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January 17, 2012
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Summary
Introduction Industry Overview M&A Activity Alarm Industry Market Values Current Capital Market Conditions Buying/Selling Alarm Businesses Q&A
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
INTRODUCTION
Henry Edmonds
Over 26 years of capital markets experience Started Edmonds Group in 2004 Founder (2005) and past Chairman of APB Services Co-Founder (1990) and CEO of SLP Capital
Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans $2B in transactions in the airline industry
MBA, Harvard Business School BS, with distinction, civil engineering, University of Virginia
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Capital raising and mergers/acquisitions advisory Average transaction size about $50 million Sweet spot $10 million to $300 million
$2.0 billion transaction value Focused on security alarm industry Broad experience representing buyers, sellers, borrowers and capital providers High level of client service
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Sales and installation - $26.8 billion Shrinking at 8% for 2010 and 2% for 2011 Growth in 2012? Monitoring services - $17.1 billion Growing at 10% for 2010 and 3% for 2011 Continued slow growth for 2012?
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
$48.5
$44.7
$43.9
$43.9
estimated
($ billions)
20 10 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: SDM Magazine
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
$16.7
$17.1
$10 $8 $6 $4 $2 $0
$10.3
$10.7
(methodology change between 2007 and 2008)
2006
2007
2008
2009
2010
2011
Very fragmented - over 15,000 local and regional providers Top five companies control only 39% of the market 20th largest company has about $3 million in RMR
86,000 customers
Companies with less than $200,000 in RMR control almost 50% of the market
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
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Other 49%
Vivint 2%
Source: http://www.sdmmag.com
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Source: http://www.sdmmag.com
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Source: http://www.sdmmag.com
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Tyco/ADT
ADT North America Residential - $3.1B in revenue Also includes small commercial Fire and Safety - $10.2B in revenue Large commercial, all international and product companies (Simplex Grinnell; Software House etc.) Flow Control - $3.7B in revenue Quarterly growth expectation for Wall Street
More transparent public data How long with ADT NA Residential stay public
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Active secondary market for buying/selling alarm companies or just contracts Hundreds of transactions occur every year
Larger (more efficient) buyers get predictable and significant economies of scale by acquiring Transactions trade based on buyers cash flow not seller
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2012
BV Capital Partners - DTT Bain Capital Securitas Direct (Europe) Stanley Works Niscayah (Europe), Microtech (Canada) Tyco/ADT Signature Security (Australia) Ascent Media Monitronics RockBridge Connect America (PERS), Protect America Summit Partners Central Security Group Oak Hill Security Networks ADT - Broadview GTRC Protection One
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
2011
2010
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Significant factor in the industry today Approximately 1 million accounts purchased in 2011
Doesnt include company acquisitions (like Broadview) Weekly or monthly closings Typically newly created accounts Accounts only Aged accounts Usually one off transaction Seller stays in business
Bulk sales
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
1,000 800 600 400 200 0 2006 2007 2008 2009 690 710 620 740
1,000 850
2010
2011
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Adjusted EBITDA and SSCF Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding Total direct and indirect cost associated with new account creation, less upfront revenue, divided by newly created RMR Net Creation Cost before allocation of corp. overhead Gross Creation Cost after allocating corp. overhead
Attrition rate
Growth rate
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Cash Flow
Adjusted EBITDA Reported EBITDA - earnings before interest, depreciation, amortization and taxes Adjusted to exclude all creation costs Example: Monitronics vs. ADT Adjusted EBITDA margin EBITDA as a % of revenue
Adjusted EBITDA reduced by the cost to replace attrition This is the sustainable or steady state cash flow the business is generating SSCF margin SSCF as a % of revenue After all investment in creation
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
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Adjusted EBITDA of 50% to 65% for companies with scale 8% to 12% Gross Creation Cost 25x to 35x Net Creation cost 20x to 30x 10% to 30% organic Summer programs - can be much faster Dealer programs can be much faster
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Attrition rate
Creation cost
Growth rate
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Size of transaction Company reputation Ease of reprogramming/line swing Sales approach to generation customers Credit score profile/amount of upfront payment RMR per account Volume of account generation Critical mass per market/geography Quality of account and financial data
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Quality of installs Service call rates Billing profile Homogeneity of accounts Age of accounts Type of RMR (residential vs. commercial)
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
70.0x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x < $50K $50K-$100K $101K-$500K $ RMR per transaction 38.0x 32.8x 25.0x 45.0x 37.4x 30.0x 45.0x 38.4x 27.0x
64.0x
42.9x 30.8x
> $500K
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Fewer than 2,000 accounts Buyers are typically local or regional companies Too small for national buyers or PE firms
Not enough scale to support financial reporting requirements Friends and family
Multiples in the 20s for smaller end, low 30s for larger end 71% of all deals involve fewer than 300 accounts (SDM)
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Local/regional firms
Too small for national buyers or PE firms Angel investors provide equity to the extent available
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
4,000 to 20,000 accounts Sweet spot for regional consolidators Smaller PE firms also like this size transaction
Equity checks of $2M to $8M Big enough to afford CFO $200k and up - good size for industry focused lenders If they buy, typically just for accounts Shut down sellers operations Depends on market conditions Quality of management and accounts
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
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Over 20,000 customers Buyers are nationals, non-industry strategics and larger PE firms Nationals still likely to consolidate or shut down operations Non-industry strategics and PE firms keep operation and management
Not many data points each year, so significant swings in the data
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Debt Markets
Very favorable for middle market and lower middle market transactions
Loan facilities under $250 million Banks, specialty finance companies, hedge funds
However, most industry leaders require a minimum deal size of $5 million to $10 million
Alarm Financial Services (AFS) - $200,000 to $1.5 million CapitalSource - will go as low as $3 million if transaction is very straight forward Lack of industry understanding low advance rates
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
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Some facilities term out over five to seven years Stretch senior advance rates up to 30x
Debt/RMR Permitted attrition rate Permitted creation cost Debt service coverage Capital expenditure
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Maximum advance rate of 26-32x RMR Current coupon 8-12% Additional PIK interest of 2% to 4% May required warrants or other yield enhancement
Unsecured or second lien position Similar covenants to senior debt with an additional cushion
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Equity Markets
Close to $500 billion in money to spend Many more PE firms interested in the alarm industry
Industry performed well through 2008/2009 recession Viewed as safe harbor with good upside potential
Favorable debt market conditions help valuations Not many public alarm companies
Very expensive to be a small public company (market capitalization of less than $500 million) Markets dont really understand alarm industry accounting
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
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Strategic Buyers
ADT, Protection One, Monitronics, Stanley Security Networks, ASG, CSG, Guardian, Vector Ascent Media bought Monitronics Stanley entered the alarm market several years ago Phone companies, cable companies dabbling again
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The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Key Considerations
Market timing
Timing makes a huge difference Good data, good performance Investment bankers Accountants/due diligence experts Lawyers If seller, could leave a lot of money on the table If buyer, might not get what you think youre getting or pay too much
The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.
Be prepared
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Key Considerations
Valuations very much affected by capital market conditions Debt and private equity markets are currently very favorable
Supply and demand very health supply at the moment Cost and terms
Need to know what your business is worth if youre selling Need to know what the market is and what youre getting if youre buying ITS A SELLERS MARKET TODAY
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Contact Information
Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: hedmonds@theedmondsgroup.com Website: www.theedmondsgroup.com
The Edmonds Group, LLC Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.