Special Situation Investing

Tuesday, February 06, 2007

Tyco (TYC) Spinoff

I have posted about it before, but just a note that Tyco released it's results a few days ago, and announced that the breakup of the company should be happening in April. Tyco is a conglomerate and fallen angel, both of which make for a good spinoff. By splitting apart related businesses, ideally the businesses should prosper under intensified management scrutiny. Also, by splitting up, perhaps some of the bad-will left over from the previous CEO's corruption can finally be put to rest.

The company will be split into 3 new companies: 1) health care, 2) electronics and 3) engineered and safety products. Breen, the current CEO, will take over the engineering/safety business. This in itself is admirable as his division has the worst growth prospects. Based on interviews I have seen of him, I have a lot of respect for the man as he really seems focused on enhancing shareholder value. By splitting up he is robbing himself of power but for the benefit, hopefully, of shareholders.

I am not going to go out and recommend this stock or do a real analysis on it due to lack of time. I will tell you that a number of value investors including Chris Davis and Warren Buffet (albeit a relatively small percentage of his portfolio) hold the stock. I have also seen many arguments for why the sum of the parts will equal the higher $30's or low $40's (stock currently trades at $32.50) and they seem plausible. A decent article on the breakup can be found here.

From the article:

Bates sees the health unit eventually trading for $15 to $17 a share, or 17 to 19 times the earnings he projects.
Bates figures the electronics business is worth $12 to $14 a share, on a P/E of 16.5 to 19.
In all, the unit containing fire, security and other businesses should trade for $11 to $14 a share, Bates says, with a P/E of 15 to 17.

I own a position in Tyco from before the spinoff was even announced and before I started this blog but I never bothered to put it on my stock list. Personally, despite what the value guys are saying, I would be hesitant to throw new money at it. I just can't get over that it was selling for $25 this summer.


  • Great to see you updating the site so frequently.

    Thanks for the informative posts.

    By Anonymous Anonymous, at 6:15 PM  

Post a Comment

<< Home