Thoughts on a potential ASG-Protection 1 merger
YARMOUTH, Maine—How about the news this week of a purchase of and merger of ASG and Protection 1?
I'm eager to see how this all shakes out. Taking a look at the potential 50.4x RMR mulitiple if the purchase price is $2 billion, Imperial Capital's Jeff Kessler repeated his oft-emphasized mantra that the multiple of RMR is not the be-all end-all of deal valuations. You need to look at EBITDA and Steady State Cash Flow, neither of which publicly available for these companies right now.
It's a hefty multiple though, something that Protection 1's Tim Whall has seen before, notably when HSM was sold to Stanley in 2007 for 60x Remember that? Whall ushered in the era where every alarm company owner and his brother thought they'd get 60x.
Kessler did take a gander at the per-subscriber numbers for the potential ASG/Protection 1 deal, and said that at $2 billion, the value-per-subscriber for these two companies would be $1,164. That is not a high number and it is lower that the current value of ADT subscribers and Ascent (Monitronics) subscribers, he said. BUT, then again, the mix of subscribers is not comparable, he added. For example, Protection 1 has residential, multi-family, wholesale customers—from cable companies and other entities—as well as national and large commercial accounts. ASG has a mix of resi, small commercial, large commercial and government. So, the "per subscriber" metric could also be thrown off by one of the specific groups of subscribers.
Kessler noted that the Protection 1 has "not been growing that fast" and said that cash generated has gone into it national accounts and small business divisions. He called the technology investments the company has made in this area "exceptional" and complimented its residential platform as well which uses "Alarm.com and internally generated software." He is a big fan of Protection 1's Don Young who he called a "tech guru in this industry."
Every time I speak to ASG, CFO Ralph Masino makes a point of talking about how most of the company's growth is organically generated. I have many examples, but here's a story from February 2014 where Joe Nuccio was talking about ASG's goal of reaching $10 million in RMR.
From that story:
Why is $10 million an important benchmark?
“It’s not the $10 million number that’s important, it’s [ASG’s] percent of growth year over year. [We’re able to continue to grow at that rate] even at our size,” Nuccio explained.
ASG likes to enter a new region every year. Those new regions generally start with an acquisition, but when ASG moves into that region it concentrates on internal growth, he said.
“We grow at 12 to 14 percent a year because we continue to develop our internal growth engine,” Nuccio said.
He pointed out that 76 percent of the $900,000 of RMR that ASG added in 2013 was generated by organic sales.
What will happen to the management teams of the two companies should Apollo's deal come to fruition? Protection 1 is clearly the larger of the two companies, but both companies have strong and highly regarded management teams. Maybe some of them want out ... for a little while anyway? We'll see. Kessler surmised that "Apollo would line them up and see who does the best job."