Strong Performance After Spin-Off
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On Oct. 1, 2012, defense and security conglomerate Tyco International (NYSE: TYC) completed its spin-off of residential security firm ADT Corp. (NYSE: ADT). The split created a company that boasted $3.25 billion in annual revenues and an EBITDA of $1.36 billion. ADT is by far the largest home security and automation business in the United States and enjoys a substantial presence in Canada as well.
Following the split, both Tyco and ADT appear to be well-positioned for future value creation as standalone companies or takeover targets. Accordingly, they have both exhibited market-beating stock-price movements. Based on the raw numbers, ADT’s performance has been slightly more encouraging for its shareholders.
About Tyco and ADT
Schaffhausen, Switzerland-based Tyco International is one of the world’s leading manufacturers and distributors of prevention, security and monitoring systems for homes, businesses and individuals. The company markets several distinct lines of products and operates several integrated divisions. Its principal areas of operation include fire prevention and safety, intruder prevention and response, poison-gas detection and prevention, and access control and monitoring.
Like its U.S.-based spin-off, Tyco operates monitoring centers that can mount appropriate responses to intruder and fire alarms. It also retains a support staff of technicians and managers to engage in troubleshooting activities and assess threats. Popular Tyco-owned brands include SimplexGrinnell, Scott and SensorMatic. Tyco employs about 70,000 people in Europe and the Americas and earned $1.3 billion on revenues of $10.5 billion in 2012.
Boca Raton, Florida-based ADT is a major U.S. home-security firm that also counts a significant number of businesses as customers. The company’s signature product is an intrusion-monitoring system that notifies a manned control center after an unauthorized breach. However, it also markets and distributes detection systems for carbon monoxide, water damage, smoke and other environmental hazards.
In recent years, ADT has also made a serious foray into the cutting-edge “home automation” space and appears poised to reinvent itself as a focal point for a variety of home technology systems. ADT employs about 16,000 people in North America.
How the Deal Was Structured
In early October of 2012, ADT split from Tyco and began trading publicly under its own ticker symbol. The stock began trading at $36 per share. Under the terms of the deal, Tyco shareholders of record on Sept. 28, 2012, received one share of ADT for every two shares of Tyco that they owned.
Tyco shareholders also simultaneously received about one share of flow control company Pentair (NYSE: PNR) for every four Tyco shares that they owned. In a separate but related deal, Pentair had agreed to acquire Tyco’s spun-off flow control unit in tandem with the ADT transaction. As a result, Tyco shareholders who participated in the ADT spin-off were technically parties to two separate deals.
As a result of this transaction, Tyco’s share price dropped from about $56.25 at the close of trading on Sept. 28 to about $28.50 at the close of trading on Oct. 1.
Since the spin-off became official, the value of ADT’s stock has increased from $36 per share to about $46.40 per share. As of mid-February, this represents a five-month return of approximately 29%. Relative to the S&P 500′s run-up of about 5% during the same period, this represents a premium of about 24%. Since it began trading publicly, ADT’s stock price has ranged between a post-offering closing low of $36.35 and a closing high of $48.15.
Tyco has also performed fairly well. Relative to its post-split closing price of $28.50 per share, the stock has appreciated by about 12.5% and currently sits near $32 per share. Relative to the S&P 500′s performance during the applicable period, this represents a premium of about 7.5%.
Both Tyco and ADT appear to be positioned to capture growing shares of their respective markets. In particular, ADT has several impressive strategic advantages over its peers. For starters, its recurring revenue figure exceeds 90%. In other words, more than $9 out of every $10 that ADT earns comes from repeat customers.
In the highly fragmented market for residential and business security services, this is downright impressive. In fact, ADT controls more than a quarter of the booming U.S. security market. While the industry’s relatively low barriers to entry virtually guarantee that ADT will always face some competition, it appears likely that the company will use its momentum to increase its market share even further. Likewise, its targeted investments in home-automation technology may open another avenue for growth.
Active money managers like privately-held Corvex Management LLC have taken stakes in the company. This could presage takeover attempts or merger offers.
Meanwhile, Tyco’s drive to spin off its non-core assets has increased its attractiveness as a takeover target and fueled speculation that such a deal might occur within the next few years.
In sum, Tyco’s ADT spin-off has paid dividends for shareholders of both companies. Additionally, it appears that each company has attracted the interest of activist investors or larger industry peers. As a result, there may be additional arbitrage and value-creation opportunities within the security space before long.
mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Pentair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!