France's Schneider Electric, the world's largest maker of voltage equipment, is considering a takeover offer for industrial conglomerate Tyco International Ltd., but the idea is at an early stage and no deal is imminent, Bloomberg reported.
Schneider is working with bankers to help it weigh up a potential purchase of Tyco, Bloomberg said on its website, citing people with knowledge of the matter that it did not identify.
Neither company commented and analysts said any deal this size would face significant obstacles, not least funding. Credit Suisse analysts called the deal very unlikely because it was outside Schneider's core strength in factory automation.
Shares of Tyco, parent of the ADT Worldwide security service, jumped 3.7 per cent on Monday to $48.91 (U.S.), their highest level since 2007. Schneider shares fell 3.7 per cent in Paris to €117 euros ($169).
The cost of buying Schneider five-year credit default swap (CDS) rose 20 basis points to 78, according to Markit, a market data provider. (A basis point is 1/100th of a percentage point.) It now costs €78,000 to insure €10-million euros of Schneider's debt against default. The five-year CDS peaked at over 100 basis points at one stage before retreating.
Schneider, which competes with Germany's Siemens AG and ABB of Switzerland, has made a series of small- to medium-sized acquisitions over the past year, many of them focused on emerging markets like India and Russia.
It bought Pelco, a maker of video security systems, in 2007, adding the business to its building automation segment.
Tyco's market capitalization is roughly $23-billion, including Monday's gains. Schneider has a market value of about $46-billion. One credit analyst said Schneider would need to issue equity since it could not borrow enough to pay for such a deal.
"We doubt that Tyco, wishing to remain independent, would go quietly, and a hostile bid would likely require a high premium and considerable cash," Gimme Credit director of research, Carol Levenson, said in a note to clients.
Besides security services, Tyco makes fire safety systems and industrial products such as valves and controls used in water and chemical systems.
Analyst Brian Langenberg of Langenberg & Co. called a possible merger with Schneider "a really good deal," estimating Tyco would sell for at least 10 times operating earnings, or roughly $65 a share.
If Schneider were to bid, it would need to offer a high enough price to discourage rivals such as Siemens, U.S. companies like Honeywell and United Technologies Corp., or a telecom or cable bidder.
"I don't think you sell for less than 65 bucks," Mr. Langenberg said. "They need to have their wallet out."
Analysts including Mr. Langenberg have said the recent strength of the euro could make U.S.-listed targets more attractive for potential bidders based in Europe. One euro buys $1.44, compared with about $1.33 at the start of the year and less than $1.20 a year ago.
Mr. Langenberg credits Tyco chief executive officer Ed Breen with saving the company's reputation, then refocusing it on its core businesses after the fraud conviction of former CEO Dennis Kozlowski, who is serving a prison sentence.
Last year, Tyco added to its security technology portfolio with the $1.9-billion purchase of Brink's Home Security, a maker of residential and commercial security systems.
Tyco has been reshaping its business since the 2007 spinoff of its electronics and health-care divisions into standalone companies, now called TE Connectivity Ltd. and Covidien PLC.
It has announced several small deals in areas like valves, while also selling off assets, including a majority stake in its electrical and metal products unit and its European waterworks business.
More diversified companies are reviewing portfolios to boost growth in a slow economic rebound. Sales of non-core assets could open the door for these newly created companies to be acquired, deal-makers said last week at the Reuters Global Mergers and Acquisitions Summit.