Protection One Expected to Flourish Under Covert, Whall

Tim Whall may not have been widely prognosticated to lead the next incarnation of Protection One, but nevertheless he returns to a familiar stage for a run at yet another command performance.

Word came down Monday Protection One agreed to be acquired by “affiliates” of GTCR, a Chicago-based private equity firm, for about $392 million plus debt — a deal totaling more than $828 million. Whall will become Protection One’s CEO and be joined by his eminent business partner, Jim Covert, who will serve on the board of directors, according to sources.

The deal for the nation’s second largest alarm/monitoring company marks the third collaboration for GTCR, Covert and Whall, including investments in Cambridge Protection Industries and Honeywell Security Monitoring (later HSM Protection Services).

(For more on the businesses successes consummated by Covert and Whall, see SSI Editor-In-Chief Scott Goldfine’s blog post here.)

“Tim is an excellent operator and Jim knows how to run a business, so between the two of them — and with GTCR’s backing — it is going to be tremendous,” Les Gold, a partner in the law firm Mitchell, Silberberg & Knupp, tells SSI. “[Protection One CEO Richard] Ginsburg did a terrific job bringing the company up to where it is, but now you need a new infusion to bring it to the next level and I think with this management team they are going to get there.”

Industry experts SSI interviewed for this story say Protection One, which will be taken private, has returned to relatively strong footing since its near financial ruin several years ago. Still, the company’s incoming leadership will have to contend with significant, lingering challenges. Not the least of which is considerable debt. As of Dec. 31, 2009, the company’s total debt eclipsed $447 million.

While the recurring revenue multiple for the deal is 33, according to sources the multiple ultimately was not used to value the business in an otherwise complex transaction.

(For more on terms of the deal, click here.)

“Everyone wants to simplistically compare it to the Broadview multiple [41-43], but you have to remember there are four different components of rate that were involved in P1,” says John Mack, managing director and head of mergers and acquisitions for Imperial Capital, and former CEO of Protection One. “You had the residential monitoring rate, the commercial rate, multifamily rate and the wholesale rate.”

Each of the four types of RMR have different valuations, Mack says, “some of which would be below the norm for what you would have seen from the Broadview transaction.”

As an example, the company’s retail segment accounted for 80.2 percent of its RMR at the end of 2009, of which 30.2 percent was commercial customers. The multifamily segment accounted for 7.8 percent of consolidated revenue.

Peter Giacalone, president of Giacalone Associates LLC, a security consultation firm, tells SSI Protection One’s incoming leadership is likely to examine without delay whether or not to sell its profitable wholesale monitoring operation.

Criticom Monitoring Services (CMS), the largest wholesale provider in the United States, serves about 4,600 independent alarm monitoring companies and accounted for 13.6 percent of Protection One’s consolidated revenue at the end of 2009.

“CMS’ revenue is much smaller compared to the overall company, but the wholesale division throws off a lot of EBITDA — probably $8-$9 million a year. That EBITDA is significant, but their top line revenue in comparison to Protection One’s total revenue is small,” says Giacalone, who formerly served as COO of Criticom Int’l, and pens SSI‘s “Monitoring Matters” column.

Giacalone suggests CMS today could be worth $60-$80 million, capital which could be used to reinvest in Protection One and help finance growth.

“The reality of it is the wholesale business, although it throws off a lot of cash, it really doesn’t bring a lot to the bottom line as far the balance sheet. It doesn’t really help you from an equity standpoint,” he says. “That is going to be a challenge they have: are they willing to forgo that EBITDA for more capital to put it to better use?”

The past may lend some insight to CMS’ future. Giacalone explains when Cambridge made the large acquisition of National Alarm Computer Center (NACC) in 2000, later selling it off to Tyco, the operation created major channel conflict for its new owner. So much so that Tyco ended up selling it to IASG.

“Tyco sold off NACC when it was a deteriorated asset. They would have had much greater value if they would have sold it right off the bat. There is a lot of risk in the wholesale business anyway,” Giacalone says. “But you broaden the risk because now you are going to become a real aggressive player — GTCR didn’t buy this to be passive — and there is no question you are competing with your own customers.”

Whall will arrive at Protection One well positioned for future growth, especially in the commercial marketplace, says Sandy Jones, president Sandra Jones & Co.

“Richard [Ginsburg] and his team have been focused on commercial the last couple of years. They went from an almost all-residential company to a very high percentage in commercial,” she says. “If you look at the HSM business, a high percentage of that was in commercial. They really know how to do that. There are still some things that are not attractive about Protection One, but this group will make it very attractive.”

Gold says while Covert and Whall will remain strong in residential, they clearly see their growth opportunity on the commercial side. “Particularly as business picks up at the end of this year and into 2011, I think there is going to be a huge demand for commercial and industrial and this is where they excel.”

Acquisitions are also sure to play a significant role in Protection One’s growth strategy, Mack says. With not many pure-play large commercial alarm companies available, he says the new leadership will be looking to buy smaller commercial alarm companies.

“Look at the history of GTCR, Covert and Whall,” Mack says. “They all have a history of growing businesses by acquisition. Almost by definition they will be focused on acquisition as part of their growth strategy.”

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