February 27, 2024

DealBook: Tyco to Split Itself in 3, Hoping for More Value

TycoDaniel Acker/Bloomberg News Tyco wants to separate its North American residential alarm system unit, its flow control group and its commercial security business.

8:40 p.m. | Updated

For the second time in less than a decade, Tyco International will break itself into three companies, seeking to improve gains for its shareholders and possibly pave the way for those pieces to be acquired later.

The plan announced on Monday represents a further unwinding of a once-sprawling empire with a troubled history, one that led to the downfall of its former chief executive, L. Dennis Kozlowski.

Over the next 12 months, Tyco plans to split into three publicly traded businesses: its ADT home alarm unit, which is expected to have $3 billion in annual revenue; its flow control group, which makes valves and pipes and has an expected $4 billion in annual revenue; and a commercial fire and security unit, with about $10 billion in annual revenue.

“We firmly believe that these businesses can best achieve their full potential as stand-alone, independent companies rather than under the current Tyco structure,” Edward D. Breen, Tyco’s chief executive, said in a conference call with analysts.

Shareholders appeared to approve of the plan, pushing Tyco shares up 2.4 percent to $44.75.

Other diversified companies have sought growth by breaking themselves apart, including ConocoPhillips, McGraw-Hill and Kraft Foods. More than a dozen companies have disclosed plans to spin off units this year.

Behind the wave of corporate break-ups is the argument that the varied businesses of conglomerates obscure each division’s true value. Creating smaller, more focused companies will bolster each piece’s individual value, according to this view.

Analysts with FBR Capital Markets estimate, for example, that Tyco’s base sum of its parts is $52 to $56 a share.

In many ways, the plan continues a strategy that Mr. Breen has considered for many of his nine years atop Tyco.

Under Mr. Kozlowski, Tyco embarked on an aggressive buying spree. But the company began running up losses in a variety of operations, and Mr. Kozlowski later became embroiled in scandal over his compensation package, leading to a trial and his conviction.

Brought to the company after the departure of Mr. Kozlowski, Mr. Breen spearheaded the company’s 2007 break-up, which created Tyco International, as well as Tyco Electronics and a health company called Covidien. (In 2002, it split off its finance arm, which became the CIT Group.)

Even in 2007, Mr. Breen said in a call with analysts on Monday, he had pondered an even more ambitious unwinding of Tyco. But one of his top goals was to ensure that each unit could survive or thrive on its own.

“They were very fragmented at the time,” Mr. Breen said. Now, he added, “when you just sit back, the businesses are all performing well.”

Since then, Tyco has bulked up each of its remaining businesses through a mix of acquisitions and organic growth. It purchased Broadview Security, the operating name of Brink’s Home Security Holdings, for $1.9 billion last year, uniting two of the biggest names in home and commercial protection.

Analysts today largely agree with Mr. Breen’s assessment. “In contrast to other conglomerate separations in the past, all three of Tyco’s businesses are attractive assets with leading market positions,” John G. Inch, an analyst at Bank of America Merrill Lynch, wrote in a research note on Monday.

Tyco’s management emphasized that each division could then grow through acquisitions, using their new stocks as deal currency. At the same time, each could also become an attractive takeover target for bigger industrial companies, like United Technologies — which is said to be exploring a potential takeover of Goodrich — or Honeywell International.

Earlier this year, the French conglomerate Schneider Electric approached Tyco about a potential takeover, people briefed on the matter said previously. But such a deal would have been highly expensive, and Schneider quickly abandoned the effort after reports of the discussions surfaced. Tyco also plans to spread its corporate debt — about $4.1 billion in long-term obligations as of June — across the three spun-out businesses. That contrasts with many break-up plans, in which much of the corporate debt is piled onto one of the divisions.

Once public, each division will be led by its current president and management team.

Mr. Breen will remain involved in each of the Tyco businesses, serving as the nonexecutive chairman of the commercial protection company; director of the flow control unit; and a consultant to ADT.

As with many other corporate break-ups, the plan will be tax-free for Tyco shareholders, who will receive stock in each of the three units. That proved more attractive than selling off divisions, which would have incurred big tax hits for shareholders.

Tyco was advised by Goldman Sachs, Lazard and the law firm Simpson Thacher Bartlett.

Article source: http://feeds.nytimes.com/click.phdo?i=147a96a07208d90e3b85ade0bb015ff7

Speak Your Mind