Monitronics Reorg Fallout: Dealer Program Model Losing Luster, Industry Experts Say
As Monitronics aims to eliminate suffocating debt, plentiful access to capital has led alarm companies to be less reliant on dealer-program financing.
DALLAS — As Ascent Capital Group sets a course to restructure Monitronics (dba Brinks Home Security) under a Chapter 11 support agreement, industry experts say some of the fundamental challenges confronting the wholesale monitoring company and its dealer program mirror headwinds faced by other large competing providers.
Under terms of the voluntary restructuring agreement, Monitronics will eliminate approximately $885 million in debt — a mounting financial albatross that has dogged the company the past several years, along with wreaking havoc on Ascent’s stock price (Nasdaq: ASCMA). But reemerging from bankruptcy — and a return to profitability — will be made all the more difficult given favorable market conditions that are providing alarm companies plentiful access to capital, resulting in less reliance on dealer-program financing.
“The economy is doing so well, the businesses are doing well. There is a lot of capital available. When the capital is readily available it makes the dealer programs really in competition with other capital sources,” John Brady, president of security industry consulting firm TRG Associates, explained to me.
Downward pressure on multiples paid for recurring monthly revenue (RMR) is also going to challenge Monitronics, along with other similar large dealer program providers. The salad days when multiples approached and even exceeded 50x have faded into a bygone era.
“Investors are starting to say, ‘I understand you have an 80% margin and I understand it is predictable. But how much EBITDA on cash flow are you really generating? I am happy to pay a multiple on a cash flow. But I’m not ready to sign up, like for three years, on just a multiple of RMR,’” Brady describes.
Although the largest companies can currently achieve multiples in the low 40s, medium-sized and smaller dealers are receiving far less. The prevailing assumption is multiples are ranging from 22x to 26x; however, the actual number is oftentimes higher.
“They all end up having to sweeten the pot and effectively they get into the 28x to 30x range on a dealer-based model with attrition guarantees and stuff like that that help the economics,” Brady says. “That is still a tough multiple to be paying. Because if I am a good dealer and I run the company well and I have decent attrition, I can get bank financing at an 18 to 19 to 20 multiple. I don’t need a dealer program as badly as I do during the tough times. The dealer-based multiples are definitely under pressure.”
That thinking extends to even the smallest dealers with RMR of less than $150,000, says Jim Wooster Jr., president of Alarm Financial Services (AFS).
“From our standpoint, if Brinks Home Security dramatically alters its dealer-funding model and drops multiples significantly, we may see dealers decide that a strategy of borrowing against their accounts rather than selling them makes more sense,” says Wooster. “Many dealers already look at it this way, and a drop in purchase multiples would make the case for borrowing even stronger.”
As Monitronics worked to increase its account base organically — an effort that included boosting inside sales and acquiring DIY provider LiveWatch — the company was still competing to buy accounts and running on very expensive debt. With having to borrow cash about every six months, Brady estimates the company’s capital structure could probably only afford a 24 or 25 multiple.
“The other foot that is going to drop is, is Monitronics going to change the dealer multiple model? Are they going to have to? Are they going to have to come down a little bit? Are they going to send out a new dealer rate sheet [and require] average credit scores of 750 — not 650 — to get a 30 multiple? That is going to be the real bellwether,” Brady surmises.
John Mack, executive vice president and co-head of investment banking at Imperial Capital, says Monitronics’ path to reset its balance sheet will have implications for the dealer program market where the largest providers have gotten more conservative about their RMR purchase multiples.
“This deal does have some modestly negative implications for acquisition multiples. Brinks Home Security has higher attrition and they have not been growing for the last few years. With this profile they were worth considerably less than historical values for larger platform companies in this industry,” Mack explains. “That said, high quality companies with good performance metrics can still see acquisition valuations considerably above the implicit value of Brinks in this transaction in the lower end of the historical range for acquisitions of larger platform companies.”
Mack also sees implications for lending to mostly residential alarm companies stemming from Monitronics restructuring. Lenders are plainly concerned about Monitronics’ longstanding struggles, as well as with similar circumstances strapping other residential-focused alarm companies that have become over-leveraged.
“I believe there will be less lenders willing to lend to the residential alarm sector for the next few years — but still a number of active lenders — and the leverage levels available will be down 20-25% from the peak a few years ago,” he forecasts.
The Path Ahead for Monitronics
Monitronics has entered a quiet period during the restructuring and declined to be interviewed for this article. Under the terms of the agreement up to approximately $685 million of debt will be converted to equity, including up to approximately $585 million of the company’s 9.125% senior notes due in 2020 and $100 million of the company’s term loans. The agreement also calls for Ascent Capital Group to be merged with Monitronics, which must be approved by stockholders.
The restructuring has industry pundits wondering if the company had taken itself to market to be sold. Or not.
“It is interesting they chose to file Chapter 11 rather than sell the company; their restructuring efforts clearly put them in play,” says Michael Barnes, founding partner of consulting firm Barnes Associates. “I’m not sure if this is more of a vote of confidence by the stakeholders in the company and the future, or a comment on how low any indications of value were — i.e., is writing off/converting a bunch of debt, incurring the huge expenses and market stigma of going through bankruptcy, better than taking an offer?”
Mack does not believe an acquisition is likely in the near term.
“The bond holders who rolled their debt into equity want time for the company to grow and create more value for the equity to recover more of their original principal,” he said. “I think [Monitronics President and CEO Jeff Gardner] and his team will be very focused on lower-cost organic growth with a very disciplined approach to ongoing purchases from the dealer program and bulk acquisitions for the business.”
Putting Monitronics on the selling block may well have received a cool reception from some potential suitors. As a comparison, Brady cites the 2017 acquisitions of Alarm Capital Alliance (ACA), a division of My Alarm Center, and Alarm Funding Associates (AFA), as examples of large dealer program operators that found the M&A waters to be choppy.
“When ACA and AFA went out to market they probably touched 20 different equity firms. These were well-run companies. But it was so hard for the equity guys to get their arms around the RMR multiples being paid because it didn’t translate to reasonable levels of multiples of cash flow,” he says.
Brady describes Monitronics restructuring agreement as “well organized,” which bodes well for the company going forward. And while the company will still have to find a way to tame an onerous attrition rate that hovers around 16% to 17%, he believes the restructuring puts them on a positive foundation.
“It’s unfortunate we are going down this road because people will say [disparagingly], ‘Oh, they went bankrupt.’ Well, no, Chapter 11 isn’t liquidation. It is an organized business method to reset your balance sheet,” Brady says. “If you can do it in concert with your debt holders, which if you got debtor-in-possession financing, some bank had to be convinced that all the debt holders were not really at war. They were all going to work together.”
After rebranding from Monitronics to MONI in 2016, the company then entered an exclusive trademark licensing agreement with The Brink’s Co. in early 2018 to be remade into Brinks Home Security. Despite all the tumult surrounding the company, it remains a big player in a relatively small industry, says Peter Giacalone, president of consulting firm Giacalone Associates and a founding contributor to SSI‘s “Monitoring Matters” column.
Giacalone says a variety of options exist for the company if they can successfully restructure debt, create operational efficiencies and brush themselves off toward a new beginning. Divesture would be one option since it typically is what company’s focus on if it creates the best value considering the circumstances.
“It would be nice to see if Chapter 11 allows the breathing room to restructure on a variety of levels and get back to forward motion with the Brinks brand,” he says. “It’s important to the industry for Monitronics to survive and succeed.”
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