Ingersoll Security Spinoff Creating Deal Target: Real M&A
Ingersoll-Rand Plc (IR)’s plan to spin off its commercial and residential security businesses is creating a potential target for what would be the industry’s biggest takeover on record.
Ingersoll announced the split this week after billionaire investor Nelson Peltz pushed for a breakup. The new company, with products ranging from steel doors to electronic locks, may lure bidders including Stanley Black & Decker Inc. (SWK), which sells tools and security solutions, according to MKM Partners LLC and Sanford C. Bernstein & Co. Tyco International Ltd. (TYC), the maker of commercial fire and security products, may also be interested, said Keybanc Capital Markets Inc.
The security business, which will be incorporated in Ireland and generates about $2 billion in annual revenue, offers buyers a low corporate tax rate and the chance to expand amid a rebound in U.S. construction spending, a driver of security- device installation. The new company may be valued at about $3.8 billion including net debt, based on the average of three analysts’ estimates. Even without a premium, that would be the largest takeover in the security-services industry, according to data compiled by Bloomberg.
“If you’re an acquirer, you have the chance to buy this business before the earnings expand based on a recovering set of construction markets,” Steven Winoker, a New York-based analyst at Bernstein, said in a telephone interview. “Security and fire are attractive market segments for large multi-industry conglomerates globally to consolidate. The markets are growing, they’re generally profitable and they’re currently fragmented.”
Ingersoll’s board and management team reviewed “many strategic alternatives” for boosting shareholder value, Misty Zelent, a spokeswoman for Swords, Ireland-based Ingersoll, wrote in an e-mail in response to whether the company would be open to a sale of the security business. The focus was on selecting the best option, which is the plan “to combine our security businesses into one, publicly held company.”
Today, shares of Ingersoll rose 0.4 percent to $47.69.
The security divisions include Schlage brand lock sets and deadbolts and Briton door closers, while the remaining Ingersoll company manufactures refrigeration, heating, ventilation and air-conditioning systems under brand names such as Thermo King.
In August, Peltz suggested in a filing that the company split in three, the same month that the hedge-fund manager joined Ingersoll’s board.
Anne Tarbell, a spokeswoman for Peltz’s Trian Fund Management LP, said Peltz declined to be interviewed because he is an Ingersoll board member.
Ingersoll said this week that the tax-free spinoff of the combined residential and commercial security units will be completed within the next year.
Nicholas Heymann, a New York-based analyst at William Blair & Co., estimates the new company will post an operating profit of about $405 million next year, for an operating margin of 19 percent to 20 percent.
The profitability of the operations may lure potential buyers, said Jeff Hammond, a Cleveland-based analyst at Keybanc.
The security business makes sense as a takeover candidate, Hammond said in a phone interview. “The securities space is viewed as a very attractive space with good growth prospects, and the Ingersoll-Rand business is a great franchise with very good returns,” he said.
Ingersoll said the security company will be incorporated in Ireland, where it will continue to have an effective tax rate in the low 20 percent range, according to Bernstein.
The tax benefits may draw acquirers, said Joshua Pokrzywinski, an analyst with MKM in Stamford, Connecticut. He pointed to Eaton Corp.’s takeover of Cooper Industries Plc as an example of a deal at least partly motivated by capturing Ireland’s tax savings.
There’s also a chance for a buyer to get a hold of Ingersoll’s security products before a potential building recovery, said Bernstein’s Winoker.
U.S. construction spending climbed 1.4 percent in October, almost three times more than forecast and the biggest rise since May, the Commerce Department said last week. The increase was driven by a healing residential real estate market, even as government and businesses delay construction projects.
“Commercial and residential new construction in the U.S. appears to be bottoming and security business revenue and cash flow should increase in line with any future recovery,” Michael Lamach, Ingersoll’s chief executive officer, said on a conference call with analysts this week regarding the spinoff.
Stanley Black & Decker, with a market value of $12.2 billion, may be interested in acquiring Ingersoll’s security business to further diversify away from power tools, Bernstein’s Winoker said. The company bought Niscayah Group AB last year for $1.2 billion to expand in surveillance and fire-alarm systems.
“They have some exposure to security and construction,” MKM’s Pokrzywinski said in a phone interview. “It would be complimentary to the portfolio. You wouldn’t have a lot of product overlap.”
Tim Perra, a spokesman for Stanley Black & Decker, declined to comment on whether the New Britain, Connecticut-based company would be interested in buying the business.
Ingersoll’s security operations also “would be a potential fit” for Tyco, which makes fire detection systems and burglar alarms, said Hammond of Keybanc. Tyco has a market value of $13.2 billion.
While Tyco is a logical buyer for the commercial business, it may not be interested in Ingersoll’s residential security products, said Steven Scruggs, a Charlotte, North Carolina-based money manager at Bragg Financial Advisors Inc., which oversees $850 million, including Ingersoll shares. Tyco spun off its ADT Corp. home security business about two months ago.
“Tyco was the first name that came to mind,” Scruggs said in a phone interview. “Part of it fits in but part of it wouldn’t.”
Brett Ludwig, a spokesman for Schaffhausen, Switzerland- based Tyco, said the company does not comment on acquisition or divestiture candidates as a matter of policy.
William Blair’s Heymann projects an enterprise value for the new security company of about $3.6 billion, including about $1.2 billion to $1.3 billion in net debt, according to a Dec. 10 report. Eli Lustgarten, an analyst at Longbow Research, said in a note yesterday that the new company may have an enterprise value of about $3.8 billion, while MKM’s Pokrzywinski estimated about $4.1 billion. Ingersoll hasn’t disclosed how much debt the new entity will take on.
Based on an average enterprise value estimate of $3.8 billion, the spun-off company would already rank as the biggest takeover of a security-services maker, even without accounting for a premium, according to data compiled by Bloomberg. The largest deal to date is the $3.2 billion acquisition of Securitas Direct AB, a Swedish burglar alarm company, last year.
Bernstein’s Winoker wrote in a report yesterday that the new security company could fetch $3 billion to $4 billion in a takeover, based on a 20 percent to 35 percent transaction premium to rivals’ trading multiples.
Buyers aren’t likely to weigh bids for Ingersoll’s security business until after the spinoff is complete, said Lustgarten at Longbow.
“A lot can happen in a year,” the St. Louis-based analyst said in a phone interview. “You have no knowledge of the financial structure of how this company is going to come out, so there are a lot of issues that you have to deal with before you make any judgment on how attractive as a takeover candidate it would be.”
Still, United Technologies Corp. (UTX) could eventually be interested in the unit to expand its surveillance and fire- detection products, said Keybanc’s Hammond and Richard Tortoriello, an equity analyst at Standard & Poor’s in New York.
“United Technologies has been acquiring and growing their security business,” Hammond said.
The Hartford, Connecticut-based company expanded in the fire and security business through more than 60 acquisitions from 2003 to 2010, including the purchases of General Electric Co.’s security division, Kidde Plc and Chubb Plc. United Technologies, which is valued at $74.4 billion, has been reorganizing its fire and security business.
John Moran, a spokesman for United Technologies, declined to comment on whether it’s interested in Ingersoll’s security operations.
“This is a business that’s very digestible to these very large companies,” Bernstein’s Winoker said. “If they like the business, it’s for sale now.”
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