Tyco's breakup means 60% gain for shareholders

Tyco International Ltd's second breakup in four years is giving Chief Executive Officer Ed Breen the chance to boost its value by 60 per cent after shareholders lost $10 billion owning the conglomerate's pieces.

Tyco, valued at $67 billion before its split from Covidien Plc and TE Connectivity Ltd. in July 2007, said yesterday it will divide into three more units. With Tyco, Covidien and TE Connectivity worth $57 billion last week, breaking up Tyco's remaining businesses would give investors a boost of $13 billion, according to analysts' estimates compiled by Bloomberg.

Since 2002, Breen has been selling pieces of the company that L Dennis Kozlowski, convicted of stealing millions of dollars, spent a decade building. While many shareholders haven't benefited from owning Tyco, Covidien and TE Connectivity, as the financial crisis caused the biggest equity rout since the Great Depression, JPMorgan Chase says running the maker of industrial valves, home security systems and commercial smoke detectors as three entities will increase the value of each and make them more attractive as takeover targets.

When you're looking at opportunities to make the investor whole, there's a big difference between then and now, C Stephen Tusa, a New York-based analyst at JPMorgan, said in a telephone interview. The last time they did this the market tanked. There's clearly strategic interest in some of these assets now. That is what will ultimately create value for shareholders.

Relative Value
After plunging 11 per cent, the day Tyco said it was splitting in January 2006, the Schaffhausen, Switzerland-based company recovered to post a 14 per cent return by the time the breakup was completed in July 2007, including dividend payouts.

The shares of Tyco lagged behind the Standard & Poor's 500 Index over that span.

The company since Breen was named as CEO in July 2002 has more than tripled through last week.

The last one created the value too, Breen, 55, said in a telephone interview. It worked very well especially considering the environment we were living in.

This time, the breakup of Tyco will create three standalone companies: ADT's North American residential security business, its flow-control unit that is the biggest maker of industrial valves, and the world's largest commercial security and fire- systems division.

Shareholders will get stock in each of the three companies under a tax-free spinoff structure, which will take about 12 months to complete.

Sum of Parts
Breen will stay on as non-executive chairman for fire and security, a director at flow control and a consultant to ADT. Using the average sum-of-the-parts model from analysts' estimates, Tyco could be worth $64 a share, or $30 billion.

Jeffrey Sprague, co-founder of Vertical Research Partners Inc., estimates that Tyco's pieces may command as much as $70 a share, or almost $33 billion. That compares with Tyco's value of $20.3 billion, or $43.70 a share last week.

With yesterday's announcement, Breen can restore the decline in value shareholders have suffered since Tyco's initial separation into three companies in July 2007.

This is about enhancing overall shareholder value and the current structure since the last split may not be doing it, Louis Meyer, a special situations analyst for Oscar Gruss & Son Inc in New York, said in a telephone interview.

From the 2007 breakup through last week, shares of Tyco slid 18 per cent. Covidien has gained 12 per cent to give it a market value of $23.9 billion. TE Connectivity slumped 25 per cent in the same period, trimming its capitalisation to $12.8 billion, data compiled by Bloomberg show.

Breakup Rationale
The S&P 500 retreated 19 pe rcent in the same period. Stocks globally slumped as the collapse of Lehman Brothers Holdings Inc in September 2008 froze credit markets and deepened the longest recession since the 1930s.

Separating the rest of Tyco will now allow shareholders to choose the pieces they want to invest in without being forced to own the entire business, according to Nick Heymann, an analyst at William Blair & Co.

The separate businesses will appeal to different types of investors and there will be an opportunity to let the full value of the shares come to life, he said in an interview in New York yesterday. Given the health of these businesses, you've got good visibility of their future. Heymann estimates Tyco is worth as much as $65 a share using a sum-of-the-parts valuation.

The breakup also will make takeovers of any of the three units more likely since they will be smaller and easier for a buyer to evaluate, according to Brian Langenberg, principal at Langenberg & Co in Oak Park, Illinois.

It makes the pieces a small enough bite that someone can go eat, Langenberg said. It was the right thing to do.