Alarm Monitoring Outlook

Transcription

1 2013 First Quarter Summary Consolidation in the alarm monitoring industry continued at a strong pace in 2012 with more deals on the way in With overall industry revenues flat, many companies relied on acquisitions to boost revenue.. In addition, technological innovations have enabled a host of new products and services that can be sold to new and existing customers. Consequently, the total available market for the alarm services industry is expected to grow significantly in the coming years. Many innovative companies are taking advantage of these technologies to accelerate their organic growth rates and build their recurring monthly revenues. Economic Snapshot The economic downturn that began at the end of 2007 impacted industries unevenly. The security alarm services industry fared better than most, but was not able to escape the effects entirely. IBISWorld estimates that industry revenue for the last five years through 2012 declined at an annualized rate of 0.8% to $16.7 billion. The decline in new housing,, decreased corporate security budgets, and smaller disposable incomes have been a few of the main drivers of declining ng revenues in the industry. i These factors have also contributed to the stagnation of the household alarm system penetration rate in the US at around 20% for the last five years. ii Going forward, outlooks are positive as economic forecasts in the US improve and new technologies create new revenue opportunities. Collectively, the security alarm services industry is projected to grow at an annual rate of 2.5% over the next five years reaching $18.9 billion in iii Leading Public and Private Companies in the Sector Thomas H. McConnell Headwaters MB tmcconnell@headwatersmb.com Transaction activity in the alarm monitoring industry was strong in 2012 with the large and mid-tier alarm monitoring companies completing a slew of deals. Newsworthy events include the spin-off of ADT from Tyco with ADT retaining its ranking as the largest provider of electronic security in North America. iv The recapitalization of Vivint by Blackstone was completed at a strong valuation of about $2 billion (approximately 10x EBITDA and 50x RMR) bringing a large payday to earlier investors. v On the acquisition front, a number of small to medium sized companies completed multiple add-on acquisitions including Protection 1, Loud Security, Per Mar, and F.E. Moran. vi Industry Trends and Opportunities 2012 Rank Company Gross Revenue 2011 (USD in mm) Recurring Monthly Revenue (RMR), Dec. 31, 2011 (USD in mm) 1 ADT (NYSE:ADT) $5,100.0 $ ,800 2 Stanley Convergent $798.4 $ Vivint $312.9 $ Protection 1 $345.6 $25.2 1,585 5 Monitronics Int. $313.0 $ Slomins $257.0 $ Vector Security Inc $212.1 $ Guardian Protection $136.4 $ ASG Security $106.2 $ Bay Alarm Company $96.5 $ Source: SDM Magazine May 2012, Headwaters MB Subscribers (in thousands) To bolster organic growth rates, many alarm monitoring companies have added other managed services to their product and service offerings.. Popular additions include managed access control, video verification, video surveillance as a service (VSaaS), video storage, PERS monitoring, video guard replacement, and environmental monitoring. Market demand is being validated on both the residential and commercial side for these new services. For example, residential monitoring customers benefit from remote access to their home s surveillance systems, climate controls, lights, and alarms, especially as costs have come down. The mobile wave is also helping as consumers enjoy being able to access these systems through their smart phones or tablets. vii For commercial customers, managed access control is gaining traction. Businesses with multiple locations, such as restaurants, are able to update electronic building access rights to multiple locations by updating credentials on a centralized server. 1

2 Overall, we expect that these new services will increase the customer value proposition generating incremental high margin revenues. While some companies have been successful in building out these services internally, others might benefit from industry consolidation in order to keep pace. Despite lofty expectations, the most recent SDM 100 report reveals that alarm monitoring continued to be the primary revenue source for the top 100 companies in 2011constituting 48% of overall sales, followed by sales and installation at 31%, and service contracts at 10%. SDM reports that only 1% of revenues of the top 100 companies came from managed services, but significant growth is projected going forward. viii Dealer Revenue Across Business Services 2% 1% 5% 3% Monitoring 10% Sales/Installation 48% Service Contracts Non-contracted service Test & inspection 31% Other Hosted & managed services Source: SDM Magazine May 2012, pg 70, Headwaters MB In the coming years, changing national al demographics will also present growth opportunities. With the baby boomer generation moving into retirement and spending more time at home, there is likely to be increased demand for additional security and health support services. ix Company in Focus ADT ADT underwent significant change in 2012 with its spinoff from Tyco International in September. On a standalone basis, the Company has a commanding 25% market share in the US and Canada. As the largest player in North America offering electronic security interactive home automation and related monitoring services, ADT reported $3.2 billion in revenue and $1.3 billion in EBITDA in At its recent stock price, this equates to an enterprise value of approximately 7.55x 2013 projected EBITDA. x ADT has done a good job introducing new products and services to the market. During the Company s latest earnings call, and first as a stand-alone alone entity, CEO Naren Gursahaney noted that for the full year, gross adds increased by 8.7% as we achieved solid growth across both our direct and dealer channels. Our subscriber acquisition costs per customer in our direct sales channel were up 3.8% versus last year driven primarily by higher Pulse take rates. Gursahaney also noted that Pulse, ADT s product allowing customers to remotely monitor various security systems as well as adjust temperature controls and lighting, continued to help drive average revenue per customer which grew by 5.7% to $ It is also noteworthy that Pulse units accounted for 13% of gross adds during the quarter across all channels. These include direct residential with a take rate of 23%, small business with a take rate of 15%, and the dealer channel with a take rate of 1%. In aggregate, Pulse customers accounted for just under 3% of ADT s base. xi What s Next With economic outlooks improving ing and businesses taking advantage of technological innovation, managed services will continue to grow as a percentage of total revenue in the industry. Deal activity will remain robust as companies review their own service offerings and look to take advantage of growing trends through acquisitions. Ultimately, these innovative companies will be able to accelerate their growth rates and strengthen their market position through capitalizing on these opportunities. 2

3 Appendix: Selected M&A Activity in 2012 Announced Date Target 13 Dec 2012 Ogren Electronics LLC 5 Nov 2012 Streff Security 31 Oct 2012 Workman Security Services 31 Oct 2012 L&B Commercial Security 31 Oct 2012 AAC Security 29 Oct 2012 Pinnacle Security 15 Oct 2012 Suntera Security 18-Sep-12 Vivint 11 Sep 2012 Integration Logistics 27 Jun 2012 Lakeshore Alarm Services LLC 11 Jun 2012 Myers Protection Services 11 Jun 2012 SNC Security Systems Acquirer(s) Per Mar Security Services Per Mar Security Services Ascent Capital Group Blackstone Group L.P. Central Security Group F.E. Moran F.E. Moran Description Per Mar Security Services has acquired Ogren Electronics LLC from Terra Nova. The acquisition will add about 250 alarm accounts to the Wausau operation. Per Mar Security Services has acquired a 100% stake in Streff Security.. This is its third acquisition this year, and adds around 250 accounts to Per Mar s Cedar Rapids reach. As of October 2012, acquired Workman Security Services, which had 190, mostly residential, accounts. has acquired L&B Commercial Security which specializes in numerous phases of design, installation and monitoring of intrusion and fire alarm systems in commercial and residential applications. As of October 2012, acquired AAC Security with 127 mainly residential accounts. Ascent Capital Group s wholly-owned security subsidiary, Monitronics International, has acquired nearly 93,000 subscriber accounts representing $4.4 million of gross recurring monthly revenue from fellow security company Pinnacle Security for $131 million. has acquired Suntera Security. The addition of Suntera adds 15 employees to Protection 1 s roster and the General Services Administration contract, along with the Texas Mutual Award Schedule. This will enable Protection 1 to provide services to both Federal and state government agencies, as well as others requiring DOD security requirements. Blackstone Group L.P. agreed to acquire Vivint for $2 billion. This represents an EBITDA multiple of 10x and an RMR multiple of 50x. Protection One has acquired Integration Logistics Central Security Group has acquired Lakeshore Alarm Service LLC in a deal that brings CSG more than 1,000 accounts. Financial terms of this deal were not disclosed. F.E. Moran has acquired Myers Protection Services, a provider of f home alarm and security, business security, electronic life safety monitoring and fire systems. F.E. Moran has acquired SNC Security Systems. SNC has locations that extend to 49 states and Canada. They provide Fire, Security, CCTV Camera Systems, and Access Control locally and throughout the United States. 3

4 7 Jun 2012 Essential Security Group 5 Jun 2012 Norshore Alarm Co. 24 May 2012 JMS Alarms & Security 24 May 2012 LPE Security & Fire Alarm Systems 23 Apr 2012 New Mexico Security Services 10 Apr 2012 ABLE Security & Automation Corp. 30 Mar 2012 Westec Intelligent Surveillance 12 Mar 2012 Camtronic Security Integration LLC 27 Feb 2012 Due West Security LLC 22 Feb 2012 Custom Systems Technologies 10 Feb 2012 SafeLink Security 7 Feb 2012 Low Voltage Systems 26 Jan 2012 Electronic Alarm Systems View Systems Alarm Detection Systems Doyle Security Systems Doyle Security Systems Safeguard Security and Communications Gilmore Security Systems Interface Security Systems Central Security Group Bay Alarm Company American Alarm and Communications View Systems is set to acquire Essential Security Group under a stock exchange agreement. According to the terms of the deal, this agreement will allow a partnership to commence, thereby bringing the resources of ESG's management team to View, and authorized distribution rights of View's technology to ESG. As of fiscal year-end 2011, Essential Security Group's sales were $1.50 million and the company had 90 employees. Alarm Detection Systems has acquired Norshore Alarm Company The deal will enable ADS to expand further into the state of Illinois. Doyle Security has acquired JMS Alarms & Security which designs and installs electronic alarm systems. The deal is motivated by Doyle s aim of consolidating its presence in the Capital District of New York State including Albany, Rensselaer, Saratoga, and Schenectady. Doyle Security has acquired LPE Security & Fire Alarm Systems which is involved in fire alarm and security systems. The deal is motivated by Doyle s aim of consolidating its presence in the region, into the Capital District of New York State including Albany, Rensselaer, Saratoga, and Schenectady. Safeguard Security and Communications has acquired a 100% stake in fellow security New Mexico Security Services. Gillmore Security Systems has merged with fellow US provider of security solutions, ABLE Security & Automation Corp.. Ray Laino, ABLE Security s owner, will join Gillmore s sales team. Interface Security Systems LLC has merged with Westec ec Intelligent Surveillance Security Systems News reports that Westec currently has $1.7 million in RMR, but the combined entity will bring in approximately $7.6 million in RMR. announced the acquisition of Camtronic Security Integration LLC. As at fiscal yearend 2011, Camtronic Security Integration's sales were $0.84 million and the company had 7 employees. has acquired about 400 accounts from Due West Security LLC. has acquired a 100% stake in Custom System Technologies which services around 1,100 accounts. xii Central Security Group has acquired SafeLink Security in order to expand its geographic reach. Global Security pipeline reported in 2011 that Central Security Group had new cash backing from a private equity firm which it is set to use to open new branches in Kansas City, Austin and San Antonio, and make two or three acquisitions. Bay Alarm Company has acquired fellow Californiabased alarm system company Low Voltage Systems to consolidate its presence in the region. American Alarm and Communications has acquired Electronic Alarm Systems, a security management company that specializes in security systems, fire alarm systems, access control systems, access systems supervision, radio power alarm communication, safe, vault and ATM protection, premise audit and surveys, sprinkler systems supervision, 24 hour local UL monitoring, remote video transmission, and CCTV systems. 4

5 26 Jan 2012 Phoenix Fire Alarm & Communications 13 Jan 2012 Dart Security Systems 13 Jan 2012 Access One Security 13 Jan 2012 LSG Security Systems 9 Jan 2012 Signature Alert LLC Source: siaonline.org, Headwaters MB American Alarm and Communications American Alarm and Communications has acquired Phoenix Fire Alarm & Communications, a commercial fire company that offers repair, installation, hard wired and wireless systems, local 24 hour UI monitoring, to both homes and businesses. has acquired Dart Security Systems, a firm specializing in burglar and fire alarms, central station monitoring, CCTV surveillance control systems, carbon monoxide and gas, X10 home automation systems, design and system engineering, and telephone systems. has acquired Access One Security, a New York based provider of alarm systems. has acquired LSG Security Systems LSG specializes in the sale and installation of security systems. has acquired a 100% stake in Signature Alert LLC. As at fiscal year-end 2011, the target's sales were $1.50 million and the company had 8 employees. i Security Alarm Services in the US. IBISWorld. Feb Pg. 3 ii Security Industry Monitor. Imperial Capital. August Aug Pg. 19 iii Security Alarm Services in the US. IBISWorld. Feb Pg. 3 iv Jaffe, Michael. Stock Report: ADT Corp (The). Standard & Poors. 08 Dec 2012 v Bosch, Rodney. Vivint to Build Commercial Accounts Division after $2B Deal. Securitysales.com. 01 Oct 2012 vi siaonline.org. M&A database vii Security System Services industry report. Hoover s.com. Pg Oct 2012 viii SDM Magazine. May Pg 70 ix Security System Services industry report. Hoover s.com. Pg Oct 2012 x Capital IQ as of 21 Dec 12 xi ADT Corporation Q Earnings Call Transcript. Morningstar.com xii Nacelewicz, Tess. Pro 1 acquires in Southern California. Securitysystemsnews.com. 21 Feb 2012 To subscribe to our quarterly Security Industry Updates at no cost please Tom McConnell at: tmcconnell@headwatersmb.com ***Disclosure: This newsletter is a periodic compilation of certain economic and corporate information, as well as completed and announced merger and acquisition activity. Information contained in this newsletter should not be construed as a recommendation to sell or buy any security. Any reference to or omission of any reference to any company in this newsletter should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. We are not soliciting any action with respect to any security or company based on this newsletter. The newsletter er is published solely for the general information n of clients and friends of Headwaters MB, LLC. It does not take into account the particular investment objectives, financial situation, or needs of individual recipients. Certain transactions, including those involving early stage companies, give rise to substantial risk and are not suitable for all investors. This newsletter is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Prediction of future events is inherently subject to both known and unknown risks, and other factors that may cause actual results to vary materially. We are under no obligation to update the information contained in this newsletter. Opinions expressed are our present opinions only and are subject to change without notice. Additional information is available upon request. The companies mentioned in this newsletter may be clients of Headwaters MB, LLC. The decisions to include any company in this newsletter is unrelated in all respects to any service that Headwaters MB, LLC may provide to such company. This newsletter may not be copied or reproduced in any form, or redistributed without the prior written consent of Headwaters MB, LLC. The information contained herein should not be construed as legal advice. 5