Possible Protection 1 buyers: PE firm, telecom or cableco

Pro 1 is reportedly up for sale with a $1.5b price tag, and an analyst tells SSN having an 'asset of this quality' on the market is unusual
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Wednesday, August 6, 2014

YARMOUTH, Maine—Home security giant Protection 1 is up for sale for more than $1.5 billion, Reuters reported this week. Likely buyers could range from a top private equity firm to a telecom or cableco, an industry analyst told Security Systems News.

GTCR, the private equity firm that bought Protection 1 in 2010 for $828 million, has asked Morgan Stanley to help in the sales effort, the news service reported Aug. 4.

Romeoville, Ill.-based Protection 1 did not respond to SSN’s request for comment on the report, which Reuters ascribed to unidentified sources.

Jeff Kessler, managing director of institutional research at Imperial Capital, a New York City full-service investment bank, said the news that Protection 1 was up for sale was “a surprise to me.” He’s an expert on Protection 1, which he described as “one of the premier, if not the premier, providers of security in this country.” Kessler said he covered the company for years when it was public and also visited it after GTCR took it private when it bought it four years ago.

Kessler stressed that his knowledge about a possible sale comes solely from the Reuters report. If it’s correct, he said, it’s big news because he believes the company is doing very well. “It’s unusual that an asset of this quality comes on the marketplace,” he said.

Kessler speculated that the most likely buyer of Protection 1 would be another private equity firm, but one larger than Chicago-based GTCR.

“I think if GTCR believes that they can get this type of money in this period of time, why not have this thing financed up in the next level of private equity?” Kessler said.

He said that some of “the biggest guys out there” are interested in investing in the “connected premises,” which includes not only the home but commercial businesses. Protection 1 has been rapidly growing its commercial business with national accounts, Kessler said.

What about a strategic buyer, like ADT?

“At this point in time it would be a big acquisition for ADT,” Kessler said. “But that doesn’t rule out the cable [companies] or telcos being interested in this company.”

That’s because Protection 1 would be able to provide the professional monitoring side of security, which cablecos and the telecoms typically lack or are weak on.

“Everybody has been talking about bundling and getting new customers and market share and pricing when it comes to the front side of running a security business, but very few people in the public markets have been talking about the critical importance of being able to get a call within a couple of seconds and making a decision on that call with regard to dispatching or not dispatching [or] with regard to providing a health consultation or not within 30 seconds or so,” Kessler said.

Kessler said that Protection 1 has worked with a telecom in the past, “so I wouldn’t just dismiss the possibility that there could be an acquisition here from a strategic point of view.” Protection 1 had a partnership with Bell South in the mid-2000s that “actually worked fairly well” but ended because Bell South was acquired, Kessler said.

He doesn’t believe Protection 1 would go public again. “I don’t think the management team there would like to have to deal with public investors who don’t understand the security industry that well. I think a public stock [offering] is probably the least likely of [the scenarios].”

Protection 1 is one of the largest full-service business and home security companies in the United States. As of the end of 2013, it had more than $429 million in revenue, 1.5 million customers and $28 million in RMR, an increase of nearly 8 percent over the previous year, according to published reports.

By contrast, home automation/home security company Vivint—which was acquired by The Blackstone Group in 2012 for more than $2 billion—ended 2013 with more than $42 million in RMR, an increase of 23 percent over the previous year, according to published reports. Provo, Utah-based Vivint, which has more than 800,000 customers, had in excess of $500 million in revenues in 2013.

Is the reported price tag of more than $1.5 billion for Protection 1 reasonable? That price is almost double what GTCR paid for it.

Kessler said he can only speculate on the value of Protection 1 because it is not only a private company for which precise financial data is not readily available, but also because it’s “a complicated company.” He noted Protection 1 has two other parts that represent about 25 percent of the company’s business—its multifamily business and its wholesale monitoring business, CMS—in addition to its residential and commercial security business.

But based on the published report of $28 million in RMR for the company at the end of 2013, combined with the reported sale price, Kessler estimated a multiple that is “probably in the high 40s, low 50s.”

He also praised Protection 1 CEO Tim Whall, CFO Dan Bresingham and CIO Don Young as “three of the leading executive luminaries in the industry right now,” and noted that their “top-notch management” has resulted in marked improvement in both the residential and commercial side of the business.

So while he said that reported $1.5 billion sale price “would represent a significant premium over what [GTCR] bought it for, … that premium goes into what [the executive team has] done with getting the internal metrics in terms of customer retention and customer life in the residential business up and building up the commercial business.”

The commercial business, which focuses on fairly high-end national accounts, is now about 50 percent of Protection 1’s business, whereas previously it represented 40 to 45 percent of the business, Kessler said.

“They’ve done a really good job in the commercial area, growing it and making sure that they are a name that is mentioned when we talk about large scale installations,” Kessler said.