Tyco is Strategic Buyer of Choice –

Bucking the trend of many conglomerates that are selling off their non-core divisions to pay down debt and focus on their core businesses, Tyco International Ltd. is instead snapping up companies like a hungry turtle, and private equity firms have been the benefactors.

Tyco, which bills itself as a diversified manufacturing and services company, plans to acquire an electronics manufacturer and a disposable diaper brand this month, providing solid exits for two private equity firms along the way. These acquisitions closed on the heels of another Tyco/private equity firm deal that took place in July.

Code Hennessy & Simmons LP sold CII Technologies, an Asheville, N.C.-based manufacturer of switches and connectors used in defense electronics and industrial products, to Tyco for $310 million on Dec. 4. The day before, New York-based Wellspring Capital Management sold Paragon Trade Brands Inc., a manufacturer of private label infant disposable diapers in the United States and Canada, to Tyco’s health-care division for $650 million.

For Tyco Healthcare, the Paragon acquisition adds to its range of absorbent personal care products, which the subsidiary is already in the business of manufacturing and marketing.

Subject to approval, Tyco plans to acquire Paragon in an all-cash transaction for $43.50 per share.

The deal represents a short but profitable success story for Wellspring.

“We bought Paragon out of bankruptcy in January 2000 for about $280 million,” said Bill Dawson, a senior managing partner at Wellspring. “We bought the company for $10 a share and sold it for $43.50 a share, making 4.35 times on our investment.” Ontario Teachers and Lexington Partners were co-investors in the original transaction.

Over the nearly two years Wellspring owned the company, the firm brought in a new management team, effected a restructuring plan and rationalized capacity, Dawson said. For example, Paragon had previously entered the feminine care market, which was losing $1 million a month; Wellspring shut that business down. Moreover, Wellspring increased Paragon’s stake in the second largest diaper company in Mexico, Grupo Mabe S.A., from 15% to 20%, but reduced its holdings in Latin America from 49% to 20%.

Up to Code

Code Hennessy, for its part, will make a four-fold return on its original investment in CII, according to sources close to the deal with Tyco. Terms of the CII transaction call for Tyco to pay $127 million in cash for the equity of CIIT Holdings Inc., a shell company that controls CII Technologies, and assume $183 million in debt. Officials at Code Hennessy did not return phone calls.

CII sells to major appliance manufacturers including Westinghouse Electric Co., General Electric Co., and Amana Appliances, a division of Maytag Corp. Tyco plans on increasing its focus on industrial applications, aerospace components and power distribution systems.

Quick Turnaround

And in July, another private equity firm, GTCR Golder Rauner LLC, sold a portfolio company to Tyco in an all-cash deal valued at $1 billion only a year after its original investment of $200 million in the company.

GTCR closed its sale of the businesses of Cambridge Protection Industries LLC to ADT Security Services Inc., a division of Tyco. Cambridge Protection provides electronic security services to more than one million residential, commercial and government customers throughout North America, primarily through its SecurityLink brand. GTCR and CEO James Covert founded Cambridge Protection in April 2000.

David Donnini, a principal with GTCR, said of the exit, “We were in the right place at the right time. The sale occurred a lot more quickly than we would have expected, but Tyco was the logical strategic buyer.”

He also gave credit to the management team for “making the difference.” As for IRR, “We don’t calculate it when it’s that high,” he said.