Adient To Be The Name Of Johnson Controls Automotive & Interior Taxable Spinoff

After discussing the importance of a spinoff’s tax free nature the other day, of course, there is a big spinoff on the horizon which will be treated as a taxable dividend for shareholders. Due to complications arising from its merger with Tyco (TYC), Johnson Controls’ (JCI) automotive and interior business spinoff will indeed be taxable upon its separation from the newly created entity. Basically, despite the name being Johnson Controls and JCI shareholders in majority control, Tyco (and its international domicile) will technically be the surviving entity and since it isn’t in the interiors business, it would have had to wait years to execute a tax free spinoff. Of course, it’s not all bad news on the tax front. Since the new combined parent company will be incorporated overseas, the spinoff, which will be named Adient, will have a UK domicile leading to a much lower corporate rate compared to being US based. Here is how the WSJ pegged it:

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.

5-7 points of a lower tax rate is meaningful and over time, the expectation is that shareholders will benefit more from this lower rate than on not paying taxes on the spinoff. Of course, that is only true for shareholders who hold the name for a long time. Additionally, it also ignores the addition of operating risks (is the company able to generate profits etc.) and assumes that that no corporate tax reform takes place in the US. No big deal right?

In the meantime, progress on the spinoff has been brisk with a name choice and the filing of an initial Form 10. Beginning with the name, Adient ‘is a Latin word that translates to accepting and advancing a situation or a stimulus, which is representative of our constant drive to engage, compete and always improve.” Additionally, according to expected CEO and Chairman Bruce McDonald, Adient is ‘a positive, powerful name that underscores our unique point of differentiation, namely, our ability to bring the right pieces together the right way, at precisely the right time, to deliver the best value for our customers.’ Well, when you make something up, it can be whatever you want it to be including positive and powerful. I guess Johnson Seating was too boring.

Additionally, Adient’s board of directors is starting to take shape. In addition to chairman and CEO Mr. McDonald, the board will also include:

  • John M. Barth. Mr. Barth has extensive experience in the automotive industry and leading public companies as the chairman of Johnson Controls from 2004 to 2007 and chief executive officer from 2002 to 2007. Mr. Barth will serve as the Adient lead director.

  • Julie L. Bushman. Ms. Bushman has served as a director of Johnson Controls since 2012. She is currently the senior vice president, business transformation and information technology of 3M Company and has served in that role since 2013.

  • Raymond L. Conner. Mr. Conner has served as a director of Johnson Controls since 2013. Mr. Conner is currently the vice chairman of The Boeing Company and president and chief executive officer of Boeing Commercial Airplanes and has served in those roles since 2013 and 2012, respectively.

  • Richard Goodman. Mr. Goodman has served as a director of Johnson Controls since 2008. He also serves as a director and as the chair of the audit committee and member of the nominating and governance committee of Kindred Healthcare, chair of the audit committee and member of the compensation and benefits committee of The Western Union Company and chair of the Audit Committee of Toys “R” Us.

  • Frederick A. Henderson. Mr. Henderson is currently the chairman and chief executive officer of SunCoke Energy and of SunCoke Energy Partners GP, and has served in those roles since 2010 and 2012, respectively. He was President and CEO of General Motors during 2009, President and COO of General Motors from 2008-2009, and Vice Chairman and CFO of General Motors from 2006-2008.

The new company will trade under the ticker ‘ADNT’ and shareholders should expect to receive one share of ADNT for every 10 shares of Johnson Controls owned. Although the high ratio may create some odd position sizes, Adient is going to be a big company with over $20b in sales. The spinoff is expected to take place in October after the merger is consummated.

Disclosure: Author holds no position in any stock mentioned.


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