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Tyco International

After announcing a second phase of its epic dismantling, Tyco International ( TYC) is now set to both be a value proposition for shareholders as it spins its ADT and flow control businesses and an M&A target, potentially motivating some hedge funds to jump into shares of the industrial giant.

On Sept. 21, Tyco announced it would spin its residential security business called ADT and its flow control business into separate publicly traded companies, adding to the de-consolidation of Tyco from an industrial conglomerate with a near $100 billion market cap. In 2007, the company spun its Covidien ( COV) healthcare business and its TE Connectivity ( TEL) business in two shareholder spins. If the September spins and one announced by Covidien in December were to pass, the empire could be whittled down to six child companies.

Shareholders in an spin or an exchange offer may benefit from the growth of a leaner Tyco International and the growth of child entities, while the separated businesses may also become easier to swallow as M&A targets, potentially adding a catalyst for shares.

After ABB ( ABB) announced a $3.4 billion deal to buy electrical equipment manufacturer Thomas & Betts ( TNB), Morgan Stanley analyst Nigel Coe cited a post-split as the "most likely" takeover target, just as the engineering industry enters in the biggest M&A cycle in a decade.

In filings released this week, hedge fund Westfield Capital Management unveiled an over 4 million share position in Tyco International, or a near $200 million stake. Meanwhile, Maverick Capital added over 3 million shares to its Tyco holding, more than doubling its stake to nearly $300 million. Westfield Capital Management seems to have a fancy for companies that need or are considering de-consolidation plans. The company has top 10 positions in Valero ( VLO) and Tesoro ( TSO), both which announced 2011 spins. The fund also has stakes in Oracle ( ORCL), United Technologies ( UTX) and Vertex Pharmaceuticals ( VRTX), which all tried their hand at the deals game. In the most recent quarter, Westfield built the bulk of its stake after paring a June position of 1.6 million shares almost completely, signaling a bet on strong value in the spin or possible M&A.

Maverick Capital Management's share buying also reflected a re-ignition of interest in Tyco International as a key investment. The fund held 6.3 million shares as of the quarter ended in Sept. 2010, but it liquidated that stake by December of that year. From June 2011 through September, Maverick returned to Tyco, buying up over 2.8 million shares. With its fourth quarter buying, Tyco International is now Maverick's fourth largest holding, only surpassed by Apple ( AAPL), Marvell ( MRVL) and JPMorgan ( JPM).

James Dinan-run York Capital Management is making a similar, albeit smaller Tyco play as the company proceeds with spin plans that may generate strategic interest. Once a holder of over 5 million Tyco International shares, York Capital Management slashed its stake from June through September, but fourth quarter purchases signal that the company is a value play.

Even if a takeout emerges, the company's core business is showing signs of improvement. "Tyco's fundamental momentum and operational margin improvement continue to underscore that nobody in the company appears to be distracted by its upcoming split into three separate legal entities," wrote William Blair analyst Nicholas Heymann in a Jan. 31 note. Heymann gives Tyco International shares an "outperform" rating and a price target of $57.

Tyco International is expected to earn $18.8 billion in revenue and $1.7 billion in profit in 2012, with those figures growing to $18.9 billion and $2 billion respectively in 2013, according to consensus estimates of analysts polled by Bloomberg. Those analysts give Tyco International a price target of $55.47 a share.

After an over 10% fourth quarter rally on the company's spin plans, Tyco ended 2011 up over 12%. With a stronger industrial and business outlook for 2012, the company's shares have continued to rally in 2012, posting an over 4% gain to $48.65 year-to-date.

For more on Tyco shares, see 9 ex-dividend stocks with a "buy" rating and 3 stocks riding a 2012 M&A wave.

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