Tyco plans split into four companies; will sell plastics division
Pembroke, Bermuda - To increase shareholder value and pay off about $11 billion in debt, Tyco International Ltd. announced Jan. 22 a plan to divide itself into four independent, publicly traded companies.
Pembroke, Bermuda - To increase shareholder value and pay off about $11 billion in debt, Tyco International Ltd. announced Jan. 22 a plan to divide itself into four independent, publicly traded companies. Each would focus on one of Tyco's four existing businesses: security and electronics, healthcare, fire protection and flow control, and financial services. The new firms would continue to be based in Bermuda. Tyco Plastics, which its parent reports is one of the largest manufacturers of plastic film and other plastic products in the U.S., would be sold.
Tyco says it believes these actions will lead to substantially greater total shareholder value by creating independent companies that will be more appropriately valued by the market. 'Each new public company created from these transactions will be a proven industry leader, and each will go forward with a global market position, a strong and experienced management team, an entrepreneurial culture, an independent board of directors, and significant financial strength,' states Tyco.
Already unanimously approved by the company's board of directors, the plan calls for Tyco's healthcare, fire protection and flow control, and financial services businesses to be taken public through initial public offerings (IPOs), and then distributed to Tyco's shareholders. Tyco's security and electronics businesses would be combined as a fourth publicly traded company. Tyco expects to complete the first of these IPOs, Tyco Capital, in 2Q02, and then finish the rest of these transactions by the end of 2002. Each IPO, shareholder distribution, or sale will be subject to applicable regulatory approvals.
Besides creating value for its shareholders, Tyco says it plans to use proceeds from the IPOs and the sale of its plastics business to eliminate at least $11 billion of debt. This is expected to help give each of the four new companies a strong balance sheet and a financial profile for each consistent with an 'A' rating. There would be material change in the capitalization structure of Tyco Capital, which presently has an 'A' rating.
To lessen its debt, Tyco states that it plans to repurchase most of the public bonds issued by Tyco International Group S.A. and also buy back some convertible bonds that would otherwise continue to be obligations of its security and electronics divisions. Bonds not repurchased may be converted into an appropriate number of shares of each of the four public companies.
'This is a bold, shareholder value-driven plan that we believe will create extraordinary near- and long-term benefits for Tyco's shareholders and bondholders, as well as for our employees and customers,' says L. Dennis Kozlowski, Tyco's chairman and ceo. 'Over the past decade, Tyco's share price has increased tenfold, as we have used Tyco's size, access to capital and operating philosophy to build world-class healthcare, electronics, telecommunications, security, fire protection, flow control, and financial services businesses. These businesses have now developed to a size and stage where they can thrive on their own, and perhaps be even more agile than Tyco. The plan we are announcing today is the logical extension of the same value creation strategy we have successfully pursued for nearly a decade.
'Furthermore, as independent, public companies, each of these businesses will offer investors a 'pure-play' opportunity with excellent growth prospects and greatly increased simplicity, clarity and transparency. As such, we believe each will be valued substantially higher than the implied valuations they have received in recent years as part of Tyco.'
Dennis Kozlowski will be chairman and ceo and Mark Swartz will be chief financial officer of the new security and electronics company. Rich Meelia, who has served as Tyco Healthcare's president since 1995, will be president and ceo of the new healthcare company, and Chuck Dockendorff will continue to serve as its cfo. Fire protection and flow control will be run by Jerry Boggess, ceo, who has led Tyco's fire protection business since 1989. Jack Guarnieri, a senior finance executive in the flow control business, will be cfo of the combined fire protection and flow control firm. Al Gamper will continue to serve as president and ceo of Tyco Capital, and Joe Leone will continue as its executive vp and cfo.
'I am extremely proud of Tyco's performance. We have built a great portfolio of businesses, and over the five years ended Sept. 30, 2001, we have delivered earnings per share growth at a compounded annual rate of over 40% and industry-leading operating profit margins in each of our businesses. During this same period, we have increased annual free cash flow from $240 million in 1996 to $4.8 billion in fiscal 2001. Nonetheless, even with this performance, Tyco is trading at a 2002 P/E multiple of 12.0x, a discount of almost 50% to the S&P 500,' adds Mr. Koslowski. 'The plan announced today is designed to close the gap between Tyco's market value in recent years and the value of our businesses. Our objective has always been to deliver value to our shareholders. That is why we are taking this action today, and why we are all very excited about the future.'
Tyco estimates that, if the four new companies had been established for the year ending Sept. 20, 2001, they would have the following pro forma financial results, which are earnings before non-recurring charges and credits, interest, taxes and goodwill amortization:
Security and electronics would have had $17.6 billion in pro forma revenues; $4.2 billion in pro forma operating profit; and a 23.7% pro forma margin in 2001.
Healthcare would have had $7.1 billion in pro forma revenues; $1.7 billion in pro forma operating profit; and a 24.4% pro forma margin in 2001.
Fire protection and flow control would have had $7.6 billion in pro forma revenues; $1.3 billion in pro forma operating profit; and a 17.1% pro forma margin in 2001.
Financial services would have had $5.4 billion in pro forma revenues and $1.2 billion in pro forma pre-tax earnings in 2001.