Meet the "Toddler Tycos"
January 22, 2002: 5:10 p.m. ET
Tyco is breaking up into four companies and that looks like good news for shareholders.
By Staff Writer Paul R. La Monica
NEW YORK (CNN/Money) - Usually there's a kernel of truth to Wall Street gossip. But in the case of Tyco it looks like the rumormongers got it completely wrong.
In what turned out to be one of Wall Street's better-kept secrets, Tyco unveiled a plan on Tuesday to split into four publicly traded companies. CEO Dennis Kozlowski opened up the conference call by sarcastically dismissing the litany of rumors about the company before proceeding with the details of the breakup plan.
So now Tyco investors have to be wondering what these new separately traded companies - - let's call them the Toddler Tycos - - will be worth. Well, it looks like Tyco may be worth substantially more piecemeal than it currently is as one huge conglomerate.
Four Tycos are better than one
J.P. Morgan Chase analyst Don MacDougall, who actually put out a report before the news was announced on Tuesday morning, estimated that Tyco (TYC: up $1.10 to $47.55, Research, Estimates) could be worth $90 a share in a breakup. Merrill Lynch analyst Phua Young, in a note issued after the conference call ended, had a slightly more conservative break-up value: $80. Either way, MacDougall's and Young's estimates are considerably higher than Tyco's Tuesday closing price of $47.55.
Before the breakup was announced, Tyco was trading at only 12.5 times fiscal 2002 earnings estimates of $3.70. The stock has been trading at such a relatively cheap multiple because of confusion over how to accurately value a company with so many different businesses. But with Tyco splitting up into four pure play companies, that shouldn't be a major concern anymore. Here's a closer look at each of the Toddler Tycos.
Electronics will be the biggest Tyco
The electronics and security business will likely merit a much higher multiple than Tyco's current P/E. According to MacDougall's research, competitors in the electronics business traded at a multiple of 30 times 2002 earnings.
This division is the biggest in terms of revenues and profits and it has the highest growth prospects. It's no surprise then, that Kozlowski chose to become CEO of this segment. Security was previously part of the fire protection division but its addition should offset some of the volatility on the electronics side, which has been struggling lately due to the sluggish demand for telecom products. In Young's breakup model, he values the electronics business at 25 times earnings.
Making money from medical
The healthcare segment also will probably trade at a higher valuation than Tyco's current multiple. Comparable medical devices companies are trading at an average of 23 times 2002 earnings estimates, according to MacDougall, and at 22 times in Young's breakup model.
With $7.1 billion in revenue, Tyco's medical devices division is the second largest, behind only Johnson & Johnson. So this strong market position is likely to attract a premium. What's more, the healthcare division has the highest operating profit margins of the four Tyco businesses, at 24.4 percent.
Jumping into the fire
Tyco's fire protection unit is also a market leader. Young values it at 22 times earnings. Jerry Boggess, CEO of the fire control business, said during the conference call that the business is highly fragmented, which gives Tyco a competitive edge.
Nevertheless, fire protection delivers lower margins and slower growth than other units, making it appear less attractive than some of the other Toddler Tycos.
CIT going public again
Finally, the finance division was only given a multiple of 14 but that makes sense considering that it is a slower growth business. To that end, Citigroup, the company Young used as a comparison for Tyco's finance unit, trades at just 15 times 2002 estimates.
Tyco just bought the finance division, formerly known as CIT Group, last year. CIT's management will continue to run the company and this part is expected to be the first one to go public. Tyco hopes to spin it off in the second quarter, with the remaining spin-offs taking place by the end of the year.
Breakup will do wonders for balance sheet
Regardless of what investors think of the individual companies, shareholders still have a big reason to be happy with the breakup plan. The split will enable Tyco to reduce its debt by $11 billion. In addition to proceeds that will be raised by spinning off healthcare, fire protection and finance, Tyco also expects to raise $3 to $4 billion by selling its plastics division.
More specifically, the company said that there would be no change in the balance sheet structure of the finance unit, which as of Dec. 31, had $19.6 billion in long-term debt. Following the spinoffs, Young estimates that the electronics and security business will have about $6 to $ 7 billion in debt, the healthcare spinoff $3 to $4 billion and the fire protection business $2 to $3 billion.
Overall, this looks like a good move for Tyco shareholders. The new companies will have cleaner balance sheets and will be a lot easier to understand. That should go a long way towards easing the concerns of Tyco's numerous skeptics.
Find this article at:
money.cnn.com |
