Covidien Spin Continues Breakup of Tyco Empire (Update 1)

Article updated to reflect Covidien and Tyco share performance.

NEW YORK (TheStreet) -- Tyco International (TYC) spinoff child Covidien (COV) will itself spin off its pharmaceuticals unit into a separate public company, the company said Thursday.

The spin is a continuation of a plan that management considered earlier in the year to realize full value of the pharma division, which boasts $2 billion in annual sales, according to Bloomberg reports, and is a further dismantling of the Tyco empire. After the spin, Covidien will retain its medical device and supplies divisions, which generate $9.6 billion in annual sales and hold top market shares.

Covidien, the healthcare division of Tyco International earned nearly a quarter of the international conglomerate's near $40 billion in annual sales before the company was broken up in 2007 after a series of losses and accounting violations. In 2007, Tyco's healthcare division was spun into a standalone Covidien, and its electronics division was spun into TE Connectivity (TEL).

In 2011, the former Tyco empire underwent a second wave of de-consolidation. This September, Tyco spun its $3 billion North American ADT residential security business and $4 billion flow control division to create two new publicly traded companies, in addition to a remaining Tyco International consisting of a $10 billion commercial fire and security division.

Still to be seen is what value Tyco or Covidien can extract from shareholder spins of units that once were a part of the once giant industrial and healthcare company. Since being IPO'ed in 2007, Covidien and TE Connectivity shares have fallen, even as annual revenue and profits at both companies are up.

"This transaction, if completed, would give both businesses greater flexibility to focus on and pursue their respective growth strategies, while potentially providing shareholders with greater value over the longer term," said Covidien Chief Executive José E. Almeida in the statement.

The spin is expected to be completed within 18 months in a tax-free distribution to shareholders. Covidien shares rallied over 3.5% on the news of the split to 43.67 in afternoon trading.

With Thursday's Covidien spin of its pharmaceuticals, there will be five independent publicly traded children from what was formerly Tyco International.

The spin will allow its pharmaceuticals unit to better handle new pain management drug research and development, while also diversifying its sales. Currently, Covidien's pharmaceuticals business generates just a third of its sales internationally, while its medical devices unit generates nearly half of sales abroad.

It's a move that closely matches Abbott Laboratories (ABT) October spin into two publicly traded companies; one focusing on medical products and the other on pharmaceuticals research and development.

In June, Covidien considered selling its pharmaceuticals for up to $4 billion, according to Bloomberg reports, only to see deal talks falter.

"We've evaluated whether to separate these businesses for several years, due to the major differences between the medical products and pharmaceutical industries. We believe that now is the right time to do so because we have significantly improved the operations, performance and pipeline of our pharmaceuticals business," said Chief Executive Almeida in a Thursday statement.

-- Written by Antoine Gara in New York