Blackstone Acquires Vivint for $2B; Analysts Weigh In on Deal

By Rodney Bosch

PROVO, Utah — Blackstone Group LP will acquire Vivint Inc. for more than $2 billion, gaining legions of home-security, energy-management and solar-power customers throughout North America. 

Blackstone is buying a majority stake in the Provo, Utah-based company from initial investors Goldman Sachs Group Inc., Jupiter Partners LLC and Peterson Partners LP. 

Vivint management, including CEO Todd Pedersen, will remain with the company and continue to run daily operations. Pedersen will keep a minority equity stake. The deal is expected to be completed by the end of the year. 

Pedersen tells SSI the deal will allow Vivint to expand upon its technology-based platform, enter new markets more expeditiously and free up management to be “more thoughtful about what we are going to become in five years.” 

“We have been able to raise capital, but we have 14 lenders in our credit facility which is not very efficient. It became too much to manage that many banks and lenders in one facility,” he says. “Bringing on someone like Blackstone that validates equity valuation in a company, and puts real money down to prove that to the markets, will help us access a more efficient capital structure that we are contemplating.” 

Pedersen tells SSI the initial bidding rounds for the company attracted 46 groups, which was reduced to nine serious bidders. Eventually, Blackstone won out over Ares Management LLC and GTCR LLC, which owns Protection 1, Pedersen says. 

Vivint bills itself as the largest home automation services company in North America, and the No. 2 residential security services provider in the United States as well as in Canada. 

Founded by Pedersen in 1999 as APX Alarm, the summer sales model company has built a customer base of more than 650,000 customers, providing connected smart home systems, including alarms, lighting controls, energy management and more. It also provides severe weather alerts to customers at risk of tornadoes. 

A new, larger credit facility was needed, in part, to fund Vivint’s plans to create a nationwide commercial division beginning in 2013. As the largest U.S. owner of hotel properties, among other significant real estate holdings in its portfolio, Blackstone offers Vivint potential synergies for developing a fledgling commercial division. 

“A new structured facility will open up that opportunity for us. We intend to aggressively pursue that market. We feel we are uniquely capable of the sales and the installation on a nationwide basis. It will be a very big push of ours,” Pedersen says. 

Vivint already dabbles in providing commercial systems “as a natural byproduct” of selling to residential customers who own businesses, Pedersen says. However, it has heretofore been unable to launch an in-house commercial sales operation to augment its door-to-door model. “We intend to grow our inside sales substantially through advertising. We are going to sell tens of thousands of commercial systems annually. We can install in 96% of the zip codes in North America. It is a natural fit for us.” 

As part of the deal, Blackstone will also take over Vivint’s affiliates Vivint Solar and 2GIG Technologies, which provides panels and peripheral devices. Vivint launched Vivint Solar in 2011 after it received $75 million in financing from U.S. Bancorp in support of its plan to offer leased solar installations for homes. 

Pedersen estimates the solar operation is already the No. 2 installer of solar systems on a daily basis after market leader SolarCity. “I believe we will be No. 1 in three to six months with this new capital infusion that allows us to rollout markets quicker and faster. We don’t want to have 50 sales reps; we would like to have hundreds and hundreds of sales rep in the solar space.” 

Among other markets in Pedersen’s immediate sights are home health-care monitoring, as well as taking Vivint’s portfolio of services to Australia where the company is completing work on licensing and receiving compliancy listing for its panels and other products.  

Vivint’s home-management services, excluding solar, will end the year earning $34.7 million in recurring monthly revenue (RMR), Pedersen says. A 25% increase in RMR is projected by the end of 2013. 

While the security industry has only produced a handful of installing/monitoring company acquisitions the size of Blackstone’s deal for Vivint, the $2 billion price tag is not expected to affect the valuations of other players in the industry, according to Michael Barnes, founding partner of consulting firm Barnes Associates. 

Barnes — who disclosed to SSI his firm worked for one of the prospective Vivint buyers — says the selling price indicates a RMR multiple “something north of 60x,” which includes 2GIG and Vivint Solar. “[That is a very] aggressive price, and while only several deals have ever touched that price level, it is not unprecedented. What is unprecedented is a security alarm company growing from $0 to $34 million of RMR in six years, all through internal sales.” 

Barnes says the valuation is unlikely to have a significant impact on the broader market as there are so few players of Vivint’s size and aggressive business model, let alone those that can achieve comparable growth results. 

“It meshes well, however, with the high valuation Monitronics [acquired by Ascent Media Corp. in 2010 for $1.2 billion] has continued to receive in the public markets, and what we expect the new ADT will trade at when it spins out from Tyco. Large, highly efficient companies that can grow have pretty much always received strong valuations,” he says. Vivint executives discuss important decisions. Photo courtesy Vivint

The deal for Vivint is also a clear indication the industry is gearing up for a major push in the residential market, Barnes explains. 

“Vivint, ADT, Monitronics, CSG [Central Security Group], Security Networks all have, or will be, recapitalized and are loaded for bear. Also, Comcast and a host of other MSOs have entered the space with their eyes on the residential market,” he says. “This adds up to a lot of marketing dollars being spent. In my mind, however, the average alarm company is still going to win their share of the pie.” 

Jeff Kessler, a managing director of Imperial Capital, describes Vivint as a “disruptive company in the industry” that has excelled at “getting to where they
are going ahead of other companies.” 

“They do provide a very high value proposition for the customer with excellent underlying technology and they are very innovative in the types of new services and new markets that they are moving toward,” Kessler says. 

It is the consistent, high value proposition exhibited by Vivint that, in part, attracted Blackstone to the acquisition and that can be considered a significant factor in how the deal impacts the industry going forward. 

“It shows that a company can start from scratch and in six to eight years create a premium valuation for itself in the security industry, which has traditionally been resistant to a lot of change,” Kessler says “The marketplace is going to continue to look at companies like Vivint in a positive fashion, which they might not have done 10 or 20 years ago.” 

The deal also underscores why installing security contractors can no longer take in RMR without trying to improve the customer’s value proposition. Not doing so risks a loss of market share and even a possibility of attrition rates, Kessler says. “It is clear now that good technology is driving a customer value proposition. Whether the customer is spending $25, $30 or even $75 a month, you have to be able to offer something to the customer that is better and more valuable to keep them as a customer and to keep that RMR flowing.” 

Like Barnes, Kessler does not expect the price paid for Vivint will have much of an impact on the valuation of other security providers. There are several influences, including technology advances, that have created a floor for valuation and continue to drive deals in the industry. Among these influences, Kessler cites the current low rates of borrowing. Senior lenders are willing to lend against RMR to allow companies that are in the private equity world to borrow, which is expected to help drive “a fairly active merger and acquisition market in the alarm and home services industry at least for the time being,” he says. 

When gauging the price paid for Vivint, Kessler describes it as being “in line” with multiples seen since 2010 for deals such as Protection 1 being bought by GTCR, Securitas Direct by Bain Capital and Hellman & Friedman, Monitronics by Ascent Capital, CSG by Summit Partners, and Security Networks by Oak Hill Capital.

“All of these deals were done in the 40 to 62 multiples of RMR. All these deals were done between 10x and 13x the enterprise value,” he says. 

To gauge a true picture of the metrics of an acquisition, Kessler factors what he terms “multiples of steady state cash flow.” The valuations Blackstone paid for Vivint — subtracting the value of Vivint Solar and 2GIG — results in an RMR multiple in the range of 50x and a steady state cash flow multiple toward the lower end of the 10x to 13x range noted above, according to Kessler. That is a multiple toward the bottom of the range, which has been 10x to 13x steady state cash flow, during the past 18 months, Kessler says. 

“This is still a big deal because the company has basically said it is going to produce something along the lines of $34 million of RMR for 2012,” he says. “They haven’t published it but we have estimated their steady state cash flow. Based on that, it is a big deal due to the size of the company. They are up there along with Monitronics and Protection 1 as the No. 2 players in the industry.”

Rodney Bosch is managing editor for SECURITY SALES & INTEGRATION magazine. He can be reached at (310) 533-2426.

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