Tyco Spinoff Not Worth It

Please read part 1 of the article to see the details of the Tyco spinoff. Let’s examine each company after the spinoff. 

Pentair/Tyco Flow Control

Immediately after the spinoff, Tyco Flow Control will merge with Pentair, and they will trade under the current Pentair symbol PNR.

“Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water & Fluid Solutions and Technical Products. Water & Fluid Solutions is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment and enjoyment of water. Technical Products is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components and protect the people that use them.”

This merger makes a lot of sense on a couple of levels:

  • As Pentair CEO Randy Hogan puts it, “it’s an incredibly complementary combination with their strength in flow control and ours in water and fluid processing and importantly their thermal management business together with our technical products business.”
  • Since Pentair is already a public company, Tyco Flow Control will not have to deal with the cost associated with becoming and being public.
  • Since Tyco shareholders will be the majority owners (52.5%), and it is incorporated in Switzerland, the tax rates should be lower.

Separately, for a cyclical company, Pentair looks fully valued.

  • Trades at over 15 times fiscal 2012 earnings.
  • Growing earnings between 10% to 15%
  • Growing revenue below 5%.

After the companies are fully merged and margins are improved, the valuation should be very similar.  Here are the individual and combined results for the first six months of this year.

Combined Results of Operations for PNR and Tyco Flow Control

At the current distribution of .24 shares of Flow Control for every Tyco share and the current PNR price of $44.04, Tyco shareholders should get proceeds of $10.57 if they were to sell right away. There should be selling pressure on PNR as some Tyco shareholders dump the shares right away.

ADT

ADT shares will be coveted in the open market.

  • It is the leader in the fragmented 12.5 billion home securities and monitoring service industry. It controls about 25% of the market while the next competitor controls about 4%.
  • It is a high margin business due to the fact customers are charged monthly and most of the cost is upfront to install the security system.
  • It could be a takeover target for cable companies like Verizon and Comcast. They could easily cross sell ADT services.

Lets look at ADT’s result of operations as an independent company. 

ADT results as an independent company

Revenue has jumped due to the acquisition of Brinks Home Security Holdings in 2010. Organic revenue has been growing at a pedestrian rate of 4% a year. However, executives believe ADT Pulse will be their growth engine. Pulse allows customers to keep track of their homes from anywhere. It also charges a higher monthly fee than the regular home monitoring service.

Due to the all the aforementioned reasons, it will probably trade around 20 times FCF of $500 million or $10 billion, which should give it a price of around $42/share.

Tyco

What will be left over is the Tyco Fire Protection unit. The smaller Tyco commands about 10% of the fragmented 100 billion Fire and Security market. Here are the results of operations for the new Tyco.

New Tyco Results

Executives are targeting 4 to 5% revenue and 15% earnings growth over the next three year. Like ADT, it could be a takeover target by some of its larger competitors like United Technologies Corp, Stanley Black & Decker, Honeywell International Inc and Germany’s Siemens AG. It should trade around 15 times fiscal 2012 earnings. If you add back the restructuring, asset impairments and divestiture charges (gains) of $78 million (minus taxes) to the net income it should trade around a 10 billion valuation or $21/share.

Conclusion

HypeZero’s total sum of parts valuation comes out to $52.57 ($10.57+$21+$21). Obviously, the market disagrees with us, since the price of TYC is around $56. It is advisable to sit out the spinoff and see if the individual companies trade at a discount to our intrinsic value.

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Disclosure: I do not own shares of TYC.

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