Tyco International Ltd. (TYC) announced that it has completed the acquisition of a 75% stake in KEF Holdings Ltd., which is a UAE-based integrated valve manufacturer and provider of steel castings to the oil and gas, chemical, mining and power industries. This acquisition of KEF was first announced on March 21, 2011. The transaction is relatively small, valued at approximately $300 million.
The acquisition of KEF holdings is in line with Tyco’s strategy of strengthening its market position in the core security, fire and flow control platforms. The deal enhances the company’s position in the Middle East, as it provides its flow control business with strategic manufacturing presence.
This is because Tyco’s product knowledge, operations expertise and advanced valve technology compliment KEF’s local manufacturing and sales channels in the Middle East, providing customers a higher level of customized choice and service.
Tyco’s flow control segment comprises around 20% of its consolidated net revenue ($3.4 billion in 2010). Flow Control is a global business with 30% of sales coming from Europe, Middle East and Africa, 29% from the Americas, 26% from the Pacific region and 15% from Asia.
The acquisition should be particularly beneficial, given the fact that nearly a third of the company’s flow control revenue already comes from the Middle East. Therefore, the local manufacturing will not only help serve customers better but also attract large regional project work, making it immediately accretive to earnings. As a result, it should generate an attractive long term return on investment for Tyco.
KEF’s strong and growing reputation in the Middle East is an added bonus, as it will help Tyco pursue large revenue opportunities even beyond the Middle East. Further, KEF operated in the tax free jurisdiction of a growing emerging market, which makes it more profitable.
Tyco plans to significantly increase utilization of KEF’s world-class foundry facility to provide castings for its valves in addition to KEF’s existing customer base, which in turn should provide significant operating leverage.
Tyco International is a leading provider of security products and services, fire protection and detection products and services, valves and controls and other industrial products. The company’s main competitors include 3M Co. (MMM), Danaher Corp. (DHR), ITT Corporation (ITT) and Honeywell International Inc. (HON). Tyco currently has a Zacks Rank of # 3, which implies a short term ‘Hold’ recommendation.
