Tyco Split Set For 2012

By Ryan C. Fuhrmann | December 29, 2011 AAA

Corporate conglomerate Tyco (NYSE:TYC) spent the 1990s rolling up a wide array of businesses in an attempt to create value for shareholders. The strategy appeared to be working until former CEO Dennis Kozlowski left in 2002, and was later found to be using the company as a personal piggy bank. Since that time, the firm has been busy unwinding its collection of businesses, and 2012 will see another split into three separate companies.

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Full Year Recap
Tyco recently reported full year results that saw sales rise a modest 2% to $17.4 billion. ADT, the its residential security business, reported strong 12% top line growth and total sales of $8.6 billion, or just under half of the total top line. Operating income jumped 25% to $1.4 billion for a healthy operating margin of 15.8% of sales. The flow control business reported a respectable 8% growth and total sales of $3.6 billion, or nearly 21% of total sales. Operating income grew modestly at 1% to $413 million for an operating profit margin of 11.3%. The fire protection business saw sales rise 5% to $4.7 billion for the remaining 27% of total sales and reported healthy 16% operating growth and an operating margin of 11.3%.

Total company pre-tax income jumped 49% to $1.9 billion while net income advanced 53% to $1.7 billion, or $3.62 per diluted share. Operating cash flow was strong at $2.4 billion. Subtracting out $788 million in capex, free cash flow was approximately $1.6 billion, or $3.44 per diluted share. (For related reading, see The Essentials Of Corporate Cash Flow.)

Outlook
For the coming year, analysts project a modest 0.6% uptick in sales to $17.5 billion and earnings of $3.64 per share, which would again be roughly flat from 2011.

The Coming Split
On September 19, Tyco announced it would be splitting itself into three separate companies. It expects to complete the separation by the end of 2012 and will divide into ADT North America, a flow control products and services division and a commercial fire and security business. The motivation for the breakup is similar to other corporate spinoffs and divestitures in that management believes the "new standalone companies will have greater flexibility to pursue their own focused strategies for growth."

The Bottom Line
The Tyco breakup follows a similar split in 2007 that saw Tyco split off its diversified electronics provider Tyco Electronics, now called TE Connectivity Ltd. (NYSE:TEL) and healthcare instrument provider Covidien (NYSE:COV) that competes with the likes of PerkinElmer (NYSE:PKI). Despite the greater flexibility in pursuing their own strategies, none of the underlying share prices have moved much in the past five years. ADT looks like the most appealing of the latest round of spinoffs, with the commercial and fire unit a potential takeover candidate for larger rivals such as United Technologies (NYSE:UTX).

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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