July 13, 2010 / 1:14 PM / in 8 years

UPDATE 4-Tyco Electronics to buy broadband company ADC

* Pays $1.25 bln, or $12.75/shr, for ADC

* Deal aimed at market for consumer electronics

* Tyco Electronics Q3 earnings beat forecast

* ADC shares jump 42 pct, Tyco Electronics also up (Adds background, analyst comment, byline, updates shares)

By Nick Zieminski and Ritsuko Ando

NEW YORK, July 13 (Reuters) - Tyco Electronics Ltd (TEL.N), has agreed to buy broadband equipment maker ADC Telecommunications Inc ADCT.O for $1.25 billion in cash, betting on future demand for fiber optics and diversifying away from its historical automotive connector business.

Tyco Electronics said it would pay $12.75 cash per share, a 44 percent premium to ADC’s closing price on Monday.

It said the deal would help it expand in the market for consumer electronics like smart phones, 3D television and video-conferencing. It said the deal would boost earnings by 14 cents per share in the first full year after closing.

Barclays Capital was the sole financial adviser to Tyco Electronics. Morgan Stanley advised ADC.

The deal is expected to be completed in the fourth calendar quarter, Tyco Electronics said. ADC would be required to pay a $38 million termination fee, according to an SEC filing.

“It’s a smart deal,” said telecommunications equipment analyst Lawrence Harris of C.L. King. “The fiber-optic connectivity space is an area that’s going to experience growth in the next several years.”

ADC shares jumped $3.68, or 42 percent, to $12.53 on the Nasdaq. Tyco Electronics gained $1.09, or 4.4 percent, to $26.37 on the New York Stock Exchange.

TELECOM CONSOLIDATION

ADC products, including copper and fiber-optic cables and network access devices, enable the delivery of high-speed data. The company reported net sales of $997 million for its 2009 fiscal year, which was 11 months long because of a change in reporting periods.

Fiber-related sales accounted for more than a third of ADC’s sales in the most recent quarter.

“You’ll see phone company networks switching more to fiber versus copper, and certainly devices like cellphones, and increases in data traffic, are going to drive fiber optic sales,” said Harris, who rated ADC a “strong buy” with a $13 price target.

Tyco Electronics was paying a healthy premium but ADC shares were at multi-year low, said Longbow Research analyst Shawn Harrison. The company wanted to use acquisitions to diversify away from the automotive connectors business that still accounts for a large portion of its sales.

“It’s really a bet on growth in bandwidth more than anything else,” Harrison said.

Since the company was spun off from former parent Tyco International Ltd TYC.N, in 2007, it has spent more time divesting businesses than buying them, so ADC marks the first significant acquisition since its restructuring.

The deal follows a series of recent mergers among telecommunications carriers — who account for a significant portion of ADC’s customers — and their suppliers, a trend driven by recession and the high cost of investing in the latest wireless and fiber-optic technologies.

As customers such as AT&T and Verizon have grown through acquisitions, the industry has spent less on capital investments, said Christian Schwab, an analyst at Craig-Hallum Capital Group.

“The supplier base also needs to merge to create greater scale,” Schwab said.

Expectations of upcoming government investment projects, including Australia’s national broadband plan, helped spur interest, Morgan Keegan analyst Simon Leopold said. The 44-percent premium to Monday’s close appeared sufficient to discourage other bidders.

Competitors include Corning Inc (GLW.N), a key fiber optics provider, as well as CommScope Inc (CTV.N), which also sells network connectivity products.

Shares of CommScope, an ADC rival, rose 3.5 percent to $25.37. Corning rose 1.6 percent to $17.58, both on the New York Stock Exchange.

EARNINGS BEAT

Tyco Electronics also reported preliminary fiscal third-quarter profit of 72 cents a share on sales of $3.1 billion, topping Wall Street expectations.

Excluding one-time items, earnings were 70 cents a share, 7 cents ahead of consensus estimates, according to Thomson Reuters I/B/E/S.

That profit beat suggests rivals Molex Corp MOLX.O and Amphenol Corp (APH.N) “should have a very good June quarter,” said Longbow’s Harrison. Analysts may have to raise earnings estimates for the two companies ahead of their earnings results in coming weeks, he said.

Shares of Molex rose 2.7 percent to $18.75 and Amphenol gained 2.3 percent to $41.50. (Additional reporting by Paritosh Bansal, editing by Gerald E. McCormick, John Wallace and Gunna Dickson)

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