Tyco Could Have Fetched Higher Premium in JCI Deal, Analyst Says
Thomas McConnell, director of Denver-based Headwaters MB, believes Tyco could have been shopped more broadly.
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Tyco Int’l, with $10 billion in annual sales, has agreed to be acquired by Johnson Controls, a $40 billion building automations systems, auto parts and batteries supplier, for $20 billion in cash and stock. That pencils out to $34.88 a share – not an insignificant premium to Tyco’s recent trading price – but a discount nonetheless to its current value, Thomas McConnell, director of Denver-based Headwaters MB, an independent, middle-market investment banking firm, tells SSI.
“It’s about a 13% premium or so. They are only trading at around 9.5x EBITDA. JCI gets a pretty good deal, especially when you factor in the potential for synergies, both topline and bottom line,” McConnell says. “They are targeting savings of about $500 million, so that is certainly going to have a meaningful impact on the combined earnings of the business. My only surprise is that it wasn’t a bit of a higher premium. It seems to me Tyco is of the size where they could be shopped more broadly.”
The transaction marks the latest move by a U.S.-based company to lower its tax bill through an inversion, which allows corporations to acquire foreign-domiciled companies and reduce their tax rates by shifting their headquarters. In this case, JCI will shift its legal and global headquarters to Tyco’s in Cork, Ireland, although it will maintain its operational base in Milwaukee.
Saving taxes, however, was not the primary motivation for this deal. “There are operational synergies that are driving the deal more so than the tax inversion,” McConnell says.
Instead, the acquisition is viewed as a long-term play aimed at creating a one-stop shop to offer corporate end users various building technologies, including heating and cooling equipment sold by JCI to the fire suppression and security equipment sold by Tyco, George Oliver, chairman of Tyco, said on an investor conference call on Monday.
That is a scenario McConnell says makes a lot of sense, given the combined organization’s leading position in building controls, security, fire/life-safety, HVAC and other building systems.
“We hear a lot of talk about the Internet of Things; it becomes somewhat clichÃ© but by the same token it really is a huge growth opportunity going forward,” McConnell said. “With the explosion of connected devices and information and energy conservation and everything security going to the network, being able to do that and also to merge with another leader in the industry makes a lot of sense.”
Growth opportunities aside, JCI and Tyco will of course have their work cut out in uniting the organizations. Of the $500 million in savings the companies expect to reap over three years from the combined operations, $150 million will come from corporate and overhead “synergies.” Read: management will be streamlined, overlap eliminated and workforce potentially reduced.
“I’m sure there is going to be layoffs and you are going to be looking at every step in the production process and the distribution process to see where there could be potential synergies,” McConnell said. “Everything from the actual manufacturing of the product, as well as the work with the [systems] integration portions of the respective businesses. It will be interesting to see if whether they let [the integration businesses] continue to operate somewhat autonomously, which I would doubt, or try to merge them together.”
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