Tyco Split Could Find Bondholder Resistance

NEW YORK (TheStreet) -- Bondholders may say 'not so fast' to Tyco International's (TYC) plans to split into three companies.

The split of Tyco into three units could be held up if debt owners organize in opposition, just as they did to the company's first breakup plan in 2007.

Tyco's spinoff of its $3 billion North American ADT residential security business and $4 billion flow control division will create two new publicly traded companies, in addition to a remaining Tyco International consisting of its $10 billion commercial fire and security division.

Monday's decision to split one company into a triumvirate is similar to 2007 plans by CEO Edward D. Breen to spin off Tyco's healthcare division that earned $10 billion in annual revenue and its electronics divisions that earned $12.8 billion in revenue. The two new companies are now called Covidien Ltd. (COV) and TE Connectivity Inc. (TEL).

As in 2007, the key question will be whether shareholders and debt holders like the details of the plan.

Tyco's stock has rallied 3.1 percent since the announcement because company management and analysts believe shares of the conglomerate will be more valuable when channeled into three smaller companies with a focused expertise.

In a statement when the deal was announced, CEO Breen said that, "the new standalone companies will have greater flexibility to pursue their own focused strategies for growth." Independently, each company will have acquisition and growth strategies, according to the company's press release.

For share owners, the spinoff has great upside.

The plan is for current Tyco shareholders to own 100 percent of the three new companies and benefit from a more focused management and operating structure. On an analyst call about the deal, Breen said past 2007 spinoffs worked because each company, "has significantly outperform[ed] the market since their announced separation."

The smaller independent companies may also be takeover targets, wrote Jeff Sprague an analyst with Vertical Research Partners in a note written after Tyco's announcement. Sprague said that AT&T Inc. (T), Comcast Corp. (CMCSA) and Verizon Communications (VZ) might look to buy the independent ADT business, General Electric Co. (GE) or United Technologies Corp. (UTX) might be interested in the flow control division and Schneider Electric, UTX or Siemens AG (SI) could even look to buy the remaining Tyco International fire and security operations.

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