March 7, 2018
“Security Industry Financials – A Closer Look” covered recent deals in the security industry, as well as other financial components. Speakers John Mack (Imperial Capital), Alper Cetingok (Raymond James), and Will Schmidt (CapitalSource) discussed the following topics:
- Security market trends and drivers
- M&A activity
- The role of strategic acquisitions and financial acquisitions
SECURITY MARKET TRENDS AND DRIVERS
Equities performed exceptionally well in 2017 on the back of strong corporate earnings, lax monetary policy, and the passing of major tax reforms. Notwithstanding the strength seen for a majority of the year, 2018 has been off to a rocky start, with volatility seen in both the debt and equity markets. Mack explained that where we are with tax reform and the strength in the economy that the security industry will continue to see reasonable growth in the equity capital markets over the next several years.
Security Companies vs S&P 500
Security companies performed well in 2017, posting nearly 10% higher gains than S&P 500 index through Q1 018. Gains were primarily driven by an increased appreciation for security: both in physical security and cyber security. From home monitoring to computer security software, to enterprise level security level suites, 2017 proved that security was a major necessity for individuals and corporations alike.
Two companies up significantly in the last year: Alarm.com (+37 percent) and Control Four (+181 percent).
Significant M&A Transactions
On January 19th, ADT executed an IPO on the NYSE under the ticker “ADT” at &14/share. As of March 1st, ADT was trading at $10.68, implying a TEV of $17.6 billion; 7.6 LTM EBITDA and 51.3x RMR. At the IPO price of $14/share, ADT was trading at 58.6x RMR. ADT has fundamentally improved many of its KPI’s since its acquisition, reducing attrition, customer revenue payback, and Capex as a % of EBITDA.
BCE’s acquisition of AlarmForce Industries
Imperial Capital advised AlarmForce in connection with its sale to BCE for $16/share, a transaction that closed in January 2018. The company was valued at C$168 million, and was purchased for 52.9x RMR as of July 31, 2017.
AlarmForce is one of the largest home and business security companies in Canada with more than 100,000 subscribers, and offers a full range of residential alarm and automation solutions. The acquisition complements BCE’s existing portfolio offerings in the home security space, all of which operate in Ontario and Quebec provinces. They include Bell Aliant NexGen Home Security and AAA security. AlarmForce’s wester operations and client base was immediately sold to Vancouver-based Telus Corp. for roughly $66.5 million following the transaction at BCE’s purchase price.
Ares’ acquisition of Convergint
In Q1 2018, Convergint Technologies, a premier global service-based systems integrator was acquired by Ares Management. Convergint has strategically grown its global service footprint by acquiring 19 companies in the last five years. As of December 2016, SDM Magazine estimated that Convergint generated over $575 million in revenue, making it the second largest security integrator in North America (second only to Johnson Controls).
Moody’s through its publicly available ratings research, has indicated that the deal was valued at approximately $1.6 billion.
Ares Management is a diversified asset management business with over $100 million under management. The acquisition was executed through its Private Equity division, which has approximately $25 billion under management.
Emerging Market Trends
AI/Deep Learning is expanding the functionality of products that security practitioners can provide. Traditional analytics software can move beyond simply recognizing objects ad begin to learn how objects interact with their environment and look for anomalies. As AI progresses, a natural movement will occur from supervised learning to unsupervised learning.
Aerial Drones Enhancing Security Offering
UAVs-Pervasive wide area 24/7/365 surveillance & response at a fraction of the price
- Manually operated or autonomous patrols and threat response; Drone-as-a-Service
- Quick-response and rapid verification
- Fly to incident site uninhibited
- Real-time intelligence and video streaming
- Technology at operational phase; Regulation lags
- Supplemental services: monitoring, inspection mapping, surveying
- Counter-drone: A necessity (ex: McCarran International Airport incident)
- Currently limited to law enforcement and government agencies
Land-based Robots Enhancing Security Offerings
Make guarding and patrolling more efficient while delivering cost-savings
- Self-propelled mobile multi-sensor solution
- Camera / video analytics
- License plate detection / analytics
- Thermal imaging
- Two-way audio
- Integration with in-place monitoring solutions/command and control centers
- Cost savings
- Human guards – $25/hour
- Autonomous robots – $7/ hour
Convergence of Physical & Cybersecurity
Increasing installation of connected devices (IoT) and storage of user data in the cloud strengthen link between physical and cybersecurity
- 50 billion IoT devices are estimated to be in market by 2020 compared to over 15 billion today
- Each connected device is a potential point of attack and new devices bring new vulnerabilities
- Up to 70 % of commonly used IoT devices are vulnerable to cyber attacks
- These devices can be used to access networks for nefarious purpose
- Cybercriminals temporarily brought down Dyn, Inc. with a botnet driven DDoS attacked by hacking IP cameras causing major outages for websites such as Twitter, Amazon.com, Spotify, and Netflix
M&A and Market Overview
Mack explained that 2017 saw the most, 458, M&A’s in any year over the last five years. The strong M&A market throughout 2017 was boosted by strong corporate earnings, record private equity dry-powder, and relatively inexpensive debt.
Factors Influencing the Current M&A Environment
Many of the factors influencing M&A are currently positive, providing a strong backdrop within which to execute transactions
- Economic conditions
- Equity markets
- Credit markets
- Strategic participation
- Private equity participation
Recent U.S. Middle Market M&A Activity
Overall, U.S. middle market M&A activity is in line with the strong levels seen over the last several years.
Growth and Impact of Smart Home
The smart home market has evolved rapidly from concept to reality due, in large part, to the advancement of technologies enabling deployment on a broad scale
- Smart home technology infrastructure
- Recent technological advancement in data communication continues to drive ever-evolving and expanding smart home product offerings coupled with comprehensive device connectivity
- Key adoption drivers
- Energy and insurance rebates for connected devices
- In-home consultations (Amazon)
- Showrooms with demos (Target Open House)
- Builders installing devices prior to home ownership, and contractors installing devices as part of maintenance and service calls
- Smart home device growth
- The market for smart home devices is expected to realize explosive growth through 2020 supported by a meaningful increase in product offerings
- Smart home trends and opportunities
- Improved product capabilities coupled with heightened industry awareness are expected to continue the expansion of the smart home marker as an increasing percentage of security industry customers adopt a more advance solution
- Smart home ecosystem
- The smart home ecosystem is comprised of a diverse array of product and service provides across the security, communications and technology domains
Smart Home M&A Activity
M&A activity in the smart home segment is robust, resulting in a dramatic altering of the competitive landscape
Market Activity Update: Return of Strategic Acquirers
After an extended period of inactivity, strategic acquirers in the security industry returned en masse during the las 18 months and registered many large, noteworthy transactions that are altering the security landscape
Debt Capital Markets Overview
Debt capital markets – Score card and outlook for the security industry
- Volume- debt issuance volumes up broadly, including modestly for middle market. Security issuances strong in 2017. M&A pipeline still developing for 2018.
- Volume mix- 2017 volume quality improved with stronger new issuances vs refinances
- Structure- Covenant-lite volume spiked to a new high in Q4 2017. Structural elements favor issuers
- Leverage- Total and senior leverage increased during 2017. New Leverage Lending guidance is pointing to continued strong leverage in 2018
- Yields- Senior yields continue to tighten in 2017. Pricing to remain tight as demand for floating rate assets exceeds supply