Equity firm buys Tri-Ed, Northern Video

Combined company to operate as Tri-Northern Security Distribution
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Wednesday, March 17, 2010

Updated with quotes from Imperial Capital's John Mack, March 19.

DALLAS—Brazos Private Equity Partners, LLC, a private investment firm based here managing $1.4 billion of equity capital, announced this week the acquisition of two prominent electronic security distribution companies, Tri-Ed Distribution and Northern Video Systems. Financial terms of the transactions were not disclosed. The acquisitions are being made from Brazos Equity Fund III, which closed in September 2008 with capital commitments totaling more than $700 million.

The two companies will be combined and will operate as Tri-Northern Security Distribution, under the leadership of Tri-Ed CEO Steve Roth. Roth told Security Systems News, however, that things won’t change radically on day one.

“The near term difference is only going to be through the expanded offerings,” Roth said, as the respective product lines will be combined and offered to dealers. “The interface and the process will be exactly the same as it was yesterday in the near term,” Roth said of the buying experience.

The combination of the companies by Brazos is the culmination of talks that began in the middle of last year, Roth said.

Roth had a long relationship with John Mack, an equity investor in Tri-Ed and now co-head of the Investment Banking Group, and head of Mergers and Acquisitions for Imperial Capital. Mack helped Roth buy Tri-Ed from Tyco in 2005 and though they did attract private equity at that time, Mack said it was “not in the traditional way. It was sort of a friends and family financing, but with an established firm, Wheatley Partners, because Tri-ed had the promise to be big enough to matter at the scale of a private equity investment,” but wasn’t yet a good private equity target.

As it got to be five years later, and Tri-Ed’s revenues doubled, Roth and his team, said Mack, “got it to the size where it was at a level of interest to private investors, and they didn’t just want to sell out to a strategic and have the game be over, so we started to look at creative ways to bring in equity interest.”

Mack suggested bringing in a second company, introduced Roth to Mark and Paul Haney at Northern Video, “and that’s where the dialogue started,” Mack said. “I said, ‘Here’s an interesting opportunity to put the two of you together, and I think we can attract a really serious commitment to do something extraordinary,’ and that’s how things worked out. There was a jigsaw puzzle fit.”

As for impact on the marketplace, Bill Bozeman, CEO and president of co-op PSA Security, which does compete somewhat with both companies, said the deal would definitely have an impact. “Both companies had a significant customer base,” Bozeman said, “and you put them together and they have a more significant customer base ... and of course it’s a direct assault on ADI.”

That said, however, Bozeman thinks the encroachment on the market of IT distributor Ingram Micro could have more impact than anything anyone’s doing in the traditional security market, especially because of Ingram’s history of existing on very thin margins and on driving margin down in every market it enters. “If you look at Tri-Ed and Northern Video and add them up together, and then you take a look at Ingram Micro doing $37 billion—if they get serious, they’ll have a much bigger impact.”

Mack isn’t in agreement. “I don’t think any of them [Ingram Micro and other IT-centric distributors who’ve come into security] have demonstrated a dedication to the full spectrum of products you need to have to be serious about physical security. They’re dancing around the edges.”

Roth said this isn’t just about creating size or competition, anyway. “Consolidation for consolidation’s sake isn’t the best way to go for anyone. You have to find two companies to go together and have one plus one equal more than two, and we saw that with Northern.”

Specifically, Roth said there is very little competition or overlap between the two companies. Tri-Ed has 38 branch offices; Northern Video has three. Tri-Ed is well known for its service in those branch offices; Northern is known for having one of the best inside-sales operations in the business. Tri-Ed’s offerings lend themselves more toward the alarm and access worlds; Northern brings obvious video capabilities and products.

“They bring a tremendous expertise in the video area,” Roth said, “and a customer base that buys much more than video, so Northern can now provide a suite of products that extends well beyond what they have ... Tri-Ed takes our current method of operation and the ability to really develop the video offering and create a bigger and broader situation with the fastest growing segment of the market, which is video.”

Roth seemed to marvel at how good the fit actually is: “It’s a totally complementary business structure on both sides. There are no branch conflicts. There’s no worry about, ‘who’s the surviving branch,’ in some areas. Both employee bases, they’re rooting for each other on day one.”

Bozeman agreed that, “if you look at it from 30,000 feet, it makes a lot of sense. Northern is strong in video, and Tri-Ed is more in the burglar alarm space, and you’re now stretching out both product lines.” However, he said, “I think it’s going to be difficult to merge the two cultures,” the one focused on inside sales, the other on branch locations.

Mack said culture was an important part of the deal, actually. “We never would have done the deal without a complementary culture,” he said. “The Tri-Northern guys can now take some of the cost out to get the pricing really low, and if you can wait a few days a lot of the traditional Tri-Ed guys will be impressed with that. And when they want to just drop by and pick a few things up at the local office, they can still do that. Instead of forcing a dealer to do his business a certain way, they’ll be able to design the best fulfillment for their businesses. I think they’ll be impressed by that.”

According to a press release, Tri-Ed and Northern will retain their organizational identity, company locations and executive leadership. The senior management at both organizations will assume leadership roles as well as equity positions in the new entity. Steve Roth will assume the role of CEO; Mark Haney will serve as president; Pat Comunale as COO; Paul Haney as executive vice president; and Brian James and James Rothstein as senior vice presidents.