Tyco Becomes Target as Analysts See Schneider Talks as Sale Sign

April 14, 2011, 12:33 AM EDT

 

April 14 (Bloomberg) -- Tyco International Ltd. is emerging as a candidate for a sale or breakup whether Schneider Electric SA follows through on talks to take over the company or passes on a deal, analysts said.

 

After a 10 percent gain in the stock to $52.01 since Bloomberg reported Schneider’s interest on April 11, Tyco Chief Executive Officer Ed Breen risks criticism from shareholders if the price slumps back, said analysts including Jeffrey Sprague, co-founder of Vertical Research Partners.

 

“It’s going to be hard for Tyco to throw their hands up and say, ‘It was all smoke and let’s go back to $45 here,’” Sprague, who is based in Stamford, Connecticut, said yesterday in an interview. He rates Tyco as “hold.”

 

Schneider, a French maker of electrical components, held preliminary talks after approaching Tyco earlier this year, said three people with knowledge of the matter, who asked not to be identified because the discussions are private. Schneider hasn’t ruled out pursuing Tyco, another person said.

 

As CEO of General Instrument Corp. in 1999, Breen, 55, sold that company to then-Motorola Inc., rose to become president and chief operating officer there, then left to run Tyco in 2002. He divided the company into three businesses in 2007 and stayed to run Tyco, the world’s largest maker of security and fire- protection systems and industrial valves.

 

No Empires

 

“Ed Breen is not an empire builder,” said Stephen Tusa, a JPMorgan Chase & Co. analyst in New York who recommends buying Tyco. “This has always been a candidate for a breakup or a sale.”

 

Tyco slid 32 cents to $52.01 yesterday in New York Stock Exchange composite trading. Rueil-Malmaison, France-based Schneider has fallen 7.2 percent since April 11, closing yesterday at 112.75 euros in Paris.

 

Analysts including Tusa and Nick Heymann of Sterne Agee & Leach Inc. in New York have estimated that Tyco has a value of at least $60 a share.

 

A Tyco spokesman, Paul Fitzhenry, declined to comment yesterday. Schneider said that it was “not currently” in talks with Tyco, and Anthime Caprioli, a spokesman for Schneider, declined to comment further.

 

Tyco generated almost three-fourths of its $17 billion in sales for its last fiscal year from its security and fire- prevention units, according to data compiled by Bloomberg. The third major component of the company is so-called flow control, with offerings such as valves used in oil refineries.

 

Serious Offers?

 

“We believe Tyco’s management and board would entertain serious offers to sell the company in its entirety,” John Inch, an analyst at Bank of America Corp.’s Merrill Lynch division in New York, said in a note to clients yesterday. He rates Tyco as neutral.

 

Breen succeeded CEO L. Dennis Kozlowski, who exited amid a criminal investigation for personal tax evasion. Kozlowski ran the company for a decade, boosting revenue with acquisitions. In 2002, the year Breen joined Tyco, revenue was about $35.6 billion. Last year’s sales were less than half that amount, after about 25 divestitures and the 2007 separation.

 

Tyco under Breen created two other companies in that split: Tyco Electronics, now known as TE Connectivity Ltd., a maker of electronic components, and Covidien Plc, a maker of medical devices and supplies.

 

While a takeover by Schneider would be earlier than expected, “being acquired may be one of the logical conclusions in Tyco’s long-term strategic plan,” Deane Dray, a Citigroup Inc. analyst in New York, said in a note to clients. “Tyco’s management team appears to be working towards paring down Tyco to its ‘lowest common denominator,’ namely, its industry-leading fire and security businesses.”

 

Schneider’s Team

 

Schneider had been studying a takeover with bankers from JPMorgan Chase and Bank of America, said people with knowledge of the matter. Goldman Sachs Group Inc. has been advising Tyco, the people said.

 

Schneider’s approach valued Tyco at about $30 billion, the Wall Street Journal said.

 

If Schneider withdraws, Tyco might prove attractive to a company such as United Technologies Corp., analysts said.

 

Tyco’s ADT security-monitoring services may mesh well with the equipment manufactured by United Technologies in its fire and security business, Sprague said. United Technologies expanded in that industry by buying operations from General Electric Co. in 2010.

 

Services Market

 

While some monitoring companies might balk and buy gear elsewhere, the market is so fragmented that United Technologies could weather the loss, Sprague said. ADT has 11 percent of a market for security monitoring of at least $68 billion, Tyco estimated in a February presentation.

 

“Given the size of ADT, given who ADT’s competitors are, you could probably make it work,” Sprague said.

 

John Moran, a spokesman for Hartford, Connecticut-based United Technologies, declined to comment.

 

Another option for Tyco would be splitting into three separate companies, Ajay Kejriwal, an analyst with FBR Capital Markets in New York, said in a note. He recommends buying Tyco, while Dray rates the shares as “hold.”

 

Breen ultimately may decide to keep the company together if he doesn’t get an attractive offer, said Brian Langenberg, principal at Langenberg & Co. LLC in Oak Park, Illinois.

 

“This is a disciplined guy,” Langenberg said yesterday in an interview. “When he got there, job one was to save the ticker symbol. People are going to carp at him. He’s been at Defcon 5. If he does it, it will be the right thing at the right time at the right value.”

 

--With assistance from Zachary Mider in New York. Editors: James Langford, Ed Dufner

 

To contact the reporters on this story: Rachel Layne in Boston at rlayne@bloomberg.net; Will Daley in New York at wdaley2@bloomberg.net

 

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net