Pro One issues $3.86 cash dividend
LAWRENCE, Kan.--Protection One on April 27 announced that it will award a special one-time $3.86 per share dividend to stockholders. When the dividend is paid on May 12, Quadrangle, the private equity group that owns 97 percent of Protection One stock, will have recouped all of its investment in the company within two years.
"There was $150 million in total investment and with a combination of paid back notes or debt they owned, plus this dividend, they will have been returned all that, plus a modest gain to them," said Darius Nevin, chief financial officer for Protection One.
To pay for the dividend, the company completed an add-on debt financing, which increased its current term loan amount by $66.8 million to approximately $300 million. It extended the maturity date by one year to March 31, 2012.
Richard Ginsburg, president of Protection One pointed out that the interest rate has been decreased (to LIBOR +2.5 percent) a rate he said is much lower that what's generally seen in the industry.
Ginsburg said the move is good for Protection One, its customers, and "helpful to other companies in the industry to show that Protection One was turned around and restructured and was able to pay a large dividend in a short amount of time."
Similar examples are scarce, "where someone has invested in the alarm industry, got all their money back within a couple of years and still own a majority of a company that's performing well," Ginsburg said.
"Incremental proceeds from the new loan, along with excess cash will be used to pay the dividend and make related payments to members of management," a statement said. The total payout is expected to be $75 million.
Jack Mallon, managing director of Mallon Associates, said Nevin and Ginsburg "have done a remarkable job over the past few years turning around Protection One...a company on a respirator and near death, and it's been resuscitated and it's generating positive cash flow." However, he questioned if now is the right time to issue what he called "an extraordinary payout."
"One could question," he said, "whether a company that has $300 million in debt and which has a slender $8 million in net income and which has negative working capital and which has declining sales over the past three years, whether it's in the best interest of the company to increase their debt--even at a lower interest rate, it's more dollars going out because it's more debt--to basically enrich private equity shareholders."
Nevins said it is critical to understand how the company looked at its operating plan and what management wanted to do before it made the decision to issue the dividend. They looked at putting in place a "capital structure that would be supportive of [the operating plan] that would not in any way hamper management ability to keep that business going."
The new loan allows the company to increase the amount of money it spends on new customer creation, he noted.
Ginsburg said that this kind of transaction is not common in the alarm industry, because most companies are much smaller than Protection One, however, "there have been hundreds and hundreds of dividends paid over the last three years through the process of borrowing cash on hand, which is what we did."
"Companies exist to provide a return to shareholders and dividends are a cash return to shareholders. Companies that grow and have long, successful histories provide an attractive return to shareholders. Companies that don't do that find themselves broken up or sold or gone. It's a balance between running the company and taking care of our customers but also taking care of our shareholder," Ginsburg said.
"We think that this is a way of taking care of our shareholders while at the same time making sure that the company and our 2400 employees can grow in the business doing what we do best. We think it's the best of both worlds," he added.