UTC to buy Initial for $1.16b

Tuesday, May 1, 2007

LONDON and HARTFORD, Conn.--UTC Fire & Security has made another major play in establishing itself in the electronic security integration and installation market, with an agreement to purchase the Initial Electronic Security Group from Rentokil Initial for $1.16 billion.
Rentokil Initial began a strategic review of its electronic security business, which brought in roughly $500 million in 2006 revenue, in November of last year. The review was conducted by UK investment firm Greenhill, though the results were not publicly announced. Upon announcement of UTC's offer, March 30, for its electronic security business, Rentokil chief executive officer Doug Flynn said in a statement that the company would now focus on businesses where it can take a market-leading position, such as pest control and parcel delivery.
"It's sad," said Jack Mallon, managing director at banking firm Mallon & Associates. "Rentokil became a major player globally in electronic security and because of pressures on the company they saw fit to dismantle and dispose of all of their security operations. It's another major company that just opted to get out of this field."
Rentokil last year already divested itself of its remaining guard services division, the U.S. and Canadian portions of which were sold off to AlliedBarton and Garda, respectively. UTC estimated that its own continuing guard operations in the UK and Australia generate $550 million in annual revenue, but is looking to divest itself of the guarding operations to focus on electronic security installation.
UTC has actively been looking to increase its position in security integration. Most recently, UTC purchased North American integrator Red Hawk Industries for more than $100 million in late 2006. With this Initial acquisition, UTC will pick up companies operating in the UK (Initial Fire & Security), France (Varel), Netherlands (Delta), and the United States (Initial Electronics). UTC also owns Chubb, an integrator based in the UK.
Initial Electronics, itself, has been active in the United States. The company has acquired NTC Electronics, ISS, Video Master and Barry Security since 2003. Initial Electronics president Kevin Robison said in a statement that he looked forward to working for a bigger company "with a more defined focus on security."
Mallon noted UTC's acquisition of Chubb as a major move in the security space, "and the Rentokil piece seems to fit in very smoothly with Chubb, in terms of the type of services and the nature of the services. It seems to be a very good fit and a smart acquisition." However, he said, "If we're talking about this generating 282 million pounds ($545 million), you're talking about a two-times-sales price tag. That's pretty rich. If you calculate it on the basis of the operating profit of 40 million pounds ($78 million), you're talking about twelve-times-operating profit. It's a rich, expensive deal for UTC, but it demonstrates their commitment to the space and hopefully will further their operations."
Mallon noted, too, that security stocks tend to be valued higher in the UK and in Europe and that Securitas and Group4 Securicor have lately driven up multiples for integration firms. So the price might be more reasonable in that context.
Both UTC and Rentokil Initial declined comment on the deal, citing a wait for regulatory approval in four countries. Closing is expected in late June.