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Acquisitions are a second priority for Tyco International (NYSE: TYC, BBB+/Baa1) behind increasing dealer accounts and growing its business units, particularly its leading ADT alarm network, a person familiar with the company told dealReporter.
Tyco has widely been cited as a bidder for GE (NYSE: GE, AA+/Aa2) subsidiary GE Security, which is reportedly up for sale for about USD 2bn.
GE has not confirmed whether it is selling the unit, however, and Tyco declined to comment on an actual bid for GE Security.
The diversified industrial conglomerate’s past purchases have been smaller bolt-on acquisitions focused on extending the firm’s technology or geographic reach, said the person familiar. This strategy, noted the person familiar, would not preclude them from doing a bigger deal if an opportunity arose.
The company’s recent cash hoarding is reason enough for some market participants to ponder what the diversified conglomerate is planning on doing with its cash.
As of 26 June, Tyco reported USD 1.779bn of cash and cash equivalents. Tyco’s USD 4.2bn debt is currently below its stated targeted level of between USD 4bn and USD 4.5bn, according to the person familiar. It has about USD 200m outstanding in commercial paper, which it is comfortable maintaining, the person familiar added.
The company, via subsidiary Tyco International Finance, also raised cash when it came to the bond market on 30 September with a USD 500m 5-year offering.
But the conglomerate does not intend to use the proceeds from its recent bond issue to immediately pay down debt. According to the person familiar, Tyco will not be paying any debt down until the debt is due. Its near term maturing bonds include USD 520m 6.75% bonds due February 2011 and USD 850m 6.38% bonds due October 2011.
”[Tyco] continue[s] to generate substantial free cash flow from their operating businesses,” said Ed Wiest, vice president and senior analyst at Moody’s.
The company has enough cash on its balance sheet to withstand even a few ratings knocks and still be investment grade if it were to formally bid for GE’s Security unit, according to one asset manager who follows both Tyco and GE.
Tyco’s USD 500m debt issue on 30 September did not move its ratings’ needle much, added Wiest, who left Tyco’s ratings unchanged after the offering. Tyco’s adjusted debt-to-EBITDA is 2.2x, which is fairly strong for a Baa1 rating, he said.
While Tyco’s previous acquisition spending this year has also not been large enough to warrant much of a change in ratings from Moody’s, Wiest said the agency accommodates some flexibility in investment grade names for acquisitions in the existing ratings.
He added that Tyco could face downward pressure if its cash flow generation deteriorates significantly and/or if acquisition activities result in significant increases in debt.
But Tyco remains committed to holding onto its investment grade rating. ”If we were to go out and do an acquisition, we would not put stress on the balance sheet or put our ratings at risk,” said the person familiar.
GE Security has a wider security division than Tyco’s presently since it includes key and lock management; access control; integrated security management; fiber, transmission and structured wiring; and sound and communications along with fire and safety. But it is widely expected to be sold in whole or in parts.
According to the person familiar, there are certain parts of GE Security that Tyco does not particularly favor.
Still, a bid from Tyco for GE Security, whether in whole or part, made sense to the asset manager and an equity analyst. The cornerstone of GE Security is the fire system assets it acquired from SPX Corporation, said the asset manager. ”It’s a high quality asset. That could fit well within the Tyco portfolio of security and safety products,” he said.
GE Security bought Edwards Systems Technology, a maker of fire alarm systems, from SPX in 2005.
An additional source of funding for any such Tyco acquisition could be a sale of its Electrical and Metals unit, added the asset manager. ”At this point, it looks like the bottom in the metals sector is over and spreads should get wider so it would be an opportune time to begin selling,” he said.
Tyco could receive about USD 1bn for its Electrical and Metals unit, the asset manager said. The company would not experience a leveraging event in buying GE Security even for the expected USD 2bn price tag of the whole unit, he said.
Tyco’s Electrical and Metals segment is still a decent business, but the unit has very volatile results, said another credit analyst.
Credit default swaps (CDS) on Tyco have shown some upward pressure lately. CDS in recent sessions widened to 72bps, said a trader.
Tyco’s bonds, however, have been performing well amid the tightening in the rest of the corporate bond market. According to the asset manager, Tyco’s USD 750m 8.5% bonds due 2019 traded in the beginning of October with an average spread of 210bps; the bonds were issued with a spread of 682bps last December.
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