Tyco Slimming Down Becoming Bait for Schneider: Real M&A
Tyco spun off its home-security and flow-control units in September, the company’s second breakup in five years. The separation whittled Tyco down to a business providing video- surveillance systems and smoke detectors in hotels and office buildings that analysts estimate will boost net income by 52 percent in the next two years. That’s the second-fastest rate among the 60 industrial companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.
The Swiss company’s dominant market share would bolster complementary building services at Schneider Electric SA, Siemens AG or General Electric Co., said FBR & Co. Almost two years ago, Bloomberg News reported Schneider weighed a bid for Tyco. The company now may fetch at least $34 a share, according to Langenberg & Co., implying a takeover value of about $17 billion including net debt. While data compiled by Bloomberg show that would be the biggest industrial acquisition since Goodrich Corp. in 2011, Citigroup Inc. said a deal makes sense because U.S. commercial construction is starting to rebound.
“Tyco certainly looks more appealing” after the spinoffs, Nathaniel Gabriel, a New York-based analyst for Argus Research Co., said in a telephone interview. “The split might open the door for a deal down the road. The company’s definitely a market leader now.”
Brett Ludwig, a Princeton, New Jersey-based spokesman for Tyco, said the company is focused on achieving three-year targets, including boosting operating margins to as much as 16 percent by 2015.
“We’re 100 percent focused on driving the strategy we put in place here to achieve growth,” Ludwig said yesterday. “We’re not concerned by rumors in the marketplace.”
Today, shares of Tyco rose 1.6 percent to $31.50, the highest closing price since January 2002. It was the sixth- biggest gain in the S&P 500 Industrials Index.
Tyco completed the spinoff of the two units on Sept. 28, with shareholders receiving one share of ADT Corp., the residential-security business, for every two shares of Tyco and about a fourth of a share of the flow-control unit for each Tyco share. The flow control unit was immediately merged with Pentair Inc., a water equipment company. Tyco had already spun off its health-care unit Covidien Plc and the electronics business TE Connectivity Ltd. in 2007.
Tyco, which is based in Schaffhausen, Switzerland, is an even more attractive takeover candidate now that it has narrowed the scope of its business and improved earnings prospects, said Ajay Kejriwal, a New York-based analyst for FBR.
On average, analysts estimate Tyco will earn $1.2 billion of net income in fiscal 2015, a 52 percent gain from the $800 million projected for this year, data compiled by Bloomberg show. That’s almost double the median 27 percent increase that’s forecast for the S&P 500 Industrials Index, the data show.
“There is a very good chance this company will be acquired,” Kejriwal said in a phone interview. “Part of the reason we like Tyco is this above-peer-group profit growth rate. Post the spins, they’re a much smaller company and able to take costs out and streamline the operations.”
The business would fit well with either Schneider, Siemens or GE, all of which provide services that could be bundled and sold with Tyco’s offerings, according to Kejriwal and Brian Langenberg of Langenberg & Co. Schneider is the world’s biggest maker of low- and medium-voltage equipment such as circuit breakers, while Siemens provides heating and cooling systems and GE lights the buildings.
Those are the “three natural and capable buyers for Tyco,” Langenberg, principal and director of research at the Chicago-based firm, said in a phone interview. “That doesn’t mean they will, but it would make conceptual sense and strategic sense. We’re convinced that there’s been at least one real approach in the last few years, so I would say the chances of it getting taken out are pretty decent.”
In April 2011, Bloomberg News cited people with knowledge of the matter as saying that Schneider was studying an offer for Tyco, when it still included the ADT security business and valves used in water systems. Two days later, Schneider said it was “not currently” in talks with the company.
Schneider Chairman Henri Lachmann said in a December interview that the 30.6 billion euro ($41 billion) company will be looking for acquisitions in the U.S. and Europe.
“While it is always a possibility, it would be a very large deal for the typical candidates mentioned, such as Schneider,” Steve Winoker, a New York-based analyst with Sanford C. Bernstein & Co., said in an e-mail.
Veronique Roquet Montegon, a spokeswoman for Schneider, which is based in Rueil-Malmaison near Paris, declined to comment, when asked if the company is interested in purchasing Tyco.
Part of the appeal of Tyco is that about 45 percent of its more than $10 billion of annual sales are recurring revenue from customers who have installed its systems and need to maintain them, Langenberg said.
In a Jan. 29 conference call, Tyco CEO George Oliver cited the Architecture Billings Index, which has shown increased billings for U.S. non-residential construction, as a sign the market is poised to rebound.
The index, which the American Institute of Architects says leads activity by about nine to 12 months, was 52 in December following a reading of 53.2 in November, the highest in five years. A level higher than 50 indicates expansion.
“You’re at the doorstep of the turn in the non-residential cycle,” Deane Dray, a New York-based analyst at Citigroup, said in a phone interview. “It’s this whole Holy Grail to be able to offer bundled services for commercial buildings. You do the installation and then there’s a nice recurring revenue stream right behind it.”
In a Jan. 8 report, Dray said there was a 50 percent chance that Tyco would be bought in the next 18 months.
Tyco’s shares have risen 12 percent since completing the spinoffs, leaving it with a price-earnings ratio of 17, based on analysts’ profit estimates for this year, data compiled by Bloomberg show. The median for industrial stocks in the S&P 500 is 15, the data show.
An acquisition premium may already be partially baked into Tyco’s price, said FBR’s Kejriwal, who still recommends buying the shares. Companies that have gone through breakups often trade at premiums to the broader market for that reason, said Joe Cornell, founding principal of Spin-Off Advisors LLC.
“A company that’s been spun off into parts is probably three or four times more likely to be bought out down the road than a typical S&P 500 stock,” Cornell said in a phone interview from Chicago. “Usually they become pure-plays and more focused and smaller. That makes them more digestible.”
Langenberg estimates Tyco could be taken out for $34 to $41 a share, as much as a 32 percent premium to yesterday’s closing price of $31.01. That equates to an enterprise value -- or equity and debt minus cash -- of at least $16.8 billion. A deal of that size would rank as the largest for an industrial company since United Technologies Corp. paid $18 billion for Goodrich, according to data compiled by Bloomberg. That deal was announced in September 2011 and closed in July 2012.
“There is a very good chance this company will be acquired,” FBR’s Kejriwal said. While it isn’t cheap, “Tyco has these prime products installed at a very large and diversified base of customers globally. For any business looking to expand into this business automation market, this would be a very, very valuable asset.”