Schneider Electric tried in vain on Wednesday to quash rumors that it planned to buy Tyco International after the French engineering company's stock was hammered by worries about a capital hike.
In response to market rumors, Schneider Electric announced today that it is not currently in discussion with Tyco International regarding a potential strategic transaction between the two companies, Schneider said in a statement.
A person with knowledge of the matter said on Tuesday that Schneider, with a market capitalization of about $45 billion, had held early talks with Tyco.
Morgan Stanley analysts said any deal was likely to be at a premium of as much as 35 percent, implying a takeover price of about $31 billion.
With such a price tag, a Tyco takeover would be the biggest-ever industrial acquisition outside autos and transport, Thomson Reuters data shows. It would also be the second-biggest M&A deal this year, behind AT&T's $39 billion purchase of T-Mobile USA.
Morgan Stanley estimates a deal would require up to $17.2 billion of fresh equity, suggesting it could also prompt Europe's biggest-ever non-financial share issue -- a record held by Enel's $16.6 billion flotation in 1999.
Shares in Schneider, which competes with Germany's Siemens
and ABB of Switzerland, have fallen over 8 percent this week on concerns over the financing of a potential deal for Tyco and are down 10 percent since early April.
The stock initially rose more than 2 percent after the denial but were down 0.1 percent on the day at 112.80 euros by 1120 GMT. France's CAC-40 index was up 0.8 percent.
Schneider has made a number of acquisitions to boost its growth, but this rumored bid is a surprise due to the size of the target. This would be huge compared to Schneider's size, said Bertrand Lamielle, head of asset management at Paris-based B*Capital, with $6.5 billion under management.
This raises questions on the company's ability to finance such a big deal and integrate Tyco, and the doubts have been reflected in Schneider's share price this week.
Shares in Tyco, which has a market capitalization of roughly $23 billion and has been restructuring under Chief Executive Ed Breen to refocus on its core businesses of security services, fire safety systems and industrial products, were down 2.6 percent in Frankfurt trading, after surging 7.4 percent on Wall Street on Tuesday.
Fund managers and analysts expressed concern about shareholder dilution from a possible Schneider capital increase to fund a deal for Tyco.
That would necessarily be done at a discount to the share price, while on the other side, they would have to offer a premium on Tyco shares, with very limited potential for synergies at the end of the day, said Pierre-Alexis Dumont, fund manager at Paris-based OFI Asset Management, who does not have Schneider shares in his portfolios.
Both Siemens and ABB have been mentioned by analysts as potential bidders for Tyco, which is parent of the ADT Worldwide security service. Fund managers said the hefty premium that Schneider has been said to be willing to pay to snatch Tyco could prevent counter-bids.
ABB declined to comment, while Siemens -- which also declined comment -- has previously said it would not consider takeovers larger than the VDO auto unit it sold for 11 billion euros ($15.9 billion) in 2007.
Schneider has made a series of small to medium-sized acquisitions over the past years, many of them focused on emerging markets such as India and Russia.
Schneider's acquisition of American Power Conversion (APC) for $6.1 billion, completed in 2007, got a chilly reception from investors when it was announced, with some analysts citing pricey multiples and execution pressures.
The interesting thing to do for Schneider would be to buy some of Tyco's divisions, such as the fire and security equipment unit, which would make more sense, would be easier to finance and simpler to integrate, B*Capital's Lamielle said.
That being said, the timing is really good with a euro at $1.45. It's certainly a good idea for European companies to make acquisitions in the United States.
(Reporting by Helen Massy-Beresford, Blaise Robinson, Christian Plumb and Lionel Laurent in Paris, Emma Thomasson in Zurich and Vincent Flasseur in London; Editing by David Cowell)