M&A Watch: Valuing Tyco With or Without Buyout (TYC)

Tyco International Ltd. (NYSE: TYC) is trading up this week on continued talk that Schneider Electric may be buying the company.  Whether you believe that this report comes true depends upon which source you read last.  Schneider’s official response was that it is not currently in discussions with Tyco.  What interests us the most, however, is the question of what Tyco would be worth in a merger with Schneider OR for any other buyer.

The ballpark figure is around $30 billion, but this likely includes debt assumption.  Schneider’s statement of not being in any discussions does not matter one bit.  It does not mean that the company hasn’t talked with bankers nor that its board of directors haven’t discussed a deal behind closed doors.

Tyco deconglomerized itself in a three-way split back in 2007.  This stock was just at $47.15 last Friday and rose to above $53.00 yesterday when the news surfaced.  Shares are back under $51.00 after a near-3% drop today and the market cap is right at $24.1 billion currently.

If you just straight-line the equity value to $30 billion then the equity buyout could be as high as $63.00 per share.  That would be a post-split high since the 2007 summer when it split itself apart.  There is more than $7 billion in direct long-term debt when you combine its long-term obligations and deferred liabilities.  This implies that Tyco is fully priced right now.

Before the news of a possible offer broke, Thomson Reuters had a mean target of just over $49.50 and a media target of $50.50.  The highest price target is $54.00.  A blended 2011 to 2012 annual estimate from Thomson Reuters also generates a forward implied P/E ratio of just over 15 today.  This is generally deemed to be close to full value, short of synergies and carve-outs that can unlock more value.

Where the deal gets interesting is in the break-up values here.  The  ADT Worldwide business is perhaps the Holy Grail here but it has four other units: Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products.  The fire protection has arguable synergies, but any buyer could decide that its electrical and metals unit should go, along with the safety products and/or the Flow Control operations.  Our take is not based upon Schneider alone.  Any buyer could carve out operations here.

In 2010, Tyco had $17.016 billion in revenues.  Operating income was almost $1.6 billion and net income for holders was down at $1.13 billion. Tyco claims better gross margins than other quasi-conglomerates and any carve-outs could change how the business is truly valued to a buyer.

Tyco could feasibly fetch as high as $60.00 in a transaction.  The problem is that it starts getting very expensive on EBITDA, earnings, revenues, and even in break-up or carve-out values.  Tyco’s stock was in the mid-$30’s as recently as October 2010.  The stock was well under $30 two summers ago but it was above $50 when it broke up in 2007.

It is too bad that these interested buyers have to always wait until share prices are high and when valuations are extended.  The flip-side is that sellers don’t want to sell at the bottom and they seek to sell when they think the peak is near.  Investors also should consider that Tyco has the option of trying to unlock value on its own with spin-offs or carve-outs.

JON C. OGG