Who's going to buy Protection One?

Insight from Imperial Capital's John Mack, former CEO of Protection One
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Thursday, January 28, 2010

YARMOUTH, Maine—The speculation began as soon as Protection One announced Jan. 20 that it was putting itself up for sale: Who’s going to buy?

Will it be one of the big private equity firms who’ve recently invested in the security industry? Or will it be a strategic buyer like ADT or Stanley that takes the plunge, again?

“I wouldn’t rule them out,” said John Mack, though he noted ADT and Stanley are likely preoccupied with Broadview and Black & Decker, respectively. The buyer, Mack said, may well be someone entirely new to the security industry.

Mack, managing director and head of mergers and acquisitions for Imperial Capital, has some unique insight into Protection One. He was the company’s CEO from 1991 until 1999.

Mack surmised that Pro One’s decision to go public with the sale, “may have been designed in part to attract interest from those not traditionally thought of as buyers in the security industry.”

Was timing of Pro One’s announcement, one day after Tyco told the world it was buying Broadview/Brink’s, a coincidence?

“A total coincidence,” Mack said. “What’s not a coincidence is the fact that the M&A market is opening up for the first time in two years.”

There’s a “broad overhang” in the private equity industry right now, he explained. They raised money in 2008 and 2009, but didn’t spend it. This year, the pressure is on to put that money to work, he said. Mack noted that the Wall Street Journal reported this fall that “companies are holding on to more cash—and a greater percentage of assets in cash—than at any time in the past 40 years.” The Journal estimates, he said, that “Fortune 1000 companies have more than $1.8 trillion in cash on hand, an increase of $271 billion over last year [2008].”

This is all good news for attractive acquisitions like Protection One. So, what does Pro One have to offer?

Assuming the deal with Tyco/Broadview comes to fruition, Protection One will become the number two public company out there, an important asset for some investors who believe it’s important to buy “the number one, two or three company.” (Protection One has 2.9 percent of the market, according to estimates from Michael Barnes at the Barnes Buchanan Conference in 2009. ADT had 23.7 percent and Brink’s 4.4 percent.)

There are only two or three companies out there with a national footprint of this scope, he noted. Protection One has 66 offices and five monitoring stations. It has 400,000 residential customers and 100,000 commercial customers. “That makes it unique,” he said.

“Certainly the business has been well run in the last two to three years.” It’s overcome some problems with attrition in the early 2000s and they’ve “done a good job improving operating performance,” Mack said. In addition, they’ve completed the integration of IASG, acquired in 2007, "and are producing good metrics."

And, unlike Broadview, Protection One is made up of four discreet business units: residential, commercial, multifamily (the largest in the country), and the largest wholesale monitoring business in the country. The commercial business, while it’s not comparable to major systems integrators, “is on a standalone basis the second- or third-largest commercial alarm company in the country.” 

A sale of the company would hardly be unprecedented. Mack was part of the team that did a leveraged buyout of Protection One from Pacific Corp., an electric and gas utility in Portland, Ore., in 1988. He helped take the company public in 1994, when it was listed on the NASDAQ exchange. Control of the company was sold to Westar Energy in 1997. Quadrangle Group, a private equity group bought control of the company from Westar in 2004. Affiliates of Quadrangle currently own 70 percent of the company’s common stock.