Brink’s spin-off’s impact?

One analyst says the other big two alarm firms should benefit
Sunday, June 1, 2008

RICHMOND--The planned spin-off of Brink’s Home Security and the expected increase in valuation will likely affect how investors view ADT and Protection One, prominent industry analyst Jeff Kessler told Security Systems News in May.

The Brink’s spin-off was announced in February and is expected to take place during the third quarter this year. Once Brink’s Home Security is a standalone public company with metrics for all to see, Kessler predicted, “it should help other companies in the industry which are misunderstood or undervalued by investors as well, including ADT and Protection One, which are trading at undeservedly low multiples of RMR and EBITDA.”

Together, ADT, Brink’s and Protection One have about 40 percent of the market. ADT is by far the largest with about 31 percent of the market, while Brink’s has about 5 percent and Protection One has about 3 percent.

Kessler emphasized that each company’s situation is unique. Protection One has a majority owner: Quadrangle Group owns most of the company. “There are only about 6.5 million shares in the public … so the liquidity is less, but nevertheless, they’re still undervalued and may become relatively even more so when Brink’s splits off.” And ADT has a corporate parent in Tyco International, “although ADT provides more than half of the EBITDA for Tyco,” Kessler noted.

The Brink’s Company’s investors’ position was buoyed by Brink’s first quarter earnings, which were released April 30. First quarter revenue was up 24 percent to $920.6 million from last year’s first quarter revenue of $740.5 million. Kessler noted that “investors were expecting more weakness in the home security business. New installations were down but that was buffered by the fact that attrition remained low and high-margin RMR continued to increase, [enabling BHS] to meet or beat street-estimates of operating income for BHS.”

With Brink’s Inc.--the cash-handling business--“most investors expected a positive bump from the currency transfer in Venezuela,” he said. This happened, but Brink’s Inc. also did better than expected elsewhere in South America and in Europe as well.

Kessler called it an impressive quarter, but “even though they came in with a better than expected quarter, [Brink’s Inc.] always has question marks around it … On the other hand, the Brink’s Home Security business continues to remain the premium mass marketing brand in the industry, the metrics continue to be excellent, and the stock continues to be undervalued because of the conglomerate nature of the corporation.”

After the split, Kessler expects that the value of Brink’s Home Security will increase to nine times EBITDA and “north of 40- to 45-times RMR,” and it’s possible ADT’s and Pro One’s valuation could follow upwards, as well.