Jones Lang LaSalle
Is sum of Tyco parts greater than whole?
Friday, April 14, 2006
BY CHRISTOPHER SCINTA
DOW JONES NEWSWIRES
A breakup of the conglomerate Tyco International may not be the magic bullet company management needs to create value for shareholders.
The planned fourth- quarter breakup of West Windsor-based Tyco into three separately traded companies -- a health-care company; an electronics maker; and a fire, security and engineered-products business -- is intended to help unlock value that has been hampered by missed earnings targets and the taint of past corporate scandal.
It sounds like a good deal for investors, who get stakes in a $9.5 billion medical products operation; the world's largest electronic connector maker, with $12.2 billion in revenue; and an $18 billion-a-year market leader in fire and security and flow control.
But really, that's what Tyco shareholders already have, and it remains to be seen if the individual companies can improve operations, marred by health-care product recalls and high raw material costs.
"I'm indifferent," John Thomp son, portfolio manager of Thomp son Plumb Growth Fund, said of the breakup. "It's not going to all of a sudden make the stock more valuable," noting there are added costs to running three public companies rather than one.
Tyco's stock traded at about $31 before the split was announced in mid-January, but has since fallen to about $26 after some earnings misses and lowered forecasts.
That's about where Tyco traded in early 2004 and around 14 times the high end of its projected earnings for fiscal 2006, a lower price-to- earnings ratio than multi-industry peers like 3M and Honeywell International.
'It's a very, very inexpensive se curity," said Kevin Rendino, manager of the Merrill Lynch Basic Value Fund in Princeton. "If they can execute properly ... the stock's higher than where it is today."
Analysts and fund managers have pegged the combined value of the three separate companies in the mid- to high-$30s, quite a bit higher than what the combined Tyco trades at now.
So how does the company get there?
Chief Executive Ed Breen has reduced debt and cleaned up Tyco's balance sheet since taking over the Bermuda-based company in July 2002, after corporate looting and accounting scandals that knocked Tyco's stock into the single digits and resulted in prison terms for former Chief Executive Dennis Kozlowski and finance chief Mark Swartz.
Breen says the breakup will further the recovery.
Of the three businesses, health care has the most potential for growth, said Peter Bates, an analyst with money manager T. Rowe Price in Baltimore, which holds about 15 million Tyco shares.
Yet Tyco Healthcare has struggled to grow recently, with revenue from existing operations up only 1 percent during the fiscal first quarter. Putting more money into research or making acquisitions could quickly build Tyco Healthcare's value, Bates said.
The other spinoff, Tyco's massive electronics business, had 2005 net income of $1.85 billion, but the business is sensitive to the ups and downs of the economy and Tyco faces tough price competition from smaller companies, including Molex and Amphenol.
The electronics spinoff would likely get about $2.7 billion of debt, essentially the same as its earnings before interest, taxes, depreciation and amortization, Bates said.
The remaining business, Tyco Fire & Security and Engineered Products, with its steady cash flow from security monitoring, is ex pected to get the most attention from value investors. It houses the ADT, SimplexGrinnell and Sensor matic brands, as well as the flow control division, which makes valves, metal tubing and electrical cable, and had combined operating income of about $1.88 billion in 2005.
Bates likes this business the most, saying the problems at fire and security will get more of management's attention once it's bro ken off.
Tyco has said the breakup will cost about $1 billion but has given few details on how the companies will look.
© 2006 The Star Ledger
© 2006 NJ.com All Rights Reserved.
Is sum of Tyco parts greater than whole?
Friday, April 14, 2006
BY CHRISTOPHER SCINTA
DOW JONES NEWSWIRES
A breakup of the conglomerate Tyco International may not be the magic bullet company management needs to create value for shareholders.
The planned fourth- quarter breakup of West Windsor-based Tyco into three separately traded companies -- a health-care company; an electronics maker; and a fire, security and engineered-products business -- is intended to help unlock value that has been hampered by missed earnings targets and the taint of past corporate scandal.
It sounds like a good deal for investors, who get stakes in a $9.5 billion medical products operation; the world's largest electronic connector maker, with $12.2 billion in revenue; and an $18 billion-a-year market leader in fire and security and flow control.
But really, that's what Tyco shareholders already have, and it remains to be seen if the individual companies can improve operations, marred by health-care product recalls and high raw material costs.
"I'm indifferent," John Thomp son, portfolio manager of Thomp son Plumb Growth Fund, said of the breakup. "It's not going to all of a sudden make the stock more valuable," noting there are added costs to running three public companies rather than one.
Tyco's stock traded at about $31 before the split was announced in mid-January, but has since fallen to about $26 after some earnings misses and lowered forecasts.
That's about where Tyco traded in early 2004 and around 14 times the high end of its projected earnings for fiscal 2006, a lower price-to- earnings ratio than multi-industry peers like 3M and Honeywell International.
'It's a very, very inexpensive se curity," said Kevin Rendino, manager of the Merrill Lynch Basic Value Fund in Princeton. "If they can execute properly ... the stock's higher than where it is today."
Analysts and fund managers have pegged the combined value of the three separate companies in the mid- to high-$30s, quite a bit higher than what the combined Tyco trades at now.
So how does the company get there?
Chief Executive Ed Breen has reduced debt and cleaned up Tyco's balance sheet since taking over the Bermuda-based company in July 2002, after corporate looting and accounting scandals that knocked Tyco's stock into the single digits and resulted in prison terms for former Chief Executive Dennis Kozlowski and finance chief Mark Swartz.
Breen says the breakup will further the recovery.
Of the three businesses, health care has the most potential for growth, said Peter Bates, an analyst with money manager T. Rowe Price in Baltimore, which holds about 15 million Tyco shares.
Yet Tyco Healthcare has struggled to grow recently, with revenue from existing operations up only 1 percent during the fiscal first quarter. Putting more money into research or making acquisitions could quickly build Tyco Healthcare's value, Bates said.
The other spinoff, Tyco's massive electronics business, had 2005 net income of $1.85 billion, but the business is sensitive to the ups and downs of the economy and Tyco faces tough price competition from smaller companies, including Molex and Amphenol.
The electronics spinoff would likely get about $2.7 billion of debt, essentially the same as its earnings before interest, taxes, depreciation and amortization, Bates said.
The remaining business, Tyco Fire & Security and Engineered Products, with its steady cash flow from security monitoring, is ex pected to get the most attention from value investors. It houses the ADT, SimplexGrinnell and Sensor matic brands, as well as the flow control division, which makes valves, metal tubing and electrical cable, and had combined operating income of about $1.88 billion in 2005.
Bates likes this business the most, saying the problems at fire and security will get more of management's attention once it's bro ken off.
Tyco has said the breakup will cost about $1 billion but has given few details on how the companies will look.
© 2006 The Star Ledger
© 2006 NJ.com All Rights Reserved.
posted by Jones Lang LaSalle NJ News Blog at 1:29 PM
<< Home