The news story I initially reported about Monitronics’ blockbuster pact for Security Networks laid out some of the reasoning why industry analysts are of the belief the transaction will likely prove to be a big success, despite its high valuation.
Security Networks brings to Monitronics about 225 dealers and 195,000 accounts, as well as a monitoring center in Kissimmee, Fla., and a customer care center in West Palm Beach, Fla. Given the two firms’ very similar business models, the analysts I spoke to highlighted Monitronics’ opportunity to now leverage operational synergies.
Below, John Orr, senior vice president of corporate development for Ascent Capital Group, which purchased Monitronics in 2010, discusses the transaction in further detail. Read on to learn how his firm justified the price it paid for Security Networks and why they are keeping the pedal to metal on the acquisition highway.
What additional value does Security Networks bring beyond RMR that would explain the high valuation Ascent paid for the company?
First of all, you can’t minimize the efficiencies that you can generate by putting the two businesses together. They have been a mid to high 50s EBITDA business. We are closer to a 70% margin EBITDA business. There is an opportunity to drive their margins higher and create some pretty interesting efficiencies. We think there is a pretty clear path to $4 million to $6 million of cost savings.
In addition to that, and what really attracts us to this business, they have more than 225 active dealer affiliates that are generating accounts for them that are driving very rapid growth for Security Networks. So for us to be able to acquire that dealer network and drive more rapid growth for us, it is going to drive our already strong organic growth to even better levels. You can’t minimize the fact, yes, the multiple paid was 57x — and there is clearly a lot of value just in the RMR that we bought — but the value that is over and above that is really value for that network of dealers. But you have to think of that expense as being value for us spread over years and years of these dealers generating accounts for us. That is the real value here.
There are other recent comparable deals out there. This type of valuation is not unprecedented. We think there are market comps out there that certainly support the deal that we’ve done for Security Networks. The reason that we can justify it is because off that growth engine we are acquiring it’s going to drive that growth for us for many years to come.
The other thing is revenue multiples don’t really take into account the profitability of the business. We often think about our business as a multiple of cash flow, which takes into account profitability since all of these businesses are operated in a different way.
For us, we think about what does the discounted cash flow analysis look like on this business? And that discounted cash flow analysis takes all of the noise out of the evaluation and shows you what the cash flow you are going to generate from the efficiencies, the RMR you are buying and the increased growth engine looks like. When we do that and we think about what the returns will look like on our business, it very clearly fit the profile of the type of business that we wanted. The fact that it came out to a 57x RMR multiple is almost an afterthought for us because it is really about the cash flow that it generates.
What are some of the synergies Security Networks brings to Monitronics?
Security Networks does pretty much exactly what we do and they do it in pretty much the same way that we do it. They are a dealer-based model based in Florida. The have independent affiliates all over the county who have generated alarm monitoring contracts for them and then they turn around and sell them to Security Networks in the same way that we buy contracts from our dealers.
We are both really about outsourcing the sales and installation portion of the business and in-sourcing the monitoring piece of the business. We are both asset-like models where we are really focused on acquiring customers as opposed to internally creating them. And creating operating leverage by having a single, large monitoring center where we are able to monitor all of these customers.
Because they do it exactly like we do it, we think it is a very efficient model to acquire them and to be able to load their customers onto our system. And to acquire their network of dealers who are out generating these accounts and allow us to increase the growth of our business and hopefully take what is the best of their dealer program or affiliate program and our dealer program and create and even better program that allows us to more efficiently create customers and serve our customers.
There ought to be operating redundancies, monitoring redundancies that create synergies in a financial sense for us. But there are also just sales and installation and monitoring efficiencies as well that come from putting together two very similar businesses.
Will Security Networks eventually be brought under the Monitronics’ brand?
We will certainly take our time and take a measured approach to making sure we also leverage the brand they have created in Security Networks. While that is a logical conclusion, and may well be the path we end up going, we have not made final decisions at this point. Will evaluate it through the transition period.
What is your message to Security Network dealers?
We are very excited to have them. We see tremendous vale in what they have done. They have clearly developed a great network of really strong dealers. We hope there things we can learn from them to make our company that much stronger and better. But the bottom line is they are going to continue to operate the way they have been operating and we are going to continue to value them just the same way that Security Networks has.
What will happen with Security Networks’ monitoring center?
There will be integration of their monitoring and their call center and their corporate [facilities] into ours. But it is not like you have 14 offices where you have to do that as broadly. It is more targeted to just a few sites that they have.
We have not made a final determination [whether or not to keep the their monitoring center]. We will keep it open through the transition period. We have today a backup monitoring center, but we need to have a bigger and better backup monitoring center. It still remains to be seen whether that will be in Kissimmee or very possibly a little more regionally desirable and geographically desirable to our headquarters in Dallas.
Can we assume Monitronics will remain actively acquisitive?
We are out looking for opportunities to acquire additional businesses and continue to grow this space. We really like the alarm monitoring space. We think it is a great business. It fits the profile of the types of things that interests us — predictable, cash-flow generating, subscription-based businesses that you can appropriately leverage to drive good returns. This is a business that fits that bill extremely well.
This recent transaction puts Monitronics over the 1 million customer mark. It sounds like you won’t be stopping there, correct?
Getting to a million customer mark was a great milestone for us but it is anything but the end all, be all. We really are looking to continue to drive to levels well beyond that. There is a pretty big gap between the No. 1 player in this industry and the rest of us. We’d like to think we can step in and fill that void a bit. There are a number of companies that are private equity-owned that we hope will become available over time and that we’ll be able to be competitive in trying to acquire.
Rodney Bosch | Managing Editor