Parent: Key Dates: Ratio: Target Price & Risk (Post Spinoff) TYC (ex-spinoff) ADT Target Price $26.56 $44.67 Rating Tyco International Ltd. (TYC) Commercial Security Equipment The ADT Corp. (ADT) Residential Security Equipment Tyco Flow Control Intl Ltd. (to be merged with Pentair Limited) Industrial Machinery / Equipment Record Date: TBA Spinoff Date: September 28, 2012 0.5 ADT shares for 1 TYC share; 0.24 Tyco Flow Control shares for 1 TYC share Buy +24.9% Hold +5.4% Share price $53.00 (TYC - Pre Spinoff) (M 31 l i ) Technical split price $21.26 $42.40 Horizon (months) 12 12 Risk Low Low TSR Deal Briefing Note: In Our View Parent: Tyco International Ltd +24.9% (post Spinoff) Mkt Cap: c.$9,839m Miscellaneous - TYC (Pre Spinoff) Return 5d/YTD/1Y (%) 2.3/10.8/11.6 Volatility 30d/90d/200d (%) 25.6/22.6/24.4 High/Low 1Y ($) 57.75 / 37.39 Avg d turn 30d/90d ($ m) 137.9/155.7 Market Cap ($ m) 24,532 Net IB Debt ($ m) 3,054 Enterprise Value ($ m) 27,709 Spinoff Announcement Date September 13, 2011 Majority shareholder Listing Exchange Ticker/Bloomberg Vanguard Group, Inc NYSE TYC US Equity O/S shares m 463 Free Float (%) 99.7 The ADT Corp. +5.4% Mkt Cap: c.$9,798m July 20, 2012 Three Separate Entities To Ensure Higher Value For Shareholders Through Operational Efficiencies And Potential M&A/Takeover Opportunities; Tyco Flow Merger With Pentair Re-invigorate Investor Interest What s Interesting? (TYC - Buy) What s Interesting? (ADT - Hold) Pure play on fire & security with leading market positions Dominant market share of ~25% way ahead of competitors Portfolio of well-known brands Underpenetrated security markets in North America to create Solid market position in developed markets with expanding additional growth opportunities emerging market presence via acquisitions Growing recurring customer base with increasing shift towards Positive portfolio move towards higher margin business, leading to ADT Pulse to result in higher ARPU expanding recurring revenue and improved operating metrics Increase in customer tenure and control on customer attrition What s a Risk? (TYC) What s a Risk? (ADT) Weak economic environment Slowdown in the US housing market may adversely impact the Highly competitive market demand for security products Unfavorable foreign exchange fluctuation Higher customer disconnect rate to lower recurring revenues Competitive pricing pressure What s Interesting? (Tyco Flow + Pentair merger) (Not rated) Complementary capabilities provides strong strategic fit as well as expanded geographical reach with high exposure to growing markets Targeted cost synergies of $90m by FY13E and $200m by FY15E Strong cash flow generation, backed by operational efficiencies Peer Comparison - Tyco International Ltd. Company Mkt Cap EV EV/EBITDA (x) FY11 FY12E FY13E United Technologies Corp 69,102 72,790 7.9x 7.7x 7.4x Ingersoll-Rand plc 12,387 17,193 9.3x 9.1x 8.4x Stanley Black & Decker 11,295 14,109 9.4x 8.5x 8.1x Kaba Holding 1,386 1,460 10.7x 9.8x 9.5x Peer Group Average 9.3x 8.8x 8.4x What s a Risk? (Tyco Flow + Pentair merger) Failure to meet targeted cost synergies Relatively lower control of PNR s shareholders on New Pentair s decisions post demerger Peer Comparison - The ADT Corp. Performance - TYC (Pre Spinoff) Sources: The Spinoff Report (TSR) Research, Company filings, Bloomberg Strictly for clients of TSR* Contact: Jim Osman, jimmyosman@spinoffreport.com, London: + 44 (0)845 459 7103; New York: +1 (212) 714 7046 Company Mkt Cap $60 $50 $40 $30 $20 EV EV/EBITDA (x) FY11 FY12E FY13E Ascent Capital Group 716 1,439 9.4x 6.5x 6.3x DIRECTV 32,062 45,262 6.7x 6.5x 6.5x Comcast Corporation 87,063 139,144 8.0x 7.4x 7.1x Charter Comm. 7,526 20,324 7.8x 7.5x 7.1x Time Warner Cable 26,775 51,293 7.2x 6.8x 6.4x AT&T, Inc. 208,019 271,574 8.3x 7.0x 6.4x Peer Group Average 7.9x 6.9x 6.6x Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 TYC (LHS) Volume (RHS) SPX (rebased to TYC Prices) 40m 30m 20m 10m 0m
Parent: Jim Osman Nitin Balwani Tyco International Ltd. (TYC) Commercial Security Equipment The ADT Corp. (ADT) Residential Security Equipment Tyco Flow Control Intl Ltd. (to be merged with Pentair Limited) Industrial Machinery / Equipment jimmyosman@spinoffreport.com +1 (212) 714 7046 nitinbalwani@spinoffreport.com +1 (212) 714 7046 July 20, 2012 Target Price & Risk - TYC (post Spinoff) / ADT TYC (ex-spinoff) ADT Target price $26.56 $44.67 Rating Buy Hold Technical split price $21.26 $42.40 Last night s price (July 18 close) $53.00 (TYC - Pre Spinoff) Horizon (months) 12 12 Risk Low Low Performance & EV - TYC (Pre Spinoff) $60 $50 $40 $30 $20 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Return 5d/YTD/1Y (%) 2.3/10.8/11.6 Volatility 30d/90d/200d (%) 25.6/22.6/24.4 High/Low 1Y ($) 57.75 / 37.39 Avg d turn 30d/90d ($ m) 137.9/155.7 Market Cap ($ m) 24,532 Net IB Debt ($ m) 3,054 Enterprise value ($ m) 27,709 Miscellaneous - TYC (Pre Spinoff) Spinoff Announcement Date September 13, 2011 Merger Announcement Date March 28, 2012 Majority shareholder Listing Exchange Ticker/Bloomberg Vanguard Group, Inc NYSE TYC US Equity O/S shares m 463 Div Yield FY11 in% 1.1 Free float in % 99.7 Next News flow TYC (LHS) Volume (RHS) SPX (rebased to TYC Prices) 40m 30m 20m 10m 0m July 31, 2012-3QFY12 results Demerger Paves Way for Operational Efficiencies; Open Doors for Potential Buyers / Command Control Premium; M&A Thesis Underscored By Merger of Flow Control Business With Pentair The split of the global industrial company, Tyco International Limited (TYC), will create three independent entities - first, a pure play on the fire & commercial security (Parent); second, a focused residential and small business security company (ADT - Spinoff); and third, the flow control business (Tyco Flow Control - Spinoff) that will merge with Pentair Limited (PNR) to form New Pentair. We believe the Spinoff will maximize the ability of each independent business to leverage on their current strong operating fundamentals. It will also allow the potential acquisition of the business units more feasible, thereby resulting in the expansion of multiples due to M&A valuations. Additionally, the announcement of the merger of Tyco Flow Control with PNR in March 2012 has sparked interest in TYC and increased the possibility of a potential M&A scenario in the remaining businesses post demerger. However, TYC has already witnessed a share appreciation of 31.6% due to operational efficiencies, takeover speculation and targeted merger synergies following the breakup announcement and the subsequent merger announcement. We have assigned a Buy rating with a one-year target price of $59.43 on TYC (Pre Spinoff), which implies an upside potential of 12.1% from the current share price of $53.00. Parent - TYC (ex-spinoff): Leading positions in the global fire & security market Tyco International Limited (TYC - Post Spinoff) occupies leading market positions (10% market share in the $40bn installation sector; 15% market share in the $30bn services sector and a 9% market share in the $30bn products sector). In the $100bn global fire & security market TYC has a diverse portfolio of well-known brands, which we believe will capitalize on given attractive macro-economic trends, including a recovery in the global nonresidential construction market. TYC has a presence across the entire lifecycle of the fire & security industry, from product design and installation to ongoing maintenance and upgrades through three primary segments, namely, NA Installation & Services (39.2% to FY11 revenue), ROW Installation & Services (43.7%) and Global Products (17.1%). Additionally, the move in the company s portfolio towards a high-margin service business (increased to 45.9% of the revenue in 2QFY11 from 39.3% in 1QFY11) since 2QFY11 has resulted in a large and stable base of recurring service revenue, which in turn has driven the operating performance as well as supported strong cash flows. Based on the cost-saving measures, a shift in the business mix and rising order intake, TYC witnessed an increase in the operating margin to 8.3% in FY11 from 6.4% in FY10, which we believe will drive the adjusted EBIT at a CAGR of 5.7% during FY12E-14E. However, the depression in the global economy, competitive pricing pressure and negative forex impact (56% of its revenue from outside of North America) remain key challenges for TYC. We assign a Buy rating to TYC (ex-spinoff) with a one-year target price of $26.56 per share, implying an upside potential of 24.9% from the technical split price of $21.26 per share. Continued > See Next Page For: 2. Spinoff ADT: Dominant market share in US residential security market 3. Spinoff Tyco Flow Control: Synergies with PNR Key figures and ratios (in $ m) TYC (ex-spinoff) ADT Pro Forma (Y/E Sep 30) FY11 FY12E FY13E FY11 FY12E FY13E Revenue 10,609 10,927 11,310 3,110 3,255 3,412 Revenue growth (%) -4.1% 3.0% 3.5% 20.0% 4.7% 4.8% Adjusted EBITDA 1,299 1,606 1,700 1,534 1,613 1,689 Margin (%) 10.5% 12.2% 14.7% 49.3% 49.6% 49.5% Adjusted EBIT 880 1,165 1,240 721 766 809 Margin (%) 8.3% 10.7% 11.0% 23.2% 23.6% 23.7% EV/EBITDA 8.6x 6.9x 6.6x 7.8x 7.5x 7.1x
Continued > Spinoffs: ADT and Flow Control Spinoff ADT Dominant market position in the North American residential security market The ADT Corporation (ADT) enjoys a solid market share of 25% in the $12.5bn residential and small business security market in North America, far above other major local players like Protection One, Monitronics and Vivint with 4%, 3% and 2% market share respectively. Furthermore ADT, with a customer base of 6.4m that is seven times its nearest competitor, is well positioned to leverage on any additional growth potential with economic recovery. ADT aims to increase its penetration in the underpenetrated monitored security services market that covers 19% of US households compared to 60% to 85% penetration rate for other home services like video and internet with development of enhanced offerings that will attract new customers. ADT s expanding customer base with the addition of 1,088 customers in FY11 compared to 1,025 customers in FY10 as well as a shift in customer base towards ADT Pulse (increase in adoption rates from 15.5% in 2QFY11 to 35.0% in 2QFY12) from traditional security monitoring resulting in growing ARPU (increased by 3.2% and 3.5% y-o-y in FY11 and 1HFY12, respectively). Hence, ARPU growth, higher customer retention coupled with highlyefficient operating model drives strong cash flows (free cash flow of $537m in FY11 vs. $269m in FY10). A fall in the housing market as well as a high customer attrition rate poses a potential risk to the valuation of the company. We assign a Hold rating to ADT with a one-year target price of $44.67 per share, which implies an upside potential of 5.4% from the technical split price of $42.40 per share. Spinoff - Tyco Flow Control.. Complementary capabilities provide a strong strategic fit with PNR Tyco Flow Control following its Spinoff from TYC will merge with Pentair Limited (PNR) in an accretive all-stock; tax-free transaction valued at $4.9bn, with Tyco Flow shareholders owning 52.5% of the combined company, New Pentair (to retain the name of existing Pentair Limited). TYC management expects the transaction to create immediate value for TYC shareholders, with day-one synergies to add more than $1bn in value to the new combined entity and another $1.4bn from additional synergies to be achieved over the next few years. We believe that the merger will create a global leader in flow, filtration and equipment solutions with an increased exposure (~25%) to high-growth markets while augmented penetration & systems content will enable New Pentair to leverage service footprint to grow aftermarket & recurring revenue. Managements of both PNR and TYC expect New Pentair to generate a revenue of $7.7bn in FY12E, with an annual revenue growth of 5% to 7% for New Pentair between FY12E and FY15E on account of potential revenue synergies, including cross-selling of channels, verticals, products and services. Further, New Pentair is expected to achieve $90m of cost synergies in FY13 and $200m by FY15. The management also expects the deal to be highly accretive to the earnings by adding $0.40 to FY13E EPS with the combined EPS expected to be greater than $5 per share by FY15E. (Not rated due to its merger with Pentair Limited post Spin)
Table of Contents Part A - Fundamentals & Valuations Parent & Spinoff Entities 4 Price Charts / Peer Groups - TYC (Pre Spinoff) 7 Spinoff Summary 9 Merger Summary 15 Snippets - TSR US Corporate Spinoff Study 19 Alternative Valuation Scenarios 20 Bull Case / Base Case / Bear Case Investment Thesis - Tyco Intl Ltd (TYC) 21 Risks to Valuation - TYC 24 Valuation Summary - TYC 25 Investment Thesis - The ADT Corp (ADT) 27 Risks to Valuation - ADT 31 Valuation Summary - ADT 33 Merger Synergies -Tyco Flow Control + Pentair 35 Risks to Merger - Tyco Flow + Pentair 39 Technical Split Prices 40 Post Spinoff Listing Prices Part B - Technicals Technical Shareholdings 41 Index Movements Buyers / Sellers Part C - Insiders Insiders Overview 45-61 Management Teams, Changes, Movements Insider Holdings / Buying Activity Stock Ownership Compensation Structure Stock Options (Strike Dates, Maturity Schedule, Bonus Dates ) 3
Part A - Parent & Spinoff Entities To discuss the remaining 55 pages of our research or arrange an analyst call ahead of next week Q3 results and equally the Spinoff, please contact: Jonathan Morgan, Analyst jonathanmorgan@spinoffreport.com or directly on +1 212 714 7046 Spinoff Contribution For FY11, ADT and Tyco Flow (to be merged with Pentair post demerger) contributed 18% and 21% to the total pro-forma revenue of TYC (Pre Spinoff). ADT is a high-margin business that contributed 37% to the total adjusted pro-forma operating profit of TYC (Pre Spinoff) in FY11, whereas Tyco Flow is a low-margin business that contributed only 18% to the total adjusted pro-forma EBIT. Spinoff contribution to total revenue 21% 18% Spinoff contribution to total adjusted EBIT 18% 37% 45% 61% TYC (ex-spinoff) ADT Tyco Flow TYC (ex-spinoff) ADT Tyco Flow Source: The Spinoff Report (TSR) Research, Company filings Spinoff Transaction Structure Pre Spinoff Structure Fire Protection Security Solutions NA Commercial Security International Security Operations Security Products NA Residential & Small Business Flow Control Source: The Spinoff Report (TSR) Research, Company filings Post Spinoff Structure Tyco Intl Ltd (ex-spinoff) Commercial Fire & Security The ADT Corporation ADT North America Residential Tyco Flow Control Intl Ltd Flow Control (After the Spinoff Tyco Flow will merge with Pentair Inc) Spinoff entities
*Disclaimer This report is based on information available to the public; no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy or sell securities. All expressions of opinion reflect judgment at this date and are subject to change. Any recommendations are purely for professional investors only. If you are not a professional investor, please respectfully delete and / or safely dispose of this report. The Spinoff Report (TSR) and others associated with it may have positions in securities of companies mentioned. Reproduction of this report is strictly prohibited. 2012, The Spinoff Report (TSR). The Spinoff Report Ltd is registered in England & Wales. Company No. 6775372 and is authorized and regulated by the Financial Services Authority, No. 535037. Valuation model Sum-of-the-parts (SOTP), Precedent Transactions, and Relative Valuation Sources The Spinoff Report Research Team, Annual Reports, Quarterly Reports, Form 10, 10k, Presentations, Transcripts, Bloomberg, Thomson, Factiva Recommendations Recommendations Return Absolute Buy TP/SP 1 30% Buy 30% > TP/SP 1 10% Hold 10% > TP/SP 1 5% Sell 5% > TP/SP 1-5% Absolute Sell TP/SP 1 < -5% Recommendations are based on the target price (TP) relative to the current share price (SP). However, short-term risks or potentials may result in other term) (short recommendations Report Date Recommendation Target Price Buy TYC (ex-spinoff) $26.56 TYC (ex-spinoff) Initial Report July 20, 2012 Hold ADT $44.67 ADT Risk Risk Volatility High σ 80% Medium 80% > σ 40% Low σ < 40% The (equity) risk of a company is comprised of operating and financial risk. This risk is reflected in the volatility of the company s shares of stock. The Spinoff Report quantifies company risk through an average of (annualized) volatility over 30 and 200 days (σ). An investment recommendation should be considered along with risk and personal risk tolerance/preference. Updates on company analysis The Spinoff Report plans to release updates on the company analysis when; News on the company or industry that move price target is released Price target achieved Coverage of Spinoff for two quarters/earnings updates Share ownership The Spinoff Report (TSR) management and analysts own 0 shares in Tyco International Ltd (TYC) Contact details and other information The Spinoff Report Website: Email Enquiries for TSR US Spinoffs: www.spinoffreport.com research@spinoffreport.com