BOCA RATON, Fla. — Tyco Int’l plans to split into three publicly traded companies that will likely prove more attractive to potential acquirers on their own than as pieces of a conglomerate, analysts say.
The separation, guided by CEO Ed Breen, will create standalone companies from ADT’s North American residential security business, a commercial security and fire-systems business, and a flow control products business.
Previously, under former CEO Dennis Kozlowski, a similar break-up was considered and nearly implemented. The move was motivated in part by the “conglomerate discount,” which suggests all assets in a conglomerate trade at or about the lowest multiple of the lowest valued business, Walter Bailey, CEO and senior managing director of New York-based Focus Consulting Partners LLC, tells SSI. “I believe there is truth to this paradigm and, therefore, a fundamental piece is to unlock shareholder value by allowing the businesses to trade separately. This strategic action taken by the current Tyco implies there is a for sale sign out, whether the sale goes to the public holders or to private hands. Certainly competitors are watching this closely as a real gem is poised to shake loose.”
Bailey surmises that United Technology Corp. (UTC), Stanley Black & Decker, Johnson Controls (JCI) and Bosch, among others, will be looking at the prospect of acquiring either the ADT residential business or the commercial security and fire-systems division.
“A challenge for the private equity side will be financing given the accounting and capital intensity of the business,” Bailey says. “Discussions have often occurred about these platforms and it will be a test of markets and strategies as to whether a deal occurs before the [spin-offs] take place.”
The break-up would be the second for Tyco in less than 10 years. The company split into three public companies in 2007 when it spun off its medical and electrical units. Since that break-up, Tyco has focused on strengthening its core business units with acquisitions, particularly its ADT home security business. Last month, the company paid $100 million in cash for Visonic Ltd., a provider of wireless home security and safety systems and components, in a deal to strengthen its position in the intrusion security market.
Tyco said it expects to complete the latest separation in about 12 months. The transaction will likely have one-time costs of $700 million from refinancing debt as well as restructuring and separation, Tyco said.
“We have now reached the point where the future growth potential of our businesses can best be realized through the creation of three independent standalone companies,” Breen said on a conference call with analysts and investors following the announcement. “These businesses operate with very distinct business models, each with different capital investment needs and growth profiles.”
The new companies may reach a break-up value as high as $70 a share, Stamford, Conn.-based Vertical Research Partners Co-Founder Jeff Sprague wrote in a note to clients following Tyco’s announcement.
Along with Stanley Black & Decker, Sprague says the ADT business could be attractive to AT&T, Verizon, Comcast or to a private equity buyer. Possible buyers for the commercial fire and security business include Schneider Electric, Siemens, UTC, Honeywell and JCI, he speculated.
Tyco itself was the object of advances from Schneider in April.
“We doubt Tyco has engaged in any prior negotiations to sell a single piece because it would have been tax disadvantaged to sell,” Sprague says. “Perhaps Schneider is tainted if there was a negotiation to buy the whole company, but we believe others will be able to move on these assets immediately if they choose.”
Rodney Bosch is Managing Editor for SECURITY SALES & INTEGRATION. He can be reached at (310) 533-2426.