Sun, Jan 27, 2002 page11

• Goldman Sachs, rivals will share Tyco fee windfall

  BREAKUP With at least three IPOs, the shedding of US$11 billion in debt and the sale of a plastics business, underwriting fees will be in the hundreds of millions of dollars

  • BLOOMBERG
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  Goldman Sachs Group Inc, Merrill Lynch & Co, Lehman Brothers Holdings Inc and other Wall Street firms may make as much as US$500 million helping Tyco International Ltd split itself apart, analysts said.

  Tyco's plan to become four companies will in part reverse US$64 billion of acquisitions since 1993 -- transactions that also earned investment banks millions of dollars in fees.

  The breakup involves a minimum of three initial public offerings, the shedding of US$11 billion in debt and the sale of Tyco's plastics business. The IPOs alone may generate underwriting fees of US$337.5 million, according to Sanford C. Bernstein & Co analyst Brad Hintz.

  Goldman, acting as Tyco's sole financial adviser on the split, will be led by bankers Jack Levy, Jeffrey Moslow and James Katzman. That gives Goldman the lion's share of the investment banking business, though Tyco is likely to have many advisers and underwriters.

  "I would expect Goldman to get a bigger piece of the business than the others," said David Trone, an analyst at Prudential Securities Inc, who said fees related to the breakup, which was announced Tuesday, could be as much as US$500 million.

  While Goldman has the best investment banking relationship with Tyco, the diversified manufacturer used 13 banks led by Goldman and Citigroup Inc's Salomon Smith Barney for the US$1.96 billion initial stock sale of fiber-optic cable-maker TyCom Ltd in July 2000.

  Tyco announced 37 acquisitions last year, according to Bloomberg data, and Goldman participated in three of the largest: the completed US$10.3 billion buyout of CIT Group, which also involved Lehman Brothers; the proposed US$2.6 billion takeover of medical device maker CR Bard Inc, which involves Merrill Lynch, and the US$970 million repurchase of TyCom.

  Advising Tyco in the various transactions could add 12 cents a share to Goldman's fiscal 2002 earnings, Hintz said. Goldman shares rose US$1.80 to US$87.30.

  Tyco will need to raise about US$11.45 billion in cash to retire US$11 billion in debt, plus a 4 percent premium, Hintz said.

  To fund that, Tyco intends to sell its plastics business for about US$3.5 billion and offer about US$8 billion in stock for three subsidiaries: financial services, health care, and fire and flow control.

  Goldman will earn US$17.5 million in fees for the plastics unit sale, Hintz estimates, and about US$192 million in underwriting fees as a lead manager.

  Tyco and Goldman declined to talk about their relationship.

  Tyco director of investor relations Jack Blackstock and spokeswoman Maryanne Kane declined to name those in the running for the contracts.

  Aside from Goldman, Merrill Lynch also has Tyco connections.

  Investment banker Richard Johnson worked two years at Tyco before returning to Merrill's mergers group in late 2000. Merrill also advised Tyco on its US$12.3 billion acquisition of AMP Inc. in 1999.

  Banks that gain Tyco's business face a hard sell, investors said. Tyco shares have fallen about 18 percent this month; among investor concerns are possible capital gains bills related to the spinoffs, the chance that the CR Bard transaction may fail, and questions of whether Tyco has accounting problems. Tyco shares rose US$0.63 to US$45.

  "The company is undergoing a change in shareholders," said Marshall Front, chairman of Front Barnett Associates LLC, which manages US$2.5 billion in Chicago and owns Tyco shares. While he dismissed the possibility of accounting issues, the bankruptcy of Enron Corp and its accounting problems are causing investors to worry, he said.

  Tyco Chief Executive Officer Dennis Kozlowski told investors Tuesday the breakup wasn't related to any accounting problems.

  Tyco considered a breakup for years but didn't proceed because the various business units were too small, he said.

  With a slower US economy causing companies to hold off on stock and bond sales as well as mergers and divestitures, investment banks are likely to have to share business they might have shunned in the past, said Prudential's Trone.

  "Because there is less business, there will be more effort," he said. The banks want Tyco's business and the fees that it generates, as well as the future fees the four new companies will offer. Kozlowski said he expects the new companies to be "Tyco-esque," as in "acquisitive."

  Tyco's current plans may yet change. The company has reversed course before, buying back TyCom from shareholders in December and generating fees for JP Morgan and Goldman. Some investors speculate that some of the planned IPOs may not happen.

  Kozlowski said offers for any of the businesses that seemed likely to bring more money to shareholders than IPOs would be taken to Tyco's board.

  One target mentioned by investors is Tyco Capital, which was known as CIT Group Inc until September 2001, when Tyco bought it.

  The possible buyer: Tyco's larger rival, General Electric Co.

  General Electric, which owns GE Capital Corp, the biggest non-bank financial company, competed with Tyco for CIT and may still be interested, according to bankers and analysts.

  "It's just premature to even talk about it," said General Electric Chief Executive Jeff Immelt, in an interview. "I'll evaluate what actions they're taking and see where we'll go."

  Whether or not investors benefit from Tyco's breakup, Goldman and Wall Street won't suffer.

  "We are very confident that the investment banking fees paid by Tyco will be favorable to Goldman Sachs shareholders," Hintz wrote in a report.

  "Bankers have made out royally with respect to Tyco," said Front.

  "It's been a bonanza."
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