Tyco to purchase Sensormatic

ELECTRONICS: The US-based burglar alarm specialist is buying the developer of security tags, used for merchandise to prevent shoplifting, for US$2.3 billion in stock


Sun, Aug 05, 2001 - Page 11

Tyco International Ltd, whose ADT unit is the biggest maker of burglar alarms, agreed to buy Sensormatic Electronics Corp for US$2.3 billion, adding electronic-security tags used by retailers.

Tyco will exchange stock valued at US$24 for each Sensormatic share, a 61 percent premium over yesterday's price. Tyco said it also will assume US$116 million in debt. Sensormatic invented the security tags commonly attached to merchandise by supermarkets and retailers, including Wal-Mart Stores Inc, to stop shoplifting.

Chief Executive Dennis Kozlowski, who has spent more than US$55 billion on acquisitions in the past four years, follows a strategy of buying companies to expand product lines and then improving performance in part by consolidating operations and slashing costs. Tyco expects to cut US$160 million in costs at Sensormatic, most of that in the first year, Kozlowski said.

"It's a typical Tyco acquisition," said Brian James, an analyst with Loomis Sayles & Co in Boston, which owns Tyco shares. "There will be lots of cost-savings with consolidating some plants and distribution." The purchase is expected to add "at least" US$0.03 a share to profit in the first year, said Tyco spokeswoman Maryanne Kane.

Sensormatic, based in Boca Raton, Florida, had US$1.1 billion in sales in its fiscal year ended June 30. About 55 percent of sales were in the US, and the rest were mainly in Europe.

Shares of Tyco, based in Bermuda and run from Exeter, New Hampshire, rose US$0.51 to US$53.29. The shares have climbed more than five-fold in the five years ended in July, while the Standard & Poor's 500 index has risen 89 percent.

Sensormatic rose US$8.18 to US$23.12 on Friday. The stock plunged 31 percent to US$13 on April 10 when Sensormatic said fiscal third-quarter earnings were below estimates because customers delayed orders until the fourth quarter. Sensormatic said yesterday that fourth-quarter net income fell to US$11.1 million, or US$0.10 a share, from US$29.4 million, or US$0.34. Sales dropped 8.8 percent to US$288.6 million.

"You can't judge the long-term value of a company on results posted in a short-term challenging economic environment," said Marcy Yeamans, an analyst with Banc One Investment Advisors, which owns Tyco shares.

In 1998, Sensormatic was charged by the US Securities and Exchange Commission with fraudulently booking revenue. It settled the charges by paying US$140,000 in fines without admitting guilt.

The company's chief operating officer and chief financial officer resigned, and the case helped mold new SEC guidelines in 1999 for how companies are allowed to recognize revenue.

In the recent quarter, Sensormatic adjusted how it accounts for revenue using the new SEC rules and restated sales for previous periods. Under the revised accounting, the company's stockholder's equity, or net worth, was about US$955 million.

On a conference call, Tyco CFO Mark Swartz said the company is satisfied with Sensormatic's books.

"We've talked to their auditors," Swartz said. "We're very comfortable." Sales of Sensormatic's products, which also include access and surveillance systems used in airports, will be bolstered by ADT's 5,500-member sales force, bigger than Sensormatic's 500, Kozlowski said on a conference call.

"The price looks reasonable given Sensormatic's high gross margins," said Salomon Smith Barney Inc analyst Jeff Sprague, who rates Tyco a "buy." There are "significant growth and cost reduction opportunities as infrastructure is folded into ADT." Gross margin, or sales minus the cost of goods sold divided by sales, are about 55 percent for Sensormatic compared with about 38 percent for Tyco's security unit, Sprague estimated.

Last month, Tyco completed a US$1 billion purchase of Cambridge Protection Industries LLC, adding the SecurityLink brand. More than 20 percent of Sensormatic's business is so-called "recurring" revenue or sales of services.

Sensormatic, which is supplying security equipment to the 2001 Olympic Games in Salt Lake City, has about 5,800 employees.

Tyco's security and fire business has about 85,000. It's too early to determine how many jobs will be cut, Kane said.

Tyco's line of security products and services has evolved from the familiar ADT keypad security system found in homes. The company sells closed-circuit TV security in offices, warehouses and stores, security training for government workers, personal-duress gadgets, and services that allow customers to activate alarms and adjust the temperature in homes and offices remotely.

Tyco is also the biggest maker of electronic connectors, undersea fiber-optic cable and industrial valves. It is the second-biggest maker of disposable medical supplies behind Johnson & Johnson and has a finance unit, CIT Group.

Kozlowski reiterated per-share profit expectations of US$2.77 to US$2.78 in the fiscal year ending in September and said that US$3.45 is a "reasonable estimate" for 2002. Those projections are in line with the US$2.78 and US$3.43 expected by analysts, the average estimates according to Thomson Financial/First Call.