United Protection to buy mystery firm

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04/24/2008
United Protection is a guarding/integration firm trying to make some noise in western Canada and has been slowly moving toward the U.S. market, apparently by starting with the guarding business. They hired former CEO of Rentokil Initial Canada Don Allan in 2006, struck a deal with Convergint for some high-level integration work last year, and now are making their big play: They've signed a purchase agreement for a company in the southern United States doing more than $100 million annually. Which one? They're not saying yet. It's a mystery. No wonder people aren't in love with the guarding business here in the States, though. Look at the financials on this deal: [T]he Company has entered into a share purchase agreement to acquire a 75% interest in a private security services company based in the Southern United States (the "Target"). The consideration to be paid for the interest in the Target will consist of: approximately USD $15.6 million to be paid in cash; approximately USD $3.1 million in the form of a convertible vendor financing note; the assumption of approximately USD $7.2 million in indebtedness; and other liabilities which amounts will be confirmed prior to closing. Under the terms of the agreement, United Protection also has a five-year option to acquire the remaining 25% interest at a defined valuation multiple. The acquisition, which is anticipated to close on or before May 30, 2008, is expected to be funded through a new equity financing by United Protection. During the 2007 fiscal year, United Protection had revenues of approximately $22.5 million, net income of $0.6 million and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $1.2 million. During the same period, the Target had revenues of approximately $98.7 million, net income of $4.8 million and an EBITDA of $9.0 million. United Protection is currently in the process of conducting due diligence on the Target's financials. So, you can get 75 percent of $100 million in guarding revenue for less than $20 million and the assumption of $7 million in debt? There's something I'm missing. Net income of $4.8 million should cost more than that, it seems to me, but I'm new to the world of guarding acquisitions.