Pro One, IASG to merge

Thursday, February 1, 2007

LAWRENCE, Kan., and ALBANY, N.Y.--In a move that will make Protection One the dominant player in the wholesale monitoring business, Protection One and Integrated Alarm Services Group announced a merger on Dec. 20.
The combined company will be called Protection One and will be led by Richard Ginsburg, Protection One's president and chief executive officer.
Ginsburg said he expects the merger to improve operating margins and accelerate cash-flow growth. He said Pro One's three central stations and one disaster recovery center and IASG's three central stations will give the new company an "unmatched network of central stations to serve customers and independent alarm companies."
The wholesale operation will continue to operate separately from other divisions. "We like the wholesale monitoring business a lot and we truly believe that we can form a new paradigm to help independent dealers grow their business," said Ginsburg.
From Sept. 2005 through Sept. 2006, Pro One had revenues and adjusted EBITDA of $363.8 million; IASG had $104.4 million. As of Sept. 30, the two companies had combined RMR of $26.8 million.
Terms of the deal--which will need IASG shareholder and regulatory approval--were unanimously approved by the boards of both companies. Each share of IASG will be exchanged for .29 shares of Protection One stock, leaving 25.3 million shares outstanding. Of those outstanding shares, IASG and Protection One shareholders will own approximately 28 percent and 72 percent, respectively.
Michael Barnes, whose Barnes & Associates consulted with Protection One on the deal, said the way to view the deal price is to think about how the combined company will trade after the transaction closes. He noted that Protection One is essentially privately held at this point, as investment group Quadrangle owns 97 percent of the stock and the shares are thus rarely traded. "IASG's holders are going to receive 7.1 million P1 shares," Barnes noted. "In my view, P1's shares are not trading at values that are truly representative of the quality of their assets and the capabilities of their operations, particularly when combined when IASG's. Assuming the market recognizes the value, and trades the combined company at a value of say 34 to 40 times RMR, I think you could see a P1 share price in the range of $17 to $23. This would represent a value of roughly $5 to $7 per IASG share. This valuation range, and beyond, is certainly conceivable given the valuations received by other large alarm companies, including Brink's and including the recent transaction announced by HSM and Stanley Works, which values HSM at 60 times RMR."
"This deal is a clear win-win for both companies," Barnes continued. "IASG's operations gain the scale and coherence that they needed, along with being run by a world-class management team. P1 achieves additional growth, much of it in their core markets, and has the opportunity to further leverage their operating capability."
Pro One's merger offer was more attractive to IASG than other offers because "the combination of the resources is very complementary," said Joe Reinhart, IASG director of investor relations. "We have strengths that complement their organization, they have strengths that complement ours." Reinhart also said the combined company's national footprint will be beneficial, because "in this world, size matters."
Ginsburg said the new entity will offer wholesale dealers many "products and services that others can't." In addition, the dealer will benefit from having a "sizeable company behind it with hundreds of millions of dollars in revenue ... we believe that will be a selling attribute for those dealers."
Ginsburg said Pro One's experience turning itself around will be helpful. "When you grow as fast as IASG has, there are challenges. They've started to fix them ... and [at Protection One we] have been there and done that," Ginsburg said.
Barnes concurred with Ginsburg: "Richard Ginsburg and his team have done a phenomenal job in fixing P1, particularly in the areas of consolidating the operations, improving attrition and bringing coherence to the overall company. These improvements are much farther along than is generally acknowledged or appreciated. They are more than ready to bring this capability to bear on IASG's operations."