RMR Valuation Landscape

8/20/2019 RMR Valuation Landscape

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Digging Deep in the RMR Valuation Landscape


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Agenda

• Market Overview

• Components of Value

•

Focus on RMR

• Buyers and Sellers

• The Future

•

Q&A

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Some Shameless Self Promotion…

• Advisors & Consultants

•

26 years of security alarm industry focus

• 230+ transactions…$11 Billion

• Co-Sponsors of The Barnes Buchanan Conference

!

18th year in February 2013

! The Breakers, Palm Beach Florida

! www.barnesbuchanan.com

2

B ARNES A SSOCIATES

www.barnesassociates.com


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3

Market Overview


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Market Characteristics

•

Stable and Liquid

! Across all sizes and geography

! Residential and commercial oriented companies

•

Discriminating ! Larger valuation spreads

! Risk aversion…on both sides

4

Kiss Your Banker!!!


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Predominant Market Tension

5

Tension

BUY SIDE

ADT Spin-Out valuation

Economy … double dip

Preference for internalgrowth

Integration concerns

Attrition fears

SELL SIDE

Fewer post-sale options

What to do with the $’s

Cost of pursuing atransaction

Fear of a failed process

Post recession optimism


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Predominant Market Tension

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Tension

BUY SIDE

ADT Spin-Out valuation

Economy … double dip

Preference for internalgrowth

Integration concerns

Attrition fears

SELL SIDE

Fewer post-sale options

What to do with the $’s

Cost of pursuing atransaction

Fear of a failed process

Post recession optimism

Tax RatesNew PlayersProbability

of Change


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$100k - $10m RMR Transactions


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As Many Dealers Below 30x…as Above 50x


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Recession Periods


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$1m - $10m RMR Transactions


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Total Volume of Last 3 Years

• 300+/- M&A deals per year

• 2010 an extraordinary year (Broadview, P1, Monitronics)

• 2011…no large deals

• Strong, deep Dealer Program

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RMR Value Multiple RMR Value Multiple RMR Value Multiple

M&A 11$ 385$ 34x 108$ 4,726$ 44x 4$ 163$ 37x

Dealer Program 25 834 34x 28 948 34x 28 962 34x

Total 36$ 1,219$ 34x 136$ 5,674$ 42x 33$ 1,125$ 34x

2009 2010 2011

Acquisition Activity in $ millions


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Components of Value


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Two Basic Components of Value

• Customer Base

• Sales & Installation capability

“Uncoupled Indicators”

! Dealer Program market…34x RMR

! Bulk account sale transactions…rarely at or above 40x

! Recession/slow-growth periods…lower valuations

! Sale of pure Originator operations [ NEW ]

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Growth Engine

Customer Base


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Favorable Growth Engine Characteristics

• Year on year increase in originations

• High quality accounts generated

•

Low Creation Multiple…with low volatility

• Documented and “articulated”

! Processes

! Revenue and cost components

! Accounting impact

• FOCUSED…and scalable

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Example:

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Square Number Cost

Miles Population Accounts RMR Multiple

57 163,410 2,524 $100,783 25x

Size of Market Originated


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Focus on RMR


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The Best Account

Customer: General ElectricAs Manager for Joint DOE/NIH/

MIT Facility

Address: MIT Campus Warehouse

Boston, MA

System: Intrusion and Fire (Leased)

RMR: $2,200 (Service on T&M basis)

Quarterly Billing

Contract: 10 Year – Automatic 10 YearRenewals

Status: Considering Managed AccessControl and Video System

" Good Geography

"

Excellent Installation

" Leased System

" Accepts Rate Increases

"

Upgrades/Enhancements

Experimental Long Term Storage Warehouse forLow Level Medical Related Nuclear Waste


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The Worst Account

Customer: Mr. & Mrs. & Mrs. & Mrs. Smith

Address: 666 Jihadist LaneAbbottabad, PK

System: Intrusion and Fire

RMR: $49.99 (4,724 Rupee)Including Maintenance

Annual Billing

Contract: 3 Year – Automatic Renewal

Still in first term

History: Account acquired from

summer sales company

!

Bad Geography

!

Poor Installation

!

False Alarm Problem

! Behind on Payment

!

Status Unknown


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RMR Valuation Related Variables

• Documentation

• Quality of customer

• Quality of installation

• “Coherence” (location, fit, etc.)

• Services provided and margin potential

•

Maintenance profile (probable costs and revenue)• Attrition profile

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Spectrum of Potential Margin

HigherLower

Maintenance Test & Inspect

Non-POTSCommunication

Interactive/ManagedServices

System Lease/Subsidization

Monitoring

NOTE: high degree of variances in above

“It’s the entirety of the account that matters…”


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AccountPool Attrition…Moneyball in the Alarm Industry


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The Cost of Bad Credit Customers


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The First Term Renewal Spike


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Industry Composite by Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cumulative Percentage Cancelled 3% 10% 21% 41% 52% 60% 66% 71% 75% 78% 81% 83% 85% 87% 88%

Example Unit/RMR Roll Forward

Beginning of Year 1,000 970 900 790 590 483 403 340 289 249 217 190 169 150 133

Cancelled (30) (70) (110) (200) (107) (80) (63) (50) (40) (33) (26) (22) (19) (17) (15)

End of Year 970 900 790 590 483 403 340 289 249 217 190 169 150 133 118

Attrition Rate (Based on BOY) 3% 7% 12% 25% 18% 17% 16% 15% 14% 13% 12% 11% 11% 11% 11%

Attrition Rate (Based on Average) 3% 7% 13% 29% 20% 18% 17% 16% 15% 14% 13% 12% 12% 12% 12%

A 15 Year View – Residential Accts [A big thank you to Monitronics]


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Buyers & Sellers


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The Buy-Side is Solid…But Cautious

• 2 of the 3 types of buyers are active

! Existing industry players

! Financial buyers

•

The 3rd…Strategic New Entrants just looking (for the time being)

• Debt markets highly supportive

• Industry “in favor”

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The Sell-Side…High Expectations/Requirements

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SURVEY: What multiple would convince you to sell?


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The Future


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Bellwether Issues/Indicators

• ADT Spin-Out Valuation

• Success of Telco/MSO’s

• Economy

• Continued support of the debt markets

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B ARNES A SSOCIATES

Michael Barnes Mark GronowskiPartner Partner

[email protected] [email protected]

For our annual conference: www.barnesbuchanan.com

Questions & Answers

RMR Valuation Landscape

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