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Schneider CEO Tricoire Buoyed by Rewards of APC Risk as He Considers Tyco
Schneider Electric SA (SU) investors optimistic that the stock slump this week will deter Chief Executive Officer Jean-Pascal Tricoire from his pursuit of Tyco International Inc. should recall his biggest purchase to date.
After announcing the $6.1 billion acquisition of American Power Conversion Corp. in October 2006, Schneider plunged the most in four years on a single day. Tricoire remained steadfast, saying “the market has to take some time to understand” the deal, which added equipment to protect computers and factories from power outages to Schneider’s circuit breakers and motors.
Now Tricoire, 47, is once again testing shareholders’ appetite to back a major deal. Schneider held preliminary talks with Tyco about a takeover of the U.S. company, three people with knowledge of the matter said on April 11. A purchase would rank as the largest ever by a European industrial company. Tyco’s market value exceeded $22 billion before Bloomberg News first reported Schneider’s intentions.
“Schneider has a history of taking risks with acquisitions” said Alex Barnett, a London-based analyst at Jefferies International. “If they think they’re going to do something good for the next 4 to 5 years, they’re willing to sacrifice the short term share price.”
Schneider shareholders lost $1.7 billion on the day the company’s preliminary discussions with Tyco became known. The stock continued its descent the following day, until Schneider intervened on April 13 with a statement that the company, based near Paris, is “not currently” in takeover talks with Tyco.
The response, which Exane BNP Paribas analyst Olivier Esnou called “exceptional for Schneider,” failed to stem the slide. Schneider has lost 9.6 percent in value so far this week, dropping every day, the longest downward streak in a month. The stock fell as much as 40 cents, or 0.4 percent, in Paris today.
Tricoire has made eight purchases alone in the last six months. Schneider probably spent about 500 million euros ($723 million) so far this year, Nomura International Plc analyst Lisa Randall estimates. For Tyco, Schneider put a preliminary bid valued at about $30 billion on the table, the Wall Street Journal reported April 13, citing people it didn’t identify.
“For a project of that size, management and the supervisory board must be convinced, and it must bring value to the company rapidly,” said Lionel Pellicer, an analyst at AlphaValue in Paris.
Tricoire has led Schneider since 2006. His predecessor, Henri Lachmann, now leads the supervisory board. Under their combined reign, Schneider has more than doubled sales in the past decade through acquisitions. Goodwill has jumped from about 3.6 billion euros in 2000 to more than 10 billion euros in 2010, data compiled by Bloomberg show.
Schneider’s purchases in recent years include Juno Lighting Inc. for $410 million in 2005 that added high-end lighting fixtures, and a building-systems unit from U.K.-based Invensys Plc (ISYS) for $296 million the following year to expand in the U.S. and Asia. Last year, Schneider beat General Electric Co. (GE) with its 1.1 billion-euro purchase of power distribution assets from Areva SA. (CEI) GE CEO Jeffrey Immelt personally flew to Paris in an effort clinch the deal, before conceding.
“To put it crudely, Schneider is an ‘acquisition machine,’” said Ben Uglow, an analyst at Morgan Stanley in London. The company “is highly cash generative and its management is essentially driving a mature company toward much- higher growth areas.”
Even if Schneider were to abandon its pursuit of Tyco, the company has the means to take over other targets. Schneider has said it’s prepared to resort to acquisitions in its goal to expand in industrial automation, where it ranks second behind Siemens AG. (SIE) The company also aims to expand in building automation and security, where it trails behind Siemens, Johnson Controls and Honeywell International Inc. (HON)
Schneider would need to issue new shares and possibly sell some assets if it bought Tyco, analysts said. Schneider’s net debt was 2.7 billion euros at the end of 2010, giving it a debt- to-equity ratio of 18 percent. It had 2.6 billion euros of undrawn credit lines, the company said last month.
When Schneider bought APC, Tricoire offered a 30 percent premium to shareholders of APC as he sought to push into the growing market for data centers and cut reliance on the residential construction and factory automation. Investors have since warmed to the acquisition. Profitability at the information-technology unit has more than doubled, and the stock has outperformed peers including Siemens and ABB Ltd. (ABBN)
“The APC deal was smaller relative to the company, but at the time was perceived as very risky, and as a strategic departure for them,” said Jefferies International’s Barnett. “Long term the deal looks very compelling.”
Lachmann, too, had a taste for major transactions at the expense of mid-term profitability. Schneider shares fell 12 percent after the company said in 2001 that its planned 8.2 billion euro purchase of Legrand SA (LR), a maker of electrical equipment, will reduce profit for the next two years. The European antitrust regulator blocked the deal, forcing Schneider to sell Legrand in December 2002 to private equity firms.
Tricoire was joined in 2009 by Chief Financial Officer Emmanuel Babeau. He previously held the same position at Pernod Ricard SA, the French liquor maker, where Babeau helped engineer some of the company’s biggest transactions. Pernod paid 7.6 billion pounds (12.4 billion) in cash and stock for Allied Domecq Plc in 2005 to double its sales. In 2008, Pernod almost doubled its net debt to 12 billion euros to buy Vin & Sprit AB, the maker of Absolut vodka, for 5.6 billion euros in cash.
Buying Tyco would add ADT, the largest security systems firm as well as fire-prevention equipment and valves used in water systems. Schneider, whose roots predate the French Revolution in 1789, had traditionally targeted electrical distribution and industry automation.
Tricoire told investors in November that Schneider’s accessible market has grown from 60 billion euros in 2000 to 200 billion euros now as it added building automation, critical power systems for data centers and banks, and medium-voltage equipment for oil and gas companies and utilities.
The executives and board members will face shareholders at the annual general meeting next week. Investors will vote, among other things, whether to scrap the age of 74 as a limit for supervisory board members. A positive outcome would allow Lachmann to remain in place. One of his challenges would then be to appease shareholders over a possible Tyco bid, said Martin Prozesky, an analyst with Sanford C. Bernstein & Co. in London.
“If they do pursue Tyco, they will have a huge task to explain and to justify why this is the right thing,” Prozesky said. “The logic is kind of weak, and Tyco is large. Nobody expected it to be Tyco and nobody expected something this big.”
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