Tyco Becomes Target With Schneider Talks Viewed as Sale Sign
After the stock gained 10 percent to $51.94 through today following Bloomberg’s report of Schneider’s interest on April 11, Tyco Chief Executive Officer Ed Breen risks criticism from shareholders if the price slumps back, said analysts including Jeffrey Sprague, co-founder of Vertical Research Partners.
“It’s going to be hard for Tyco to throw their hands up and say, ‘It was all smoke and let’s go back to $45 here,’” Sprague, who is based in Stamford, Connecticut, said yesterday in an interview. He rates Tyco as “hold.”
Schneider, a French maker of electrical components, held preliminary talks after approaching Tyco earlier this year, said three people with knowledge of the matter, who asked not to be identified because the discussions are private. Schneider hasn’t ruled out pursuing Tyco, another person said.
As CEO of General Instrument Corp. in 1999, Breen, 55, sold that company to then-Motorola Inc., rose to become president and chief operating officer there, then left to run Tyco in 2002. He divided the company into three businesses in 2007 and stayed to run Tyco, the world’s largest maker of security and fire- protection systems and industrial valves.
“Ed Breen is not an empire builder,” said Stephen Tusa, a JPMorgan Chase & Co. (JPM) analyst in New York who recommends buying Tyco. “This has always been a candidate for a breakup or a sale.”
Tyco fell 7 cents to $51.94 at 4 p.m. in New York Stock Exchange composite trading. Rueil-Malmaison, France-based Schneider has fallen 9.4 percent since Bloomberg reported consideration of a Tyco offer, trading at 110 euros in Paris.
Analysts including Tusa and Nick Heymann of Sterne Agee & Leach Inc. in New York have estimated that Tyco has a value of at least $60 a share.
A Tyco spokesman, Paul Fitzhenry, declined to comment yesterday. Schneider said that it was “not currently” in talks with Tyco, and Anthime Caprioli, a spokesman for Schneider, declined to comment further.
Tyco generated almost three-fourths of its $17 billion in sales for its last fiscal year from its security and fire- prevention units, according to data compiled by Bloomberg. The third major component of the company is so-called flow control, with offerings such as valves used in oil refineries.
“We believe Tyco’s management and board would entertain serious offers to sell the company in its entirety,” John Inch, an analyst at Bank of America Corp. (BAC)’s Merrill Lynch division in New York, said in a note to clients yesterday. He rates Tyco as “neutral.”
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. In 2002, the year Breen joined Tyco, revenue was about $35.6 billion. Last year’s sales were less than half that amount, after about 25 divestitures and the 2007 separation.
Tyco created two other companies in that split: Tyco Electronics, now known as TE Connectivity Ltd., a maker of electronic components, and Covidien Plc (COV), a maker of medical devices and supplies.
While a takeover by Schneider would be earlier than expected, “being acquired may be one of the logical conclusions in Tyco’s long-term strategic plan,” said Deane Dray, a Citigroup Inc. analyst in New York with a “hold” rating on the shares. “Tyco’s management team appears to be working towards paring down Tyco to its ‘lowest common denominator,’ namely, its industry-leading fire and security businesses.”
Schneider had been studying a takeover with bankers from JPMorgan Chase and Bank of America, said people with knowledge of the matter. Goldman Sachs Group Inc. (GS) has been advising Tyco, the people said.
Schneider’s approach valued Tyco at about $30 billion, the Wall Street Journal said.
If Schneider withdraws, Tyco might prove attractive to a company such as United Technologies Corp. (UTX), analysts said.
Tyco’s ADT security-monitoring services may mesh well with the equipment manufactured by United Technologies in its fire and security business, Sprague said. United Technologies expanded in that industry by buying operations from General Electric Co. (GE) in 2010.
While some monitoring companies might balk and buy gear elsewhere, the market is so fragmented that United Technologies could weather the loss, Sprague said. ADT has 11 percent of a market for security monitoring of at least $68 billion, Tyco estimated in a February presentation.
“Given the size of ADT, given who ADT’s competitors are, you could probably make it work,” Sprague said.
John Moran, a spokesman for Hartford, Connecticut-based United Technologies, declined to comment.
Another option for Tyco would be splitting into three separate companies, said Ajay Kejriwal, an analyst with FBR Capital Markets in New York, who recommends buying Tyco.
If Tyco spins off the flow-control business in a breakup, “that would make them more attractive, a little bit more of a lean bite for Schneider,” Tusa said.
Any offer for the whole company higher than $65 to $70 a share would make sense for Tyco shareholders, said Steven Winoker, an analyst with Sanford C. Bernstein & Co. with a “market perform” rating on the shares.
“The current process is likely to create a floor to the stock price, increase investor focus on Tyco as a value opportunity and drive management to take even more aggressive actions with regard to returning cash to shareholders and either divesting or spinning flow control,” Winoker, who’s based in New York, said in a note to clients today.
Tyco may face questions on Schneider’s approach when it reports earnings for its fiscal second quarter on April 28. The company may think its stock will rise to the mid-$60 range by the end of this year and the mid- to upper-$70s by the end of 2012, Heymann said.
If Breen doesn’t get an attractive offer, he may decide to keep the company together, said Brian Langenberg, principal at Langenberg & Co. LLC in Oak Park, Illinois.
“This is a disciplined guy,” Langenberg said yesterday in an interview. “When he got there, job one was to save the ticker symbol. People are going to carp at him. He’s been at Defcon 5. If he does it, it will be the right thing at the right time at the right value.”
Tyco options traders are paying more for bullish options than any time in four years and lifting the number of bets on a gain to a three-year high. Tyco’s skew, a measure of prices for puts to sell versus calls to buy, tumbled to the lowest level since May 2007 today.
“In the options market, the skew is indicating there’s a high likelihood of a bid for the company,” Christopher Rich, the Chicago-based head options strategist for JonesTrading Institutional Services LLC, said today in an interview.
The open interest for calls to buy the stock has jumped to 140,299 contracts, the highest since January 2008 and enough to buy 14 million shares if exercised. A record 155,805 calls changed hands yesterday, with May $55 calls accounting for more than a quarter of all transactions.
“It’s a reverse skew so the options market is reflecting much more upside than downside risk,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “The options market is seeing $55 to $57.50 as the takeover target range with less probability that it goes to $60 or $65.”
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