Tyco: Better off dead

The conglomerate made infamous by the crimes of its former CEO is headed for a lucrative final breakup.

By MoneyShow.com Feb 28, 2012 12:54PM

By Igor Greenwald, MoneyShow.com

Before WorldCom and Lehman, before Bernie Madoff and Allen Stanford and Occupy Wall Street, we had Tyco (TYC) and L. Dennis Kozlowski, the CEO with a taste for $6,000 shower curtains, tax-free art, and tens of millions in "forgiven" corporate loans.

Kozlowski, who is doing 8-to-25 years in a New York state prison on larceny and securities fraud charges, becomes eligible for parole in August. And not long after that the conglomerate he expanded into a global empire will wink out of existence, its rump spun off into three separate companies that, with some luck, might become someone else's trophies.

It's taken a decade to undo the handiwork of Kozlowski and his predecessors, and so far only the shareholders of medical products maker Covidien (COV), spun off in 2007, have had much to show for the effort. But Tyco has done better lately, its shares nearly tripling off the 2009 bear-market low and surging 30% since early October.

And investors are now in line for further gains, because the final three-way split, due to be completed by year's end, involves profitable, attractive businesses. They're not exactly fast-growing -- Tyco's most recent quarter featured a 4% revenue gain.

But the growth is starting to pick up a bit, and the home alarm, corporate fire protection and flow control divisions are already very reliable producers of cash flow. Released from the Tyco umbrella, they will all have a better chance to be acquired.

Take ADT Alarms, the North American home and small-business security business that will account for some 18% of Tyco's revenue at spinoff. It's the leading home-security brand with 25% market share in the U.S. and Canada, and is growing at 4% annually by adding customers to its 6 million base and squeezing more from each account each year.

In Tuesday's upgrade of Tyco from "neutral" to "outperform," Credit Suisse notes that the market seems to be valuing ADT's mostly subscription-based revenue at 4.1 times cash flow, versus 6.7 times for cable companies. Closing that valuation gap after the spinoff would be worth roughly $8 a share, according to the analyst, who raised his price target on the shares to $60.

Others expect the spinoff to unlock even more value. At the time the plan was announced last fall, Bloomberg News pegged the sum-of-parts value at $64 a share, based on the analyst estimates it monitors, and quoted one investment manager aiming for $70.

ADT isn't even the jewel in Tyco's crown. That would be the flow-control business, which includes industrial valves, thermal controls, and water transport. This unit accounted for roughly 21% of Tyco's revenue last year . . . and a lot more of its growth.

In the most recent quarter, the division posted revenue growth of 12% and a 16% year-over-year jump in orders. The booming energy industry accounts for 40% of sales, with miners contributing a smaller chunk. Asia-Pacific brings in 40% of the revenue.

The fire-protection business, which will be merged with the commercial-security assets at spinoff, isn't as fast growing as valves or as lucrative as home alarms, but like those units, has demonstrated incremental bottom-line improvement.

Tyco's shares suffered a spell of profit-taking after the solid Jan. 31 earnings report, but have since made up all of the lost ground, and are now challenging last spring's four-year highs.

Longtime investors badly hurt by Kozlowski's megalomania will profit from Tyco's demise. They might even make enough for a holiday in Sardinia.



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