Schneider Defies Shareholders Sweating Tyco Valuation: Real M&A
Schneider Electric SA (SU), which is weighing a bid for Tyco International Ltd. (TYC), may be betting the U.S. economy will grow fast enough to make the acquisition cheap for shareholders who lost $1.7 billion yesterday.
France’s Schneider is working with bankers to assess a potential takeover of Tyco, according to three people with knowledge of the matter. Tyco, owner of security-systems firm ADT, was valued at 8.1 times earnings before interest, taxes, depreciation and amortization last week, lower than 12 of the 14 largest diversified manufacturers, according to data compiled by Bloomberg. Meanwhile, Tyco’s free cash flow yield is higher than its biggest peers Cooper Industries Plc (CBE), United Technologies Corp. (UTX), Siemens AG (SIE), ITT Corp. (ITT) and Honeywell International Inc. (HON)
While the acquisition would more than double Schneider’s North American sales, Tyco may command a $32 billion price tag, more than the company can “comfortably” finance, according to Gimme Credit LLC’s Carol Levenson. The prospect of Schneider attempting the biggest industrial takeover on record by a European company helped spur a 3.7 percent decline in the shares yesterday, wiping out $1.7 billion in market value.
“This is a great foray into the U.S. market through a quality company that is selling very cheaply,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. However, “Tyco’s market capitalization is not inconsequential. The risk could be that the economy peters out and suddenly Tyco’s business rolls over,” he said.
Paul Fitzhenry, a spokesman for Tyco, declined to comment. Anthime Caprioli, a spokesman for Schneider, couldn’t be reached outside regular business hours.
Schneider’s shares retreated 3.5 percent to 112.90 euros in Paris today. Tyco climbed 7.4 percent to $52.33 at 4:01 p.m. on the New York Stock Exchange.
Schneider’s efforts are at an early stage and no deal is imminent, said the people, who spoke on condition of anonymity because the matter is private. The company would be buying the world’s biggest maker of security and fire-prevention systems, as well as industrial valves, businesses largely outside of its current markets.
The U.S. accounted for 49 percent of Schaffhausen, Switzerland-based Tyco’s fiscal 2010 sales, with the rest of the Americas making up an additional 10 percent, according to its annual filing with the U.S. Securities and Exchange Commission.
Schneider, the world’s largest maker of circuit breakers, also has offerings in industrial automation and energy management systems for manufacturers, oil and gas companies, and utilities. About 24 percent of the Rueil-Malmaison, France-based company’s 19.6 billion euros ($28.3 billion) in revenue last year came from North America.
The U.S. economy will expand 2.9 percent this year and 3.1 percent in 2012, extending its recovery from the longest recession since the Great Depression, according to the median of economists’ estimates compiled by Bloomberg. That would outstrip projections for the euro zone of 17 countries to grow 1.7 percent this year and in 2012, the data show.
Tyco’s security solutions unit, including ADT, benefits from rising commercial and home construction. The company estimates that it has 11 percent of the $68 billion global industry through its sale of residential and commercial monitoring, video surveillance, card-access and loss prevention systems. The fire-protection unit offers sprinkler, alarm and detection systems.
‘Undervalued and Leveraged’
Schneider “is looking to buy into a vehicle in the U.S. market that is well-managed, undervalued and leveraged to sectors of the economy that will grow as the economy continues to improve,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which manages $358.2 billion.
Tyco may fetch more than $32 billion in an all-cash sale, requiring equity and debt financing, Gimme Credit’s Levenson, who’s based in Chicago, said in a report yesterday. That would make Schneider’s potential acquisition of Tyco the largest takeover of an industrial firm by a European company on record, Bloomberg data show. It would also be the biggest of any industrial deal globally after Omaha, Nebraska-based Berkshire Hathaway Inc.’s $35.8 billion purchase, including net debt, of Burlington Northern Santa Fe Corp., which was completed in 2010.
“The magnitude of this transaction would be an absolute landmark within the industrial sector,” said Ben Uglow, a London-based analyst at Morgan Stanley. “It’s a much, much, much broader discussion than simply the fact Tyco looks a little bit cheap at the moment.”
Schneider’s shares retreated 3.7 percent to 117 euros yesterday in Paris, the biggest slump since March 16, trimming its market value by 1.2 billion euros to 31.8 billion euros, according to data compiled by Bloomberg. Tyco advanced 3.3 percent to $48.72 on the NYSE, boosting its value by about $744 million to $23.1 billion, the data show.
Chairman and Chief Executive Officer Edward Breen, 55, took over in July 2002 after L. Dennis Kozlowski exited amid a criminal investigation for tax evasion. Since Tyco split into three companies in June 2007, Tyco International’s shares have fallen 8.1 percent through yesterday, trailing gains of 3.5 percent for Morris Township, New Jersey-based Honeywell and 20 percent for United Technologies in Hartford, Connecticut.
Tyco now trades at a cheaper valuation on average than its peers. Before the news of Schneider’s interest, Tyco was valued at 8.1 times trailing 12-month Ebitda, less than the 10.2 times median for diversified manufacturers with market capitalizations higher than $10 billion, data compiled by Bloomberg show. Only White Plains, New York-based ITT was cheaper at 6.8 times.
The company’s free cash flow yield, or the amount of cash from operations after capital expenses generated per shareholder dollar, of 10.4 percent is higher than Honeywell, Cooper Industries, United Technologies, Munich-based Siemens, ITT, Secom Co. of Tokyo and Johnson Controls Inc. (JCI) in Milwaukee.
“You’re looking to expand into markets that you’ve been thinking of getting into, but you don’t have any expertise,” said Federated Investors’ Orlando. “You could develop the expertise, but it would take years. The alternative strategy is just to find someone who’s already doing a good job that happens to be cheap and just go out and pay a premium and buy them.”
While Tyco’s security division and part of its fire- protection business may be compatible with Schneider’s building unit, an acquisition wouldn’t fit the company’s focus on energy management and factory automation, wrote Martin Prozesky, an analyst with Sanford C. Bernstein & Co. in London.
“We have no doubt that the large European electrical diversifieds have significant acquisition ambitions here, but this particular deal doesn’t seem to have much strategic logic for Schneider,” said Jeffrey Sprague, co-founder of Vertical Research Partners in Stamford, Connecticut.
Cooper Industries, a manufacturer of switches and other electrical distribution equipment, is a “far more credible target,” for Schneider, Sprague said. Dan Swenson, a Houston- based spokesman for Cooper Industries, didn’t respond to a request for comment.
Schneider would probably seek to sell Tyco’s flow-control division because it doesn’t fit with CEO Jean-Pascal Tricoire’s current businesses, according to analysts at New York-based Morgan Stanley and Vertical Research.
Tyco Flow Control had $3.4 billion in revenue last year. It may be able to get twice that in a sale because its business in emerging markets would be attractive to an acquirer, Morgan Stanley analyst Scott Davis said in a note yesterday.
Schneider’s debt is rated A3 by Moody’s Investors Service and A- by Standard & Poor’s. Tyco’s is rated A- by S&P while Moody’s has a Baa1 rating. Both companies may have their investment-grade ratings cut by one to two notches, according to Joel Levington, a managing director at Brookfield Investment Management Inc. in New York.
“It would be a huge deal for Schneider to undertake,” Levington said.
Overall, there have been 6,823 deals announced globally this year, totaling $690.8 billion, a 30 percent increase from the $530.5 billion in the same period in 2010, according to data compiled by Bloomberg.
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