Analysts Are Bullish on Monitronics’ $507M Deal for Security Networks
DALLAS — Monitronics’ mega deal for super-regional security company Security Networks is drawing considerable praise from industry analysts who say the combined companies could likely result in dynamic growth, based partly on the two firm’s highly complementary operations and business models.
In a deal valued at more than $507 million, Monitronics, which is owned by Ascent Capital Group, will acquire Security Networks’ 225 dealers and 195,000 mostly residential accounts. Security Networks operates a central station in Kissimmee, Fla., as well as customer care facility in West Palm Beach, Fla. Rich Perry, CEO of Security Networks, will not join Monitronics; however, the nearly 300 other Security Networks employees will remain with Dallas-based Monitronics, according to the company.
The deal, which at press time was expected to close Aug. 16, includes $487.5 million of cash and 253,333 newly issued shares of Ascent Series A common stock with an agreed value of $20 million. Security Networks’ RMR for 2012 was $7.2 million. The company, which has been owned by Oak Hill Capital Partners since 2010, has agreed to deliver $8.8 million of RMR by the mid-August closing. The firm’s 2012 revenues totaled more than $78 million with adjusted EBITDA of $46.5 million.
Monitronics, which operates one of the industry’s largest dealer programs, will have more than 600 affiliates and one million subscriber accounts upon closing the transaction.
“It makes a great deal of sense for Monitronics. It tucks in very well with what they are doing and they are going to acquire some significant economies of scale,” Les Gold, a partner in the law firm Mitchell, Silberberg & Knupp, tells SSI. “It is a win-win for both sides.”
In a research brief, Imperial Capital estimated that if Security Networks achieves its target of $8.8 million in RMR, the multiple paid would be an estimated 56.8x RMR. Imperial Capital also values the business at $2,564 per subscriber. The brief states: “Despite these high valuations, we believe that the deal can be accretive for Ascent and can produce unlevered IRR [internal rate of return] in the mid-teens … and likely will create significant value.”
“The valuation of the transaction was propelled by the scarcity of dealer-driven companies in the market and the excellent margin contribution that Monitronics should realize by folding in the Security Network’s customers and dealers,” John Brady, president of TRG Associates, tells SSI.
A transaction of this size and magnitude bodes well for other companies that share a similar monitoring/dealer program platform, according to Peter Giacalone, president of Giacalone Associates. “It has got to make some of those other similar companies with well-poised portfolios feel pretty good about themselves,” he says. “I would venture to say there is a good chance those portfolios could trade at an even higher value or at least the same.”
The substantial increase in RMR, coupled with an account base of more than one million subscribers, will considerably strengthen Monitronics’ position in the market, says Giacalone, a contributor to SSI’s “Monitoring Matters” column. He speculates the company may want to now leverage its largesse to proactively build its brand awareness to consumers.
“This really strengthens their foothold in competing with organizations like ADT and Protection 1,” he says. “They utilize their brand well as part of their dealer program, but I don’t think any would say their brand is as well-known as an ADT or P1. When you consider the one million customers, you start thinking about strengthening the brand even more. What is the next level? What is the investment worth?”
For industry observers who may have conjectured that Security Networks had quietly been on the auction block, John Orr, senior vice president of corporate development for Ascent, tells SSI that was not the case. In fact, the two firms have shared a long-running discussion about a potential sale going back to 2010 when Ascent entered the alarm monitoring space with its Monitronics purchase for $1.2 billion.
Principals from Ascent and Oak Hill Capital Partners networked at their first security industry conference in 2010 and have stayed in contact, Orr explains.
“We have been in dialogue with them ever since about the fact that we are a long-term strategic holder of these assets and they are more of a finite holder of these assets as a private equity firm,” he says. “It made sense for us talk in the future and for these businesses to fit together because they are so much alike. That dialogue continued over the years and finally came to fruition.”
(Learn more about the acquisition from John Orr in the Under Surveillance blog here.)
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