Like Father Like Son? Covidien Pursues Spinoff Of Its Own

by: Spin Doctor - January 5th, 2012  

Tyco (TYC), a champion spinner with a set of twins of its own in the pipeline, is about to become a grandfather. Covidien (COV), a 2007 spinoff from Tyco, recently announced plansto spin off its pharmaceuticals business into a

Covidien corporate logo

standalone company. Five is truly a wonderful age to become a parent. Many had predicted some type of transaction related to the pharma group as the company has been more focused on its larger and higher growth medical devices and supplies businesses.

In addition to being a top 10 generic drug maker and a leading player in the bulk acetaminophen market, the pharma group has numerous other products in its portfolio such as opoids and contrast media. As impressive as that sounds, the group is still relatively small within Covidien, representing only ~17% of total sales ($2b) and an even smaller piece of the operating income.

Current President and CEO Jose Almeida provided plenty of reasons for the split including greater flexibility for both companies, differing operating characteristics and a better opportunity for the pharma unit to grow. Apparently, it was also the perfect time to spin out the division “because we have significantly improved [its] operations, performance and pipeline.” The truth is that Covidien had tried to sell the unit, but was unable to find a buyer. While there is opportunity to grow in the pain-management segment and with new drugs, the ‘growth’ argument is a bit suspect due to the fact that even after all of the ‘improvements’ to the business, according to a recent investor presentation, the group managed a whopping 0% CAGR from ’07-’11 (vs. 10+% for the medical devices unit). The pharma unit also has significantly lower margins than the medical devices unit and is more US focused, with 2/3 of its sales coming domestically. It is also worth mentioning that the pharma group has been without a permanent leader for some time now.

It sounds to me that the company has found a way to dump a business it wasn’t particularly interested in anymore. Analysts don’t seem too fond of it either, referring to it as a ‘drag’ and other downer terms. That isn’t bad from my perspective as strong negative sentiment can often present opportunities, so this situation bears watching. The move is expected to be tax free, but patience is required here as the transaction could take up to 18 months. I wouldn’t be surprised if the company continues to pursue a sale, but either way, we will keep you updated as more information is made available.

Disclosure: Author holds no position in any stock mentioned.

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Tyco Does It Again

by: Spin Doctor - September 19th, 2011   1 Comment

In stark contrast to the American people’s  growing heft, American conglomerates appear to be on a steady diet, often slimming down via spinoffs. Break up expert and Swiss-conglomerate Tyco International (TYC) is the latest fad follower as the company announced plans to split itself into three separate companies. The new businesses will be:

  • ADT North America (residential security): Provides security and fire alarm systems. The unit will have revenues of ~$3 billion and ~16,000 employees
  • Flow control products and services: Designs, sells and services highly engineered valves and controls for the energy markets, general process industries, mining and water markets. The unit will have revenues of ~$4 billion and ~15,000 employees.
  • Commercial Fire and Security: Designs, manufactures, sells, installs and services security, fire detection and fire suppression systems. The company will have revenues of ~$10 billion and ~69,000 employees.

According to current CEO and Chairman Ed Breen, each company will “have industry-leading positions in large and fragmented industries and…have greater flexibility to pursue their own focused strategies.” As is always the case with these breakups, several analysts have predicted that the new, more easily digestible companies are likely to become takeover targets.

Mr. Breen (who took over the reigns from epic partier and currently imprisoned Dennis Kozlowsky) will have roles at all three companies, but none appear to be direct management responsibilities. Instead, the current president of each segment will become CEO of their respective companies. Additionally, only the ADT business is expected to be incorporated in the US.

Tyco has been no stranger to spinoffs under Mr. Breen’s leadership as the company spun out two entities (Covidian [COV] and TE Connectivity) in 2007. Tyco also holds a soft spot in our hearts at StockSpinoffs because the company was the subject of our inaugural post -  that spin was never consummated though as the company sold off the division instead.

The spins are expected to occur in about a year and will be subject to a shareholder vote. A lot can change in the meantime and we will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.

 

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