Argyle secures $15m

Another sign a tight money market isn’t bad for security firms?
Sunday, June 1, 2008

SAN ANTONIO--Systems integrator Argyle Security announced April 24 it has received a $15 million stock investment from Mezzanine Management, an independent investment firm. Argyle will issue roughly 18,750 shares of preferred stock, with each share convertible to 100 shares of common stock at $8 a share. That represents a premium of more than $1 over where the stock is currently trading.

“I can’t tell you how excited we are about this,” said Bob Marbut, chairman and co-CEO of Argyle Security. “Even if the environment weren’t as tough as it is, it’s great to be able to find this kind of partner and do something that’s substantial for us and on terms that are good for the shareholders.” Mezzanine did not ask for dividends to be paid out, and “the fact that they came in at $8, and no one else has come in above $8 in the whole time we’ve been a company, our other major shareholders were ecstatic about that.”

This shows, too, that “the doors are still open from financial providers,” said Gretchen Gordon, director of the Communications, Media, & Entertainment division at CIT Group, and a lender to the security industry. However, she said, “they’re more selective now, and to the extent [Argyle] was successful in raising capital, it probably means they have a quality business plan.”

Further, said William Lynch, vice president at ProFinance Associates, a deal broker in the security industry, “I think a financing of this size, at this time, is also possible because of the fundamental strength and underlying growth characteristics of the electronic security sector. Our industry should continue to attract capital because of this phenomena while other investment categories are likely to compress in the months ahead.”

Argyle has been an active acquirer since beginning operations in July 2007, having most recently bought Peterson Detention, FireQuest, and Com-Tec Security for a total of roughly $14 million in January. In the fourth quarter of 2007, the company reported revenues of $26,961 and $235,000 of net profit. This early profitability is what attracted Mezzanine, Marbut said.

“When you think about a company at this stage, even in a reasonably good environment,” normally you’d bring in partners at a discount, Marbut said. Instead, Mezzanine “is a growth strategy support partner,” he said. “If we weren’t growing, we wouldn’t have needed it.” He said having a strong balance sheet, helped by the financing, is important for the company’s corrections work, where a strong balance sheet is necessary for bonding capacity, and “it gives us equity that we can use ... for some likely acquisitions later in the year, perhaps. We’ve identified cities that we want to continue to grow in with our commercial side of the business.”

“You always want to take capital before you need it, rather than after you need it,” agreed Lynch. “And [Marbut’s] point about the bonding is very true. I can see after looking at their financials that their balance sheet did need some shoring up if they wanted to compete for some of the larger projects, and this will help them do that.”

Argyle Security, Inc. currently has two reporting segments: Argyle Corrections and MCS-Commercial. Argyle Corrections is the controlling entity for ISI-Detention, PDI, Com-Tec and MCS-Detention. Argyle Corrections Group is one of the nation’s largest providers of detention equipment products and service solutions, as well as turnkey, electronic security systems.