Security and protection services provider Tyco International Ltd. (TYC) recently inked a definitive agreement to sell its South Korean security business to asset management company The Carlyle Group LP (CG) for $1.93 billion in cash. The net proceeds from the transaction, which is expected to close in Tyco’s third quarter fiscal 2014, are expected to be $1.85 billion.
The operating units earmarked for divestment include Tyco Fire & Security Services Korea Co. Ltd., ADT Caps Co., Ltd., Capstec Co. Ltd. and ADT Security Co. Ltd., which together form and operate the South Korean security business under the name ADT Korea. Headquartered in Seoul, ADT Korea serves about 475,000 small-and-medium-sized businesses, commercial and residential customers through a nationwide network of 69 branches. It offers central monitoring services with video surveillance and dispatch, access control and other customized security solutions and guarding services.
With approximately $600 million of revenues and $125 million operating income estimated for fiscal 2014, ADT Korea was expected to contribute 20 cents per share to Tyco’s fiscal earnings. Consequently, Tyco updated its recurring earnings guidance range for the second quarter of fiscal 2014 to 39 cents to 41 cents per share, down from the prior guidance of 44 cents to 46 cents per share to take into account discontinued operations.
We note that ADT Korea has been a profitable venture. Still, the company’s call to shed this business stems from the fact that it needs adequate funds to pursue accretive acquisitions that would maximize shareholder value. The asset sale is also part of a three-year strategy, under which it aims to generate 15% earnings per share CAGR in fiscal 2015.
With a highly stable and profitable business, attractive market positioning, strong brand power and solid cash flow profile, ADT Korea is likely to accentuate Carlyle Group’s commitment to South Korea. Carlyle Group had established its regional footprint in 1999 and this strategic acquisition will give it more firepower to tap an under-penetrated Korean security services industry with growing awareness and increasing demand for safety.
Meanwhile, in a separate development, Tyco increased its share repurchase authorization to $2 billion from the existing $1.75 billion. Moving ahead, Tyco believes that its strong balance sheet will provide adequate flexibility to continuously fund organic and inorganic growth initiatives and maximize return for its shareholders.
Tyco currently carries a Zacks Rank #3 (Hold). Stocks in the industry that warrant a look include 3M Co. (MMM) and Marubeni Corp. (MARUY), both of which carry a Zacks Rank #2 (Buy).