GTCR to buy Pro One: Covert and Whall back in business

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Monday, April 26, 2010

LAWRENCE, Kan., and CHICAGO—Jim Covert and Tim Whall will be back in the security business following the close of a $828 million deal, announced today, where private equity group GTCR acquires Protection One.

“Jim will be a board member and serve as an advisor, and Tim will be the CEO,” said David Donnini, GTCR principal, who noted that GTCR has worked with Covert and Whall, notably with the Cambridge Protection and HSM deals, over the past 15 years.

“We teamed up with Tim formally a couple of years ago, and have been looking for an opportunity to get back into the space. Protection One was among his ideal platforms,” Donnini said.

The RMR multiple for the deal is 33, according to Mark Gronowski, a partner in Barnes Associates, Inc., an advisory and consulting firm that specializes in the security alarm industry, and who led the Barnes’ efforts in supporting this transaction.

“Based on the enterprise value of $828 million and the RMR indicated in Protection One’s 10k filing for 2009, the indicated RMR multiple is approximately 33 times. When contemplating this multiple, it is important to recognize that 12 percent of the company’s RMR is associated with their wholesale division, and 8 percent with their multi-family division,” Gronowski told Security Systems News, adding that Barnes Associates was “pleased to once again work with GTCR and Tim Whall. This represents another great opportunity for them, and for Protection One.”

The transaction is expected to close in the second quarter of 2010. At that time, Protection One will become a private company, wholly owned by an affiliate of GTCR.

The deal is in the form of a tender offer, scheduled to begin May 3. GTCR will acquire all of the outstanding common stock of Protection One for $15.50 per share in cash, followed by a merger to acquire all remaining outstanding Protection One shares at that same price.

A tender offer “is a very efficient process,” Protection One CEO Richard Ginsburg told Security Systems News. “It offers the shareholders the benefit of speed.” Ginsburg noted that Protection One’s board had approved the deal. “They think it’s a fair deal and in the best interest of stockholders, and that’s really important to us as a publicly traded company.” Beyond that, Ginsburg said that he believes “activity like this is good for the industry” and “the industry has good prospects going forward.”

Asked about his plans post-close Ginsburg said his goal “is to get transaction closed. That’s all I’m focused on right now.”

The offer price represents a premium of 13 percent over the April 23, 2010 closing stock price of $13.76, and a premium of 118 percent over the $7.10 closing stock price on January 19, 2010, when Protection One announced it was for sale. The purchase price includes the refinancing of Protection One’s debt. Debt financing will be provided by JP Morgan Chase Bank, N.A., Barclays Capital and TCW/Crescent Mezzanine.

John Mack, managing director and head of mergers and acquisitions for Imperial Capital, called the deal “well within expectations.” Mack, who served as CEO of Protection One from 1991 until 1999, said, “GTCR has been a longtime investor in the security alarm business and has done well. This represents a continued theme for them.” On GTCR pairing with Covert and Whall once again, Mack said, “they’re betting on guys they know and trust.”

Mack surmised that the two most likely strategic buyers, Stanley and ADT, were effectively sidelined by other ongoing deals. Stanley likely had a “hard time bidding within the time frame” given its merger with Black & Decker, and ADT is tied up with the Broadview deal.

Asked about Whall and Covert re-entering the security business and effectively competing against companies (ADT and Stanley for example) that they’ve worked for before, Mack said, “They’ve done that before. That’s not unusual.”

Noting that there will have to be some “significant debt restructuring in the deal,” Mack said that the deal is a “good sign that the financing and debt markets are significantly open” to make this deal come to fruition. It’s a positive statement for the industry and shows that GTCR has got “a strategy to grow the business, one that hasn’t been growing for the last several years.”

This marks the third time Covert and Whall have partnered with GTCR. Both are long-time security industry insiders, who have successfully built up and sold companies such as HSM and Cambridge Protection.

Covert founded SecurityLink Midwest Corp. in 1987,which he built into one of the largest alarm companies and sold to Ameritech in 1994. He remained CEO of Ameritech's SecurityLink subsidiary until 1996, when he left to found Signature Security Group in Australia, which he helped grow to one of the largest electronic security companies in Australia and New Zealand.

Covert left Signature and founded Cambridge Protection Industries in partnership with GTCR in 1999. Through acquisitions, Cambridge became the second-largest electronic security group in the U.S., with operations in more than 40 states. In 2001, Covert sold Cambridge to ADT for $1 billion in cash. In 2004, Covert returned to the security industry and was named CEO of HSM Electronic Protection Services. HSM was sold to Stanley for $545 million in cash in 2007. Whall served as CEO of HSM and COO of Cambridge. When HSM was bought by Stanley, Whall served as president of the company until he left to pursue other interests in January 2008.

Quadrangle Group LLC and Monarch Capital Partners, which together own more than 60 percent of the fully diluted shares (and approximately 70 percent of the currently outstanding shares) of Protection One, have each executed a tender and support agreement. 

Protection One's financial advisor is J.P. Morgan Securities Inc. and its legal advisor is Kirkland & Ellis LLP. Lazard Freres & Co. LLC advised Protection One’s board of directors and its independent transactions committee with respect to the fairness of the offer price to be paid in the transaction.

Morgan Keegan & Company, Inc. and Barclays Capital served as M&A advisors and Barnes Associates served as an industry advisor to GTCR. Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP provided GTCR legal counsel.

Donnini said GTCR is excited about its third go-round in the industry. “We’re getting back into an industry we love, that has been very good to us, with executives that have done a phenomenal job with us,” he said. “Protection One is a quality company with a national footprint and a great platform for what we like to do, and what we’ve had success doing in the past.”