April 13, 2011 / 9:12 PM / 6 years ago

If Schneider can't swing it, others may court Tyco

NEW YORK (Reuters) - Tyco International Ltd TYC.N chief Ed Breen has spent nearly a decade cleaning up the U.S. conglomerate, paying down debt and slimming down the company to just three integrated divisions.

His efforts were recognized this week when Tyco shares jumped 10 percent on signs French industrial giant Schneider Electric SA (SCHN.PA) has its eye on the company, which specializes in home security systems.

Despite Schneider's carefully worded denial on Wednesday that it was not "currently" in talks with Tyco, it has become abundantly clear Tyco is in play.

And even if the courtship comes to nothing, there are likely other suitors, analysts and bankers say, pointing to conglomerates such as United Technologies Corp (UTX.N), Honeywell International Inc (HON.N), ABB Ltd ABBN.VX and Siemens AG (SIEGn.DE).

Diversified industrial companies are watching closely and could be interested in bits and pieces of Tyco if not the whole company, said a source with knowledge of the situation.

Breen "has shown a real willingness to dismantle the company, let assets find their logical home," said Jeff Sprague, Managing Partner at Vertical Research Partners.

"He doesn't have any sentimental view about keeping (Tyco) together and doesn't have the empire-building instincts a lot of CEOs have."

Just the opposite. In 2007, Breen shepherded a massive break-up of the company, spinning off its healthcare and electronics arms in stand-alone companies now called Covidien Plc COV.N and TE Connectivity Ltd (TEL.N), respectively.

Tyco, the parent of ADT Worldwide, which also makes fire and safety equipment and flow control products used in the energy industry, now commands a $23 billion market value.

Interest in Tyco comes as a key market, U.S. commercial construction, looks poised to recover after a multi-year slump. New technology means residential monitoring has moved well beyond just alerting police to a break-in. Eventually, a homeowner will be able to use their smartphone to let in a housekeeper, or check on the kids while at work.

Tyco's security monitoring business, by offering a conduit into homes, could attract companies such as Germany's Siemens, or United Technologies and Honeywell, which all make complementary products such as sensors, cameras and keypads.

Tyco offers them a high-tech, fast-response monitoring service with strong, consistent cash flow. Telecommunications and cable providers, such as Verizon Communications Inc (VZ.N) or Comcast Corp (CMCSA.O), could also benefit from Tyco's know-how.

Hurdles to a Deal

Tyco has reinvented itself in the decade since a fraud scandal landed former CEO Dennis Kozlowski in prison. The case became synonymous with corporate excess. Among other indiscretions, Kozlowski lavishly spent Tyco money to decorate his Manhattan apartment with item such as a $6,000 shower curtain and a $15,000 umbrella stand.

Tyco's high market cap is an obstacle to all but the best-capitalized companies, such as General Electric Co (GE.N). But many, GE and United Tech among them, have made clear they do not have the appetite for huge deals right now.

At 14 times next year's estimated earnings, Tyco trades at a premium to peers such as Honeywell, GE and United Tech, according to Reuters data. (link.reuters.com/muh98r)

Hurdles to any deal include the complexity of Tyco's interconnected holdings. A Comcast, for example, would have no strategic use for valves and pumps. But Tyco's flow control business helps drive sales of fire safety systems, so selling it could reduce the value of what is left.

Also, Tyco is domiciled in Switzerland, where it moved its incorporation from Bermuda in 2009. A U.S. buyer would have to find huge cost synergies to offset a higher tax bill if Tyco's operations were suddenly taxed at U.S. rates, analysts say.

Schneider, meanwhile, is running into skeptical bankers for a deal that would likely value Tyco at more than $30 billion.

Schneider has reached out to funding sources, including major French banks, and may try to sell off pieces of Tyco to reduce debt, according to two people familiar with the matter.

Tyco advisers might be shopping the business around and found another buyer in United Tech, The Daily Telegraph reported on Wednesday, citing traders.

United Tech, which declined comment, has budgeted about $1.5 billion for acquisitions this year and expects to spend the sum in small chunks, executives at the Hartford, Connecticut-based company have said.

Chief Executive Louis Chenevert has told investors the company would make a larger acquisition if it found the right target, although the deal he commonly holds up as an example -- United Tech's 2010 $1.8 billion buy of GE Security -- is an order of magnitude smaller than Tyco.

Amid low interest rates and a strong euro, Siemens and ABB are possible bidders for Tyco, although the hefty premium that Schneider was said to be offering could prevent counter-bids, investors said. ABB and Siemens declined comment.

Siemens previously said it would not consider takeovers larger than the VDO auto unit it sold for 11 billion euros ($15.9 billion) in 2007.

"The remains of Tyco still represent a large, diversified mix of businesses, many with good long-term prospects and strong and predictable cash flow," said Carol Levenson, director of research at Gimme Credit. "Many of its 'legacy' issues have been settled."

Long-time industrial analyst Nick Heymann, of Sterne Agee, describes CEO Breen as on the last lap of a marathon to get Tyco stock to a new high.

"After 8-1/2 years, he's inside the stadium," Heymann said. "This quarter, the fundamental sales momentum will be back. He's got a secular story, a cyclical story, everything's globalized and the three businesses are starting to work together. Would he turn the keys over to this car? No."

If no deal materializes, Tyco shareholders could still benefit, Heymann said. Tyco will be more willing to communicate about the impact of recent cost cuts on margins and the cyclical recovery in Tyco's markets, and it may boost a stock buyback.

Additional reporting by Helen Massy-Beresford, Christian Plumb and Lionel Laurent in Paris, Emma Thomasson in Zurich, Vincent Flasseur in London, Nadia Damouni in New York and Scott Malone in Boston; editing by Andre Grenon

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