Pro One issues $3.86 dividend
LAWRENCE, Kan.-- Quadrangle, the private equity group that owns 97 percent of Protection One stock, recouped all of its investment in the company on May 12 when Protection One issued a special one-time $3.86 per share dividend.
"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.
The new interest rate (LIBOR +2.5 percent) is much lower than standard industry rates, said Richard Ginsburg, president of Protection One.
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."
"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, complimented Ginsburg and Nevin for a taking a "company on a respirator and near death," and resuscitating it to where it's generating positive cash flow. However, he questioned the timing of 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 the company looked at its operating plan and management goals before deciding to issue the dividend. They wanted, he said, "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.
While this kind of transaction is uncommon in the alarm industry, which is made up of companies much smaller than Protection One, Ginsburg said "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.
This transaction takes care of shareholders and ensures "the company and our 2,400 employees can grow in the business doing what we do best. We think it's the best of both worlds," Ginsburg added.