Bloomberg News

Tyco’s Breakup Creates Takeover Targets, Analysts Say

September 19, 2011

(Updates share prices in fifth paragraph.)

Sept. 19 (Bloomberg) -- Tyco International Ltd. plans to break itself into three publicly traded companies that may prove more attractive to potential suitors on their own than as pieces of a conglomerate.

The separation, ending a decade in which Chief Executive Officer Ed Breen transformed the scandal-plagued conglomerate into a Standard & Poor’s 500 Index outperformer, will create standalone companies from ADT’s North American residential security, flow-control and the world’s biggest commercial security and fire-systems division.

“The rationale for a split versus an outright sale is that these three constituent pieces did not make sense for one single bidder, but there are several that could see strategic rationale in the different pieces,” C. Stephen Tusa, a New York-based analyst with JPMorgan Chase & Co., wrote in a note to investors.

The new companies may reach a breakup value as high as $70 a share, Vertical Research Partners co-founder Jeffrey Sprague wrote in a note to clients today. Sprague, who raised his rating on Tyco to “buy” in August, said all of the new businesses are possible takeover candidates. Breen declined during an interview to say whether Tyco had been approached by suitors interested in the whole or parts of the company in recent months.

Tyco climbed $1.05, or 2.4 percent, to $44.75 at 4:15 p.m. in New York Stock Exchange composite trading, even amid declines in the broader S&P 500. Under Breen, the stock more than doubled before today while the S&P 500 rose 43 percent. Former Tyco Chief Financial Officer Chris Coughlin will oversee the breakup, Tyco said.

Strategic Rationale

“A split is not surprising whatsoever,” said Joel Levington, managing director at Brookfield Investment Management Inc., who once was a Standard & Poor’s credit analyst following the company. “There was not a lot of strategic rationale for holding onto the asset mix they had. That is one of the key underpinnings behind our underperform opinion of Tyco credit.”

Before the split, “there was no upside from low single-A” credit rating, he said.

Standard & Poor’s Ratings Services placed the company on CreditWatch with negative implications after the announcement.

Breen, who took over in July 2002, will stay on as non- executive chairman for fire and security, a director at flow control and a consultant to ADT. Shareholders will get stock in each of the three companies under the tax-free spinoff structure, which will take about 12 months to complete.

Tyco plans to continue paying its quarterly dividend until the split, after which the three businesses will pay a combined dividend of about the same amount. The company has about $700 million to spend on share repurchases, which it plans to resume after making none so far this quarter pending announcement of the spinoff.

‘Growth Potential’

The transaction will probably have one-time costs of $700 million from refinancing debt as well as restructuring and separation, Tyco said.

“We’re obviously splitting these three because we think they’re going to do well on their own,” Breen said in an interview. “They are in industries where people want to consolidate the market. We want our three businesses to be able to play in that environment.”

Breen succeeded CEO L. Dennis Kozlowski, who exited amid a criminal investigation for personal tax evasion. Kozlowski ran the company for a decade, boosting revenue with acquisitions. When Breen joined Tyco, revenue was about $35.6 billion. Last fiscal year’s sales were less than half that amount, after about 25 divestitures and splitting the company into three in 2007.

Spinoff Chiefs

Tyco under Breen created two other companies in that split: Tyco Electronics, now known as TE Connectivity Ltd., a maker of electronic components, and Covidien Plc, a maker of medical devices and supplies.

Tyco’s most recent split “has been a thought since, quite frankly, we separated the company three years ago,” Breen said on the call. Complexity was among the reasons Tyco didn’t spin off the businesses at the same time as its earlier move, he said.

“The real big reason, though, was that we thought these sets of businesses could be run much better than they were being run,” he said. “They were very fragmented at that time.”

Because Breen will be on the boards of two of the resulting companies, investors will see he’s confident about the move, he said in the interview.

“People will know that, ‘Hey, Ed’s 100 percent behind this,’ so that even on a personal level I really believe in this,” Breen said. “I think it’s going to play out very well for our shareholders.”

‘No External Factor’

There was “no external factor,” such as pressure from an activist shareholder, in the decision, he said. “It’s kind of nice we were able to take our time, really walk our way through it with our board and come to the right decision,” Breen said.

Each of the Tyco spinoffs will be headed by current company executives. The largest, commercial fire and security, will remain headquartered in Switzerland and garner about $10.2 billion a year in revenue, with about 69,000 employees, the company said. George Oliver will move to the post of CEO from president of the fire-protection segment.

The business may be wooed by Schneider Electric SA, United Technologies Corp., Siemens AG, Johnson Controls Inc. or Honeywell International Inc., Vertical Research’s Sprague wrote. Tyco itself was the object of advances from Schneider in April.

Takeover Targets

ADT will have annual revenue of about $3.1 billion and employ 16,000, Tyco said. It will be based in the U.S. and headed by Naren Gursahaney, currently president of security solutions. ADT may be a target for Comcast Corp., Verizon Communications Inc., Stanley Black & Decker Inc. or private equity firms, Sprague said.

The flow-control company, the world’s biggest maker of industrial valves, will be based outside the U.S. and headed by Patrick Decker, who is now the division’s president. The business will have yearly sales of about $3.6 billion and about 15,000 employees, Tyco said.

Sprague said the business may merge with a similar one spun out by ITT Corp., or Flowserve Corp. or Sulzer AG. Additional possibilities include acquisition by General Electric Co. or United Technologies, he said.

The spinoffs are subject to final approval by Tyco’s board, an opinion from the company’s tax lawyers, registration with the U.S. Securities and Exchange Commission and Tyco shareholder authorization.

Tyco was advised on the breakup by Goldman Sachs Group Inc. and Lazard Ltd. Simpson Thacher & Bartlett provided legal counsel.

--With assistance from John Lear in Chicago. Editors: James Langford, Andrew Noel

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net

To contact the editor responsible for this story: James Langford at jlangford2@bloomberg.net


Video Game Avenger
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus