Tyco Shares Fall After CIT Disposal

by Mike Godfrey, Tax-News.com, New York

03 July 2002

Bermuda-based Tyco International disposed of subsidiary CIT Group on Monday in an IPO for $4.6bn, lower than previous estimates but still a useful contribution to lowering the group's debt of $27bn.

Although Tyco is not a recent case of 'corporate inversion', it would still be vulnerable to any legislation that emerges from Congress to put tax penalties on foreign-based companies, and this may partly account for the lack-lustre performance of Tyco's shares, which closed down $1.04, or 8% at 12.71 on the New York Stock Exchange. About $90 billion in market capitalization has been erased at Tyco this year, in spite of a bullish conference call between investors and interim ceo John Fort.

Other factors affecting the shares include lingering worries over accounting practices at the conglomerate after its leader Dennis Kozlowski exited a few weeks ago after being charged with evasion of New York sales taxes on purchases of $13 of artworks.

"These are real businesses," said John Fort, denying any knowledge of accounting investigations by the SEC: "Accounting issues have created a recent firestorm in the corporate world, but we're not in this category."

Mr Fort also denied that Tyco was facing a cash crunch: "From now until November 2003, we can meet all of our obligations without refinancing any of our debt or selling any of our assets," he said.

Chief Financial Officer Mark Swartz said Tyco should exceed consensus estimates for its industrial businesses in the third and fourth quarters and would earn at least 44 cents a share in the third quarter, which ended June 30.

Mr. Swartz said Tyco should generate fiscal 2003 free cash flow of $4.2 billion to $4.5 billion, which should nearly equal net income for the period. He said that those figures translate into per-share earnings of about $2.10 to $2.25 for Tyco's industrial businesses, compared with an earnings forecast of $2.01 to $2.05 a share for fiscal 2002, ending Sept. 30.

Tyco officials said the company remains focused on cutting debt and boosting return on capital. In fact, management should cut Tyco's net debt to $17.5 billion by the end of this fiscal year from around $26 billion now, bringing down the debt-to-total capital ratio to 39%, its lowest level in three years, Mr. Swartz said. By the end of next year, Tyco should have a lighter debt load of $15 billion, or a 31% debt-to-capital ratio, he said.

Nonetheless, Moody's Investors Service is continuing its review for possible downgrade of Tyco International Ltd and its subsidiaries. The completion of the CIT initial public offering is a positive development, Moody's said, but Tyco would continue to face a significant debt burden with sizable maturities over the next 18 months.

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