Cooper Reveals Superior Valuation With Tyco in Play: Real M&A
Cooper Industries Plc (CBE), the maker of electrical distribution equipment with a valuation 52 percent greater than Tyco International Ltd. (TYC), is looking more like the target that proves you get what you pay for.
Cooper, a takeover candidate according to Citigroup Inc. and Vertical Research Partners LLC, is valued at 13.3 times earnings before interest, taxes, depreciation and amortization, more expensive than Tyco at 8.74 times, according to data compiled by Bloomberg. Cooper also trades at the third-highest price relative to free cash flow for a diversified manufacturer with a market value greater than $5 billion, the data show.
A focus on smart-grid components, LED lighting and energy- efficient technology makes Cooper attractive for Schneider Electric SA (SU), which said last week it’s “not currently” in talks to buy Tyco, as well as Siemens AG (SIE), Johnson Controls Inc. (JCI) or ABB Ltd. (ABBN), said Citigroup’s Deane Dray. The almost $11 billion company will benefit from North American and European utilities upgrading to smart grids that better manage power usage and emerging economies building new infrastructure. Cooper was one of more than 40 companies Bloomberg identified last month as fitting Warren Buffett’s acquisition criteria.
“I’m not surprised that it would be a potential target for any number of these big multinationals,” said Andrew Baumbusch, a Denver-based fund manager with Cambiar Investors LLC, which oversees about $8 billion and owns almost 2.2 million Cooper shares. “Cooper’s a very well-run entity. The current management has done a fantastic job at getting the company exposed to longer-term growth areas of the market.”
The firm’s $1.6 billion Cambiar Opportunity Fund (CAMOX) in the past year has beaten 96 percent of rival funds.
Dan Swenson, a spokesman for Cooper, which is incorporated in Dublin with administrative headquarters in Houston, didn’t respond to a phone call and e-mail seeking comment.
Anthime Caprioli, a spokesman for Schneider; Alexander Becker with Munich-based Siemens; Thomas Schmidt for Zurich- based ABB; and Paul Mason at Johnson Controls; declined to comment on market rumors.
With debt and equity of $11.1 billion, Cooper is worth 13.3 times its Ebitda in the past 12 months, data compiled by Bloomberg show. That’s 52 percent higher than Tyco, owner of the security-monitoring firm ADT, and above the median 10 times for diversified manufacturers with market values greater than $5 billion, the data show.
Cooper closed at $65.39 yesterday, which is 22 times the free cash flow generated per share in the past 12 months, higher than 17 of 20 large diversified manufacturers, the data show.
“Cooper may look a bit expensive,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. “Still, it’s a high-quality company. It would be a great fit for a lot of global companies. Energy efficiency and alternative energy are huge growth areas that the world certainly needs.”
Cooper, Lubrizol Corp. (LZ) and Falls Church, Virginia-based General Dynamics Corp. (GD) were among companies identified by Bloomberg last month as fitting the acquisition criteria listed in the annual letter to shareholders from Buffett, the 80-year- old billionaire investor and chairman of Berkshire Hathaway Inc. Two weeks later, Omaha, Nebraska-based Berkshire said it agreed to pay about $9 billion for Lubrizol of Wickliffe, Ohio.
Buffett said in the letter that he typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt.
Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.
Schneider, the French maker of electrical components, was considering a takeover of Schaffhausen, Switzerland-based Tyco, Bloomberg reported April 11, citing three people with knowledge of the matter who spoke on condition of anonymity because the discussions were private. Schneider’s shares fell 11 percent in the next six days. The stock climbed 2.3 percent to 114.25 euros ($165.61) in Paris today.
“The pressure has been building for M&A in this space for two years, and not much is getting done,” said Jeffrey Sprague, a Vertical analyst in Stamford, Connecticut. “This could blow things open.”
Schneider’s Chief Executive Officer Jean-Pascal Tricoire today damped speculation the company is exploring a major purchase, saying it prefers smaller deals.
“There is no plan of large-size acquisitions now and in the foreseeable future,” Tricoire said on a conference call with analysts. “We can also work on medium-sized deals” ranging “from one to a few billion euros,” he said.
Cooper would be a “more obvious” fit for Rueil-Malmaison, France-based Schneider than Tyco, said Sprague, who was the top- ranked multi-industry analyst by Institutional Investor for a decade until he left Citigroup a year ago to co-found Vertical. He spoke before Tricoire’s comments today.
Schneider, which specializes in energy management, would be interested in Cooper to boost its presence in the energy- efficiency market, according to Julian Mitchell, a New York- based analyst with Credit Suisse Group AG. While Cooper’s work with utility power and lighting would also fit with Schneider’s recent acquisitions and building-management business, respectively, a deal is unlikely because of the size, Mitchell said in an April 4 note.
Of Cooper’s $5.1 billion in revenue last year, about 65 percent came from the U.S. That presence may make it appealing to a large European industrial company such as Schneider, ABB or Siemens, according to Dray, an analyst with Citigroup in New York. Johnson Controls in Milwaukee may be another potential suitor if the company decides to branch outside of building controls, automotive components and batteries, he said.
“There are probably five or six companies that are able to look at Cooper to buy,” said Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc. in New York. “They’re well-positioned within electrical equipment product lines. They make products that will be around for a lot of long-term trends.”
U.S. electricity consumption is projected to rise 0.2 percent in 2011 and 2.3 percent in 2012, according to the U.S. Energy Department’s Short-Term Energy Outlook published this month. Utilities in the U.S. will spend about $5.5 billion this year on smart grids, while European utilities will shell out about $1.3 billion, according to Albert Cheung, a Bloomberg New Energy Finance analyst in London. China has said it will invest up to $660 billion through 2020 to upgrade its national grid.
‘Quality Over Time’
The Paris-based International Energy Agency last year estimated that $33 trillion of energy infrastructure investment is needed by 2035 if countries are to meet their international commitments to limit greenhouse gases.
“If there’s a thought that quality over time can trump the price side, then you’ll likely get what you pay for,” said James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, which oversees $108 billion.
Cooper has climbed 15 percent this year, to as high as $69.76 on April 1, according to data compiled by Bloomberg. It had a market value of $10.8 billion as of yesterday.
The shares rose 2.2 percent to $66.82 on the New York Stock Exchange today. Tyco retreated for a sixth straight day, losing 4.1 percent to $48.96 after Schneider’s comments.
Digesting a company of Cooper’s size would mean completing one of the largest takeovers of its kind. The biggest multi- industry manufacturing deal was Veba AG’s $15 billion merger in 2000 with Viag AG to form Germany’s largest utility, Duesseldorf, Germany-based E.ON AG, Bloomberg data show.
Wrenches, Tape Measures
Cooper, founded in 1833 by the Cooper brothers, transformed itself into a focused electrical-equipment company a year ago when it agreed to combine its tool operations, including Crescent wrenches and Lufkin tape measures, in a joint venture with Washington-based Danaher Corp. (DHR) That made it more appealing to acquirers who no longer have to deal with an unrelated, “low-growth” business, Citigroup’s Dray said.
Kirk Hachigian, 51, who became Cooper’s chief executive officer in 2005, said at a March 1 analyst conference that the company is now “100 percent electrical” and serves markets with $140 billion in sales.
“We have the cycle and the wind in our sails for the next several years,” Hachigian told investors.
Cooper almost tripled its cash and equivalents to $1.04 billion last year. Hachigian said at the analyst meeting that the company is pursuing “mid-size to larger acquisitions.”
“Cooper’s talked about wanting to be a consolidator, to be an acquirer, but as yet in the last couple of years they’ve not been able to put the balance sheet to work from a real scale perspective,” Cambiar’s Baumbusch said. “To some degree that strong balance sheet becomes a bit of a liability to the extent they want to stay independent.”
Overall, there have been 7,384 deals announced globally this year, totaling $715.9 billion, a 29 percent increase from the $553.3 billion in the same period in 2010, according to data compiled by Bloomberg.