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Schneider Said to Weigh Takeover of Tyco to Add Security Systems

Schneider Electric SA CEO Jean Pascal Tricoire
Chief Executive Officer Jean-Pascal Tricoire cut costs to help recover from a 2009 construction slump in the U.S. and Europe. Photographer: Antoine Antoniol/Bloomberg

Schneider Electric SA is studying a takeover offer for Tyco International Ltd. that would make the French company the world’s biggest manufacturer of security systems, said three people with knowledge of the matter.

Schneider is working with bankers to help assess a potential acquisition of Tyco, said the people, who spoke on condition of anonymity because the matter is private. Schneider’s efforts are at an early stage and no deal is imminent, the people said. Tyco, based in Schaffhausen, Switzerland, had a market value of $22.3 billion as of April 8.

Buying Tyco would mark Schneider’s biggest-ever takeover and would add ADT, the largest security systems firm as well as fire-prevention equipment and valves used in water systems. Schneider, which beat General Electric Co. to a French power-transmission business last year, has sought to expand in factory automation and building controls, where it trails companies including Siemens AG of Germany and Honeywell International Inc.

“Tyco could have strategic appeal to many bidders, given consolidation in fire and markets, nascent cablecom interest in security services and the ability for Tyco’s balance sheet to support significantly higher leverage,” Nigel Coe, an analyst at Deutsche Bank AG in New York said in a note. He recommends investors buy Tyco stock.

Industry Consolidation

The security industry has been consolidating with deals such as United Technologies Corp.’s $1.8 billion purchase of GE’s security unit last year. Hartford, Connecticut-based United Technologies has spent about $9 billion building its fire and security businesses in the past decade.

Tyco rose $1.57, or 3.3 percent, to $48.72 in New York Stock Exchange composite trading, while Schneider fell 4.5 euros, or 3.7 percent, to 117 euros in Paris.

Paul Fitzhenry, a spokesman for Tyco, said the company doesn’t comment on speculation. Anthime Caprioli, a spokesman for Schneider, declined to comment.

A sale of Tyco would cap a troubled corporate history in which L. Dennis Kozlowski built the company through acquisitions in the 1990s, only to end in prison in 2005 for securities fraud. Tyco announced or completed more than 100 deals from early 1994 through Kozlowski’s departure in June 2002, with an average size of $880 million for those with prices disclosed, according to data compiled by Bloomberg.

Kozlowski and former Chief Financial Officer Mark Swartz were convicted in 2005 of securities fraud, grand larceny and falsifying business records. Chairman and CEO Edward Breen took over in July 2002 after Tyco’s board fired Kozlowski.

Rebuilding Tyco

In the years following his appointment, Breen oversaw a restructuring of Tyco’s debt, replaced most of the top 400 managers including the entire board, and jettisoned divisions including plastics and metals.

Schneider has announced or completed 11 acquisitions in the past year. The company teamed up with Alstom SA of France last year to buy power-distribution assets from Areva SA for 4.09 billion, beating a rival offer by GE. Schneider’s portion of the transaction was about 1.1 billion euros.

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 when it presented annual results on Feb. 16.

The median multiple for transactions involving electronic and electrical components and equipment companies in the past 12 months is 10.1 times earnings before interest, tax, depreciation and amortization, data compiled by Bloomberg show. Tyco’s Ebitda in the year to Sept. 24 was $2.9 billion.

Capital Increase?

“Schneider would probably have to do a capital increase of about 10 billion euros, which would put its stock under quite strong pressure,” said Gael de Bray, an analyst at Societe Generale in Paris. “It may make sense because Schneider lacks some sub-segment in building automation that Tyco offers, such as security and fire protection systems, but Tyco is a bit too large to be digested by Schneider.”

CFO Emmanuel Babeau said last year that Schneider aims to be stronger in industrial automation, where it ranks second behind Siemens and ahead of Rockwell Automation Inc. The company also aims to expand in building automation and security, where it trails behind Siemens, Johnson Controls and Honeywell.

Tyco’s valves and thermal controls would add to Schneider’s offerings in industrial automation and energy management systems for manufacturers, oil and gas companies, and utilities. The business also makes heated cables used to keep pipes warm at refineries at Canada’s oil sands and pipes used to transport water in Australia.

Three Entities

Tyco split into three publicly traded entities in 2007, including the former parent, which Breen runs from West Windsor, New Jersey, though the headquarters has since moved to Switzerland. Tyco posted sales of $17 billion for the fiscal year ended in September. The company reports second-quarter results on April 28.

The other offshoots are Tyco Electronics Ltd., a maker of electronic connectors, and health-care products maker Covidien Plc. Tyco Electronics, which also is based in Schaffhausen, last month renamed itself TE Connectivity Ltd.

Tyco’s largest division is security solutions, which sells ADT brand systems and represented about 48 percent of first-quarter sales. Breen helped expand ADT by buying Brink’s Home Security Holdings Inc. for $2 billion in January 2010, in his first major acquisition since taking the helm from Kozlowski.

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