Tyco International (TYC $45.15; A-1-1-7 to B-1-1-7)
Volatility Risk: Average
2001A $3.05 2002E $3.70 2003E $4.40 $90B Market Cap.
More Thoughts On The Break-up: We See Potential Value of $70-$80; Buy - There’s More
To It Than Meets The Eye!
• We have updated our valuation models for Tyco based on the newly proposed alignment
for the four new companies and are comfortable with our $70-$80 valuation range for
Tyco.
• We view the break-up plan proposed on Tuesday as just one of many different possible
scenarios for the company. In effect, a "For Sale" sign has been put in the window.
• We believe that the plan announced Tuesday is a conservative case for value creation. If
Tyco does indeed IPO 20% of Healthcare, Fire & Flow and Tyco Capital and assuming
$1.50-$2.00 of value for Plastics, the total value to the Tyco holder could be $62 to $71.
However, if Tyco were to sell CIT for $12-$13B and spin-off (and not IPO) Healthcare
and Fire & Flow, the total value could approximate $70-$80. We view asset sales as
having a fairly good probability of occurrence.
• A major asset sale could be a significant catalyst for the shares as it could provide
proceeds to pay down a large portion of the $11B in debt that the company is targeting
for reduction. In addition, it would show some skeptical investors that the assets are
"real" and lastly, minimize EPS dilution concerns.
• If the IPOs occur, the EPS dilution associated with the IPOs and debt reduction could be
$0.05. The sale of Tyco Plastics could also be $0.05 dilutive. Collectively, we do not
deem the potential $0.10 dilution to be significant. We continue to estimate FY02 EPS
of $3.70 and $4.40 for FY03.
• Tyco purchased CIT in June 2000 for around $10B and equity has increased about
$800M. Before the purchase by Tyco, CIT’s pretax earnings run rate was $1.2B. For
FY02, we estimate CIT’s pretax income to be $1.68B or 40% higher. Our assumption of
$12-$13B for the CIT sales price seems reasonable. CIT would retain its Bermudan tax
structure. Depending on the financial situation of a potential buyer, the favorable tax
situation could be maintained.
• If the IPO’s do occur, we expect transparency to allow shareholders to see legacy Tyco’s
EPS at $3.70. Tyco is pursuing this value creation plan at a time when most of the
businesses are doing very well. Electronics, which has been weak, could be nearing a
bottom.
• The surviving entity, Security & Electronics, will be highly exposed to a cyclical
recovery in the electronics industry as 75% of the new company is electronics. The
potential timing of a break-up could allow the company to benefit significantly in the
market place.
FlashNote
United States
25 January 2002
Investor Support Group Intra-Day Special Note
TYC
Merrill Lynch & Co.
Global Securities Research & Economics Group
Global Fundamental Equity Research Department
RC#11202514
Research Summary Merrill Lynch, as a full-service firm, has or
may have business relationships, including
investment banking relationships, with the
companies in this report.
Intra-Day Special Note – 25 January 2002
2
• For those looking for comfort with the company's
accounting look at the annual free cash flow, which
was about 90% of net income in FY01.
• The bottom line is that we believe little value is being
assigned to the company at a time when catalyst(s) are
on the horizon (the break-up, a potential for large asset
sales).
• We recommend purchase of the shares of Tyco
International. Due to increased volatility we are
lowering our volatility risk rating from Low (A) to
Average (B).
(P. Young)
[TYC] One or more analysts responsible for covering the securities in this report owns such securities.
[TYC] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
OPINION KEY: Opinions include a Volatility Risk Rating, Intermediate-Term and Long-Term Investment Ratings and an Income Rating. VOLATILITY RISK RATINGS,
indicators of potential price fluctuation, are: A - Low, B - Average, C - Above Average, D - High. INTERMEDIATE-TERM INVESTMENT RATINGS, indicators of expected
total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Strong Buy (minimum 20% -- more for High Risk securities); 2 -
Buy (minimum 10%); 3 - Neutral (0- 10%); 4 - Reduce/Sell (negative return); 6 - No Rating. LONG-TERM INVESTMENT RATINGS, indicators of fundamental company
factors demonstrating potential total return for the 3-year period from the date of the initial rating, are: 1 - Strong Buy (aggregate minimum 40%); 2 - Buy (aggregate minimum
20%); 3 - Neutral (aggregate 0-20%); 4 - Reduce/Sell (negative return); 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher
(dividend considered to be secure); 8 - same/lower (dividend not considered be secure); and 9 - pays no cash dividend.
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