AlliedBarton to buy Initial

Rentokil-aInitial completes N.A. guarding divestment
Tuesday, August 1, 2006

Rentokil Initial reached an agreement with AlliedBarton in June to complete its sell-off of its guarding operations in North America. Following regulatory approval, AlliedBarton will acquire Initial Security, all of Rentokil's U.S. operations, for $73.6 million. AlliedBarton is already the largest U.S.-owned guarding company, based in King of Prussia, Pa., with 74 offices across the country.
Initial will add 45 more branch offices and roughly 8,000 guards.
Alan Stein, vice president of marketing at Allied Barton, said that Initial "has really been an attractive acquisition candidate for us for a while now. When their new [chief executive officer, Doug Flynn,] decided to change their model globally, it really heightened our interest." Stein said the agreement, which is likely to close in August, calls for AlliedBarton to continue the Initial brand for at least 12 months, "except for areas where licensing might call for it to be kept longer."
Randal Dorn, president of Initial Security, said that Flynn "decided that someone who's just in manned-guarding would be a better owner" of Initial, and AlliedBarton fits that bill. Stein said "99 percent" of the company's revenues come through manned guarding, "and I don't see us varying from that at any point."
"We're excited by that," said Dorn, "because it expands our footprint. In these days of one national vendor for national companies, it was challenging for us as a 'multi-regional' player."
By the same token, Stein said Initial's success with small and medium-sized companies was very attractive to AlliedBarton, which has in the past focused on large companies. He said Initial has developed, particularly, excellent systems for "cold start" jobs, where guards are not on hand 24 hours a day.
This deal follows the March sale of Rentokil's Canadian guarding operations to Garda World Security for $60 million. Rentokil purchased Stanley Smith Security, of Texas, and Barnes Security, of Toronto, from Australian company Mayne Nickless for $51 million in 1995.
Jack Mallon, managing director of investment bank Mallon Associates, said $73.6 million represents "an attractive price-tag for Allied, in light of the inflated amounts for guarding companies in the not too distant past."
Specifically, AlliedBarton acquired Initial for roughly 30 percent of the company's $250 million in 2005 revenues, which Mallon said is in line with historical percentages. However, prices had been higher lately, particularly in Securitas' purchases of Pinkertons and Burns in 1999 and 2000, where they paid as much as 50 percent of annual revenues, though Group 4 Securicor's (then Group 4 Falck) purchase of Wackenhut in 2002 was as low as 20 percent of annual revenues.
More importantly, "AlliedBarton, funded by McAndrews and Forbes, apparently has staked out the billion-plus security market ... designed to become the 800-pound U.S. gorilla to compete head-on with Securitas." The question, said Mallon, is where does Allied go from here? There's some speculation that AlliedBarton might prepare for an initial public offering, but with slender margins in the guarding industry to begin with, and debt that was likely brought on with the Initial purchase, it's unclear what their bottom line might look like.
AlliedBarton's Stein noted that the company already operates as a public company because of a bond issuance that was necessary for 2004's Barton acquisition, and said that while other acquisitions might be in the offing, don't expect them to be foreign-based in an effort to compete with Securitas or Group 4 internationally.
"Our expertise is in the U.S. market," he said, "and we're going to continue to focus our efforts there. We have no plans to acquire globally. We've witnessed more failure than successes in that strategy."