| NEW YORK/PARIS
NEW YORK/PARIS France's Schneider Electric SA is serious about buying Tyco International Ltd, but lenders needed to finance a transaction above $30 billion are skeptical a deal for the U.S. conglomerate can be pulled off.
Schneider has approached lenders, including French banks, about financing a potential takeover, two people familiar with the matter said. The approach is preliminary and the French company has yet to secure commitment letters from banks, one source said.
But potential lenders questioned if the proposed deal -- which could range between $30 billion and $35 billion -- will be completed, due to the large financing required and the mismatch of businesses between Schneider and Tyco, one of the people said.
Schneider Electric said earlier it, "is not currently in discussion with Tyco International regarding a potential strategic transaction between the two companies."
A person with knowledge of the matter said on Tuesday that Schneider, with a market capitalization of about $45 billion, had held early talks with Tyco, which has a current market value above $24 billion. The Wall Street Journal reported the French company has made a preliminary $30 billion bid, citing people familiar with the matter.
"The specificity of these reports leads you to believe there's been some level of conversation," said Jeff Sprague, Managing Partner at Vertical Research Partners, a U.S. research boutique focused on industrial large-cap stocks. "There's too much smoke."
Tyco's appeal lies in its access to people's homes as security systems evolve from simple burglar alarms to more sophisticated home-automation systems that, for example, allow residents to open a door remotely or monitor their children.
"It's a big conduit into the home," he added.
Morgan Stanley analysts said any deal would likely involve a premium of up to 35 percent, implying a takeover price of about $32 billion.
Morgan estimates a deal would require up to $17.2 billion of fresh equity, suggesting it could also prompt Europe's biggest-ever nonfinancial share issue, a record held by Enel's $16.6 billion flotation in 1999.
It would be the biggest-ever industrial acquisition outside autos and transport and the second-biggest M&A deal this year, behind AT&T Inc's $39 billion purchase of T-Mobile USA.
The shares of Schneider, which competes with Germany's Siemens AG and ABB Ltd of Switzerland, have fallen over 8 percent this week on concerns about financing a deal. The stock was down 0.1 percent on Wednesday at 112.75 euros.
"This would be huge compared to Schneider's size," said Bertrand Lamielle, head of asset management at Paris-based B*Capital, with $6.5 billion under management. "The doubts have been reflected in Schneider's share price this week."
Shares of Tyco, which has been restructuring under Chief Executive Ed Breen to refocus on its security services, fire safety systems and industrial products, were down 0.9 percent at $51.47 in Wednesday afternoon trading on the New York Stock Exchange after earlier falling more than 3 percent.
Tyco has reinvented itself in the decade since a fraud scandal that eventually landed former CEO Dennis Kozlowski in prison. Kozlowski's high-profile criminal case featured revelations of lavish spending for extravagant home decor and a $2 million birthday party.
Tyco has sold off assets while expanding its security systems unit with the 2010 acquisition of Brink's Home Security for $1.9 billion. Security technology accounted for more than 40 percent of sales last fiscal year. In 2007, Tyco spun off its healthcare and electronics divisions, essentially chopping the company into thirds.
Breen, CEO of Tyco since 2002, stayed on as chief of the new, smaller Tyco. He has won plaudits on Wall Street for slashing debt accumulated during Kozlowski's M&A shopping spree and generating more of Tyco's sales from so-called "recurring revenue," providing a steady cash stream.
Schneider has made a series of small to medium-sized acquisitions, many of them focused on emerging markets such as India and Russia.
Schneider's acquisition of American Power Conversion (APC) for $6.1 billion, completed in 2007, got a chilly reception from investors when it was announced, with some analysts citing pricey multiples and execution pressures.
"Schneider, if you look back at APC, they always kind of ring the bell for the end of the M&A cycle in our space and they always pay a nose-bleed price," said analyst Nick Heymann of Sterne Agee, who put the chance of a Tyco-Schneider deal at less than 25 percent.
(Additional reporting by Helen Massy-Beresford, Christian Plumb and Lionel Laurent in Paris, Emma Thomasson in Zurich, Vincent Flasseur in London, and Nadia Damouni and Soyoung Kim in New York; editing by David Cowell. Derek Caney and Andre Grenon)