional information regarding our quarter results and we'll address questions related to the earnings later this week on our respective earnings call. So let me conclude where I began on Slide 23. We believe that this is the best transaction for both companies and will transform our ability to capture the opportunities in a fast evolving marketplace and deliver world class products and services for our customers. With this transaction, we're creating a new global industrial leader with strong growth prospects across products, geographies and end markets.
We have the best talent in the industry and our inspired energetic workforce will allow us to expand and expand our ability to invest globally, develop new and innovative solutions for our customers and create significant value for our shareholders over the long term. In short, this combination of Johnson Controls and Tyco will create a better company, and I can't be more excited about this transaction and all the opportunities that lie ahead. We appreciate your time today. Thank you very much. And operator, let's take some questions.
Thank you. First question is from Jeffrey Sprague from Vertical Partners. Sir, your line is now open.
Hi, Jeff. 1, congrats. You had a long weekend, I guess.
Sure.
Hey, one just very, very housekeeping
question, make sure I got some arithmetic right here. Just looking at the pro formas and what's going on with the cash consideration, how do we think about the actual share count of the combined entity based on the closes on Friday?
Yes. Jeff, this is Robert Olson. And when all the dust is settled in the new company, we think that the Tyco shareholders will own 43.7% roughly of the new company. JCI shareholders were on 56.3% roughly. Right now, we're in the sort of the range of $940,000,000 total shares.
Great.
And then I was also thinking about this portfolio. We've got a lot to accomplish in the near term, but it's not hard to look out a little further into the future and think of some other permutations. Will putting these assets together in any way tie your hands on other moves? I'm thinking specifically about spinning off other assets or things of that nature. We found with the Eaton Cooper combination, for example, that there was kind of a 5 year period where their hands were tied.
I understand what you're saying. I don't think we have anything that we're planning to do that would be in the way. But I think we're we feel pretty comfortable with our flexibility.
And then just one last one and I'll move on. I'm sure there's a lot of questions. Could you just address, George or Alex, kind of the complexity or challenge of putting the branch networks together? I understand that there should and could be a pretty big opportunity there, but you're dealing with customer relationships and sales folks and these things can often be quite disruptive. How do you plan on approaching that?
And what percent of the synergy target is related to that?
That's a great question, Jeff. One of the things that and I'll turn it over to George here because they've gone through some of their own consolidation, so they have some experience. If you recall, we've done this before at Johnson Controls when we acquired York. We went through the same exercise. So I can visualize this because I lived through it and that was a big part of the integration plan when we did it with York.
So you get a good we got a good sense of what needs to happen and when the planning that needs to go forward. If you look at the percentage of synergies, that's kind of cascading. A good part of it is comes through our BE organization at the branch level, above the branch level and at our headquarters of both BE and Tyco. But it's very, very analogous, at least from my perspective, what we did with York. So I'm pretty confident around our integration.
George, you may have a perspective.
Yes, Jeff, let me comment on that. When you look at the business systems that we put into place, I would say both companies have done a great job in continuing to standardize and simplify the work that's done in the field. And that has created a huge platform for continued integration here with the combined capabilities. When you look at the $500,000,000 of synergies, we do expect to be able to be at a full run rate by year 3. When you break those down, about $150,000,000 are structural kind of redundancies, corporate cost.
And then the remaining 350 relates to it would be the sourcing branch network, manufacturing optimization and that type of opportunity. And then in addition to the $500,000,000 we have about $150,000,000 of tax synergies.
Great. Thank you very much. Good luck.
Thanks, Jeff.
Thank you. Next question is from Steven Winoker from Bernstein. Sir, your line is open.
Congrats. Very exciting guys. Thanks, Steve. George, though, I do have and whatever value that market is going to ascribe to that over time. But more just the valuation for Tyco on a kind of tangible or at least pre synergy basis, how are you thinking about that for shareholders going into this?
Well, I mean, when you it starts, I mean, right out of the gate here, we our view is that there is substantial value creation north of 30% for Tyco shareholders. And it does start with the 13% premium on the exchange ratio, which is the last 30 day VWAP. Now in addition to that, we get we do get 40%, 40% of the synergies that we discussed, which we're estimating to be around 6 $50,000,000 plus. And then you'd have to argue what the multiples are. But as you do that math, you get well north of 30%.
And now what we haven't counted in here, Steve, is the work that we've done around our growth and innovation strategy. As we have been advancing our strategy, recognizing with the convergence of the building, we're making great progress with what we have in Fire and Security. The convergence with that what that is going to have with the controls in HVAC creates a much greater value proposition for our customers. And so in these numbers, we haven't counted revenue synergies, but we see from day 1 being able to leverage the combined distributions, the combined customer base that we serve and then more importantly now leveraging a lot of our innovation that will enable us to put all of the capabilities together to be able to capitalize on the trend with smart buildings. And so I think this is hugely exciting for the Tyco shareholders and gives us an opportunity to create a lot of value.
Okay.
I'll just add something, and this is Alex, just that particularly the folks that follow Tyco may or may not be intuitive. Part of the portfolio transformation that John's Controls is going through is because we believe that we're not that we haven't been able to realize the multiple expansion that we should get by being a multi industrial in the spaces that we participate in, the remaining Johnson Controls. I think this transaction will speed that effort up and new Tyco shareholders will able to participate in that multiple expansion.
Okay. And then one follow-up question to Jeff's earlier question on the branch network synergies. So when I think about the field force and all of the mechanical, electrical, design, install, engineering, commissioning service capabilities that you your combined companies
have. I mean, is there
a simple way to think about how those things fit together? Or is this frankly just one of the most complex things you're going to have to deal with through the whole integration? It could be exciting, but I'm wondering how much overlap there is.
Steve, we have been working on more integrated solutions in the space we're in, beginning to capitalize on what we see as being the trend of convergence. And so we have a lot of similar capabilities in place within our branch network today. So this gives us the opportunity to leverage the scale of the combined businesses together, create centers of excellence around project design, project execution and then ultimately performing the services. And then you get the structural savings with the combined footprint that we're still in the early innings of combining the footprint that we had in Fire and Security. This gives us the acceleration, the ability to be able to accelerate that combination and optimize that in a much bigger way with the scale that we have.
And Alex talked earlier about they have tremendous strength in Asia. We don't. We have tremendous footprint and strength in Europe. They don't. And when you look at the combination and how this plays out not only for potential cost, but the ability now to accelerate revenue, it's pretty compelling.
Yes. And I'd just add that there's you asked a question around overlaps. There's not a lot of overlaps, but what there is a lot of complementary within the branches. There actually is within the Johnson Controls branch network of complements that will come right out of the chute there. But from a standpoint of overlap, there's not a lot of overlap.
But it's not something that neither one of us are unaccustomed to. So I think when you sit here, it looks complex when you get at the branch level. This is not going to be a very complex, at least the idea that is from the standpoint of the branches. I can speak to that from a person that came from the branches.
Okay, great. Thank you.
Thanks, Steve.
Thank you. Next question is from Brian Johnson from Barclays. Sir, your line is open.
Brian? Just a couple of house keeping ish kind of questions unfortunately. First is, what's the logic and were there any considerations in terms of having the seating spin after the merger as opposed to before?
Why did we do one way versus the other? Yes. Well, I think part of what we wanted to do is make sure that from the standpoint of the opportunity that's in front of us, we wanted to make sure that we could capitalize on the opportunity to get this done. We did look to see if this was going to be something that was going to adversely affect our to operate and get the spend completed. And in fact, what we did was we had the folks from Tyco come in and get comfortable with where we were in the process.
Based on where we were in the process and what was going on, it was best for us to go ahead and get this done. And we saw that this wasn't going to interrupt. And I think George can speak for the Tyco folks. They felt comfortable that they were going to be shareholders in a good company going forward.
Yes. What I would say, Alex, is we have a lot of experience in these type of transactions. And I think with the team that we've had working with your team, we have a high degree of confidence that the work that's been done is on track. It is scheduled to be spun in the Q1. And we'll be working with the team to make sure that, that happens and have high confidence that it's actually going to take place as planned.
And second question, do you have any preliminary timeframe for the cost synergies and then for the revenue synergies in terms of how quickly after the close by the end of fiscal year you could start seeing some of those savings?
Yes. So I think what we've talked about is that the cost synergies we should see and I don't know that they'll be linear, but that'll be over a 3 year horizon is where we see the cost synergies. As it relates to the tax synergies, we'll start seeing some tax benefits immediately. And then over time, we'll be able affect all of the tax synergies. But it's not back end loaded.
And as I think, on the synergies, about 150 were tied to corporate, some of the redundancy there, then 350 operational. So there's a good balance of how that synergy those synergies play out over the 3 year period.
Yes. And just I didn't want to avoid your question on revenue. We didn't include this in any of our modeling. And so we see it as being conservative. Going back to my experience with York, it took a little bit longer for us.
We got the cross selling fairly quickly, but in order to get the more strategic stuff, it took us a little bit longer. So we really see that as upside and what you can expect from us. And George and I, as we work through with the teams over the next few months, we'll be able to detail out more about what that opportunity looks like. But we see that today, and I think maybe even in the slide, we talk about it being upside to the opportunities that we've talked about, but it's important.
Yes. And I think there's significant opportunity with the trends that are underway, and we're very excited about just day 1 leveraging the combined capabilities as they exist today. But more important now, as we're competing with some of the new market that's being created with the convergence, this is going to give us a big leadership position in being able to capitalize on that new market that's being developed in the smart buildings.
Okay. Thank you.
Your next question is from Nigel Coe with Morgan Stanley. Your line is now open.
Thanks. Good morning and congratulations. Yes, so just maybe could how long this been have you been discussing the potential for Emergent? I'll ask the question in the context of the degree of confidence around the cost synergies. 5,000,000 dollars doesn't feel like the most demanding target out there.
So I'm wondering is this more of a I mean, I don't want to say back of the envelope, but I mean, it's a question of as you do more due diligence, that number could rise over time.
Well, I would tell you that the way that this started, we've been as you all know, we've been very focused on creating an operating company in Tyco in the last year and a half, really focused on now being a growth and innovation company. And we have as we work through this and really from an outside in perspective from the customer and what's happening in the market, realize that there is a true convergence of technology that's taken place. And that we were going to take all of the strength that we had in our portfolio and look to combine with others in the building that would create a competitive advantage in being able to capitalize in that space. And so it was I initially engaged Alex and was interested in the controls business because I felt that the business was very complementary with what we do in Fire and Security. And that when we look at the total customer problem and the ability to be able to create new business models to be able to better support customers, create value and accelerate growth, there isn't a better combination.
It's a great strategic fit and the foundation of the deal is the strategic fit and being able to now capitalize on the growth opportunity that we see going forward.
Yes. As it relates to the robustness of the number, I would actually say that the number is pretty robust as it relates to kind of some bottoms up planning. I mean, this is actually I don't want
to talk about how long
we've been doing working on it, but we've been working on it in some detail. What I would say is we both George and I would sit here and say we're confident about the number and you look at it from a top down perspective, we think there's more opportunity. But we have a lot of confidence because we understand where the numbers are coming from and we've really worked at this bottom up. So you can look at it either way. You can look at it and say it's conservative or you can look at it and say that we know what we're doing and we've got a good plan.
But either way, you should feel good about this is a good starting point.
Nigel, just to reinforce that with the work that we've done in Tyco in the last 3 years with the amount of productivity and cost that we've been able to achieve. And learning through that process, I'm highly confident that what can be done here with the combination will be achieved and delivered.
And a quick follow-up, George. How does Tyco ON fit with JCI Building Controls? Is some of that investment you've been making, is that now somewhat redundant? Or does it fit
Nigel,
it
Nigel, it's an awesome fit. I mean the work that they have with their MedAssist platform and at every level of the building and the capabilities that exist within Medisys and then controlling the building and then the work that we've done with Tyco on with our cloud based platform that enables us to be able to collect a lot of other data through our sensors and devices and then to configure that data such that we can apply analytics, which then ultimately delivers the value, whether it be energy savings, better utilization of space. There's a lot of new business models that will be built off of our infrastructure. And so this I see this as a total fit. I actually had a discussion with one of our technology leaders this morning after the announcement and said that it's an unbelievable fit with the synergies in the capabilities that come from Johnson Controls with the work that we've already done with Taekwondo and that how that comes together and just creates a leadership platform to be able to serve the building.
Yes. I've been excited when I listen, this is Alex, when I look at some of the technology that Tyco has and where they're headed, particularly as it looks at some of the insight they have for their customers around the retail space. But if you look at what John's Controls has done, if you're not familiar, is today when we sell a piece of equipment like a chiller, a mechanical piece equipment, we monitor that equipment today and we look at not only trends, but we look we use big data analytics in order to determine how to maintain that chiller and anticipate when the chiller is going to have a failure. So I think our philosophies are similar. I think we're just working in 2 different spaces.
And so it will be great to be able to pull these capabilities together. So I'm looking forward to it. Pretty excited.
That's great. Thanks a lot.
Thank you. Next question is from Steve Tusa of JPMorgan. Your line is
open. Hey, good morning.
Good morning, Steve.
Can you just
talk about the capital structure of the combined co and just kind of the cash that's moving around here. I mean the $3,900,000,000 is basically kind of a facilitation payment for this merger is kind of the way it would seem to me, but maybe not? And then what happens with obviously the auto dividend? I guess in the end, when all this mixes in, what does the capital structure look like?
Yes. Steve, this is Robert. Roughly, as you know, Tycho has about $2,000,000,000 of debt today. JCI is in the range of $7,000,000,000 We've said as part of this deal, we'll go out and raise roughly $4,000,000,000 I think JCI has publicly stated as part of the automotive spend, the dividend back would be in the $2,500,000,000 to $3,500,000,000 range. So you do all the math and you get a net debt in the $10,000,000,000 to $11,000,000,000 range.
That puts us higher net debt to EBITDA than we've been historically, but in the right range with our competitors, puts us in the 2% to 2 point 2 range and gives us a lot of flexibility going forward. Yes.
And we've got some pretty strong cash flows coming out of the backside of this. Brian, I don't know if you're on the phone, if you got something that you want to add, particularly as it relates to the automotive dividend?
Yes. I mean, the way we've thought about this is that the $3,000,000,000 to $3,500,000,000 of leverage that we put in auto we'll get back basically $3,000,000,000 of cash. And that cash has all been considered as Robert just said and where we're going to
end up net
debt will probably be in $10,500,000,000 range. So even at that level, if we look at the cash flows with an organization that generates EBITDA of close to $5,000,000,000 including the synergies, we're pretty comfortable with that leverage position.
And then what happens to the free cash flow until close? Is there is that at your discretion on the JCI side? What's the status on that?
Yes. So as part of the agreement, we've got interim operating covenants that have kind of provided a framework for both companies to operate until closing. And as you can imagine, I mean, there's no provisions to do anything unusual with cash. I mean, I think one of the things that we're looking at and Tyco historically, we've had back ended free cash flow numbers in late Q3, early Q4 where our largest numbers are. So that's going to be right in the period when we'll be likely getting the dividend from the Adient spin as well.
So I mean in the months of June through December, there's going to be a significant amount of free cash flow in the Adient spend dividend that will allow us flexibility in capital allocation.
Okay. And then one last question, George. I know you guys preannounced positively on the Q1 but didn't update the year. Any commentary on that front?
What I'd say, Steve, is we're off to a very solid start here and that you saw the results in the Q1 and feel good about the progress we're making in the current year. We're going to be going through that in a lot of detail here as we do the investor call on our earnings on Friday. We'll talk in detail there. But as we start the year, we're tracking as we expected.
Okay, great. Thanks a lot.
Operator, we've got time for one more call.
Thank you. Last question is
a couple of things. Just one quick clarification, a technical question from a perspective of JCI shareholder. You would get conversion partly or could get conversion partly in cash with a maximum of $3,900,000,000 in cash and that's how you come up with the 56.3 percent for JCI shareholders. So it's not that you get a share in the NewCo plus the $3,900,000,000
Well, yes. So technically, what you do is you get a share plus the prorated piece of 3
$900,000,000
Okay. Maybe I'll follow-up on that.
Yes. Let me just the JCI shareholders will have the right to choose a share. They will also have an option if they choose to take cash or some portion of cash. The $3,900,000,000 will ultimately be prorated amongst the shareholders. Obviously, the demand for that cash will not exactly equal $3,900,000,000 either it will be more or less.
Depending on the share price.
Okay, yes. So it's part of the it could be some part of that conversion. It's effectively like a share repurchase. You're not issuing as many shares. Yes.
So definitely, we can follow-up with you later.
Yes. Can you talk about just 2, just operational things? One is, do you have an estimate of how much it's going to cost to execute the synergies? And then secondly, from your customers' perspective, aside from the convenience and simplicity of having 1 enterprise system instead of 2, why is there an advantage to combining FHIR Security and HVAC? Is there some way you can from a customer's perspective, they can say that this is financially positive for them?
Yes. Rob, this is Robert. With regard to your question on what it's going to cost to drive the synergies, we've looked at this. We think it's roughly about one time the synergy value.
And then as it relates to why would a customer benefit, 2 things. I mean, first off, I think you're right, you've got you're going to end up having some real convenience early on just because we're going to have one person and one stop shop and one set of technical expertise. Long term though, I think the benefits are much more significant. The technology is converging and as the technology converges, it's not only going to be a lower cost to serve, but beyond the lower cost, there's going to be the ability to utilize the data that we get from the customer in ways that the customer is going to help inform us to help them operate their facilities and their operations more effectively. And I think that's the real opportunity that's coming around this whole idea of the Internet of Things and smart buildings.
So hopefully, that makes sense. But what's going to happen is we're going to see our industry transform.
And I would add that we have a strong overlap of our customer base today and actually work together on many projects. And so there is a natural synergy here with the convergence of this portfolio to be able to better serve these customers coming already from a strong position.
Okay. Great. Thanks for your questions here. I think Alex and George you both have some
Sure. I'll take the lead here. As you can see, I'm very excited about this transaction for the Tycho shareholders and for both sets of shareholders with the combination that we're creating and the opportunity that we have to fundamentally lead the industry, driving a lot of growth and delivering a lot of value, as we discussed today, to both sets of shareholders. And certainly look forward to talking to you further on Friday on our earnings call and then there's a number meetings coming up here over the next few weeks and engaging with you even further during those meetings. Thanks for joining today.
Yes.
So I'll just drop off and say that before we go, first off, I just want to thank the Tyco team and George. It's been a pleasure working with this team. And that should be an indication, I think, for and feel comfortable for not only our for you folks on the phone, but our employees. I look forward to the next few months and the next few years and creating a new company that is going to be something special. It's really exciting, and I look forward to sharing all that with you as we move forward.
So take care. Have a good day. Thanks, everybody.
This concludes today's conference. Thank you for your participation. You may now disconnect.