Tyco's latest breakup could feed shareholder activism

By Nick Zieminski

NEW YORK (Reuters) - The imminent breakup of Tyco International Ltd (TYC.N), its second in five years, could provide ammunition to activist shareholders if the newly separated pieces prove more successful than the former industrial conglomerate.

The separation of Tyco's ADT security service, its commercial fire and security businesses, and the merger of Tyco Flow Control with Pentair, are expected to be completed early next month. Shareholders approved the three-way split on Monday.

Tyco stock has gained almost 40 percent since the split was announced a year ago, outperforming both the broader market and other industrial shares. Proponents of the breakup say that being independent and more focused should allow the three companies to set and execute strategy more effectively.

"A lot of people will end up holding all three pieces because they think that one or more of them is a potential takeover candidate and the management has the flexibility to deploy cash on any number of things," said Vertical Research Partners analyst Jeff Sprague.

The breakup of a manufacturing conglomerate is a relatively rare event. ITT Corp's (ITT.N) recent split, which has received positive marks from investors, was the only other major example since Tyco's 2007 healthcare and electronics spinoffs.

In other market sectors, however, companies announcing breakups or major divestitures have included ConocoPhillips (COP.N), McGraw-Hill Companies Inc (MHP.N) and Expedia Inc (EXPE.O), as well as Kraft Foods Inc (KFT.O) and Fortune Brands (FBHS.N).

If the new, nimble baby Tycos do well, for example by entering new markets or consolidating rivals, that brings fresh attention to other industrial companies that hold disparate businesses, Sprague added, citing Ingersoll Rand Plc (IR.N), Dover Corp (DOV.N) and Textron Inc (TXT.N) as examples.

"It creates pressure for companies to perform and, or, to justify their structure," Sprague said. "It doesn't lead to an explosion of activity in this sort of thing (but) it feeds shareholder activism if people are seeing companies do this with success."

Ingersoll, a maker of heating and cooling systems for homes and businesses, has been urged by activist investor Nelson Peltz and his Trian Fund to consider breaking up the company. It has added Peltz to its board while defending its business model.

"The portfolio is very connected on some fundamental levels," Ingersoll CFO Steve Shawley told an investor conference last week.

VALUING THE PIECES

One challenge to measuring the success of the new stocks - Tyco Fire & Security, ADT, and the new, larger Pentair majority-owned by Tyco shareholders - lies in figuring out how to value the companies.

The remnant of Tyco, which will sell commercial fire and security products and hold the ADT brand outside North America, can be compared to Honeywell International (HON.N), United Technologies Corp (UTX.N), Ingersoll and Johnson Controls Inc (JCI.N), analysts say. Those names are more diversified than Tyco Fire and Security but participate in similar markets.

Pentair has easier, more direct comparisons. It resembles Flowserve Corp (FLS.N), Xylem Inc (XYL.N) - once part of ITT - Swiss-based Sulzer AG (SUN.S) and others, all part of a flow control market that has been called ripe for consolidation.

Flow control refers to companies that make valves and controls used in energy and other markets.

ADT, a provider of monitored security services with a growing business in home automation systems, may be tougher to figure out. The company, a dominant player in a fragmented field, is comparable to both cable and telecommunications rivals, as well as to divisions of some industrial companies.

Both ADT and Tyco analysts suggest the company can be measured in terms of monthly recurring revenue, a key metric for security services, or in terms of a multiple of operating earnings. Analysts caution that valuing the company in traditional price-to-earnings terms may be less meaningful because of complicated tax matters, a Tyco legacy.

Becker Capital Management, which owns around 550,000 Tyco shares, expects to hold all three of the new companies, said Becker analyst Mike McGarr, who said an improving housing market will allow ADT to focus on pricing and ways to limit customer turnover.

"It's more fun to follow a company that's in one line of business," McGarr said. "Conglomerates are hard to figure out."

(Editing by Patricia Kranz and Matthew Lewis)