TEG Presentation to AAGSTL 1-17-12forweb

© The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are

fully credited and sourced to The Edmonds Group.

Presentation to Alarm Association of Greater St. Louis

January 17, 2012

2 © The Edmonds Group, LLC 2012 Materials may be freely distributed if unaltered as long as they are


Summary Introduction Industry Overview M&A Activity Alarm Industry Market Values Current Capital Market Conditions Buying/Selling Alarm Businesses Q&A

INTRODUCTION



Henry Edmonds Over 26 years of capital markets experience Started Edmonds Group in 2004 Founder (2005) and past Chairman of APB Services Co-Founder (1990) and CEO of SLP Capital

Largest lender to alarm industry when sold to CapitalSource in 2004

Over $400M of alarm loans Wall Street investment banker (1985-1990)

$2B in transactions in the airline industry MBA, Harvard Business School BS, with distinction, civil engineering, University of

Virginia



The Edmonds Group Investment banking services

Capital raising and mergers/acquisitions advisory Approximately 40 transactions closed

Average transaction size about $50 million Sweet spot $10 million to $300 million

$2.0 billion transaction value Focused on security alarm industry Broad experience representing buyers, sellers,

borrowers and capital providers High level of client service

ALARM INDUSTRY OVERVIEW



North American Alarm Industry 20% household penetration

36 million households of 180 million 50% business market penetration

3 million businesses of 6 million Total industry revenue estimated to be $43.9 billion

for 2011 Sales and installation - $26.8 billion

Shrinking at 8% for 2010 and 2% for 2011 Growth in 2012?

Monitoring services - $17.1 billion Growing at 10% for 2010 and 3% for 2011 Continued slow growth for 2012?



Total Alarm Industry Revenue

$22.3 $24.1 $25.4 $25.5 $29.5

$32.3

$48.5 $44.7 $43.9 $43.9

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

($ b

illio

ns)

(methodology change between 2007 and 2008)

Source: SDM Magazine

estimated



Security Monitoring and Service Revenue

$10.3 $10.7

$17.0

$15.2

$16.7 $17.1

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

2006 2007 2008 2009 2010 2011

($ b

illio

ns)

Source: SDM Magazine

(methodology change between 2007 and 2008)

estimated



North American Alarm Industry Very fragmented - over 15,000 local and regional

providers Top five companies control only 39% of the market 20th largest company has about $3 million in RMR

86,000 customers Companies 95 to 100 in the SDM 100 average just

over: $200,000 in RMR 5,000 customers

A number of companies don’t submit data to SDM Would be on the list if they did

Companies with less than $200,000 in RMR control almost 50% of the market



North American Alarm Industry Recurring Revenue Market Share

ADT Security Services

29% Protection

One 3%

Monitronics Int. 3%

Vivint 2% Stanley

2%

6-100 12%

Other 49%

2010 Estimated Market Share



SDM 100 Ranked by RMR – Top 10

Source: http://www.sdmmag.com



SDM 100 Ranked by RMR – Second 10




SDM 100 Ranked by RMR – Last 10




Tyco/ADT Tyco breaking into public companies

ADT North America Residential - $3.1B in revenue Also includes small commercial

Fire and Safety - $10.2B in revenue Large commercial, all international and product

companies (Simplex Grinnell; Software House etc.) Flow Control - $3.7B in revenue

Likely means each will be more acquisitive Quarterly growth expectation for Wall Street

More transparent public data How long with ADT NA Residential stay public

Public market discount for RMR business Takeover target

ALARM INDUSTRY M&A ACTIVITY



Liquidity/Secondary Market Activity Active secondary market for buying/selling alarm

companies or just contracts Hundreds of transactions occur every year

Entire companies Dealer programs Bulk sales of accounts only

Larger (more efficient) buyers get predictable and significant economies of scale by acquiring

Transactions trade based on buyer’s cash flow not seller Hence RMR multiples Still all about cash flow



Major M&A Transactions 2012

BV Capital Partners - DTT 2011

Bain Capital – Securitas Direct (Europe) Stanley Works – Niscayah (Europe), Microtech (Canada) Tyco/ADT – Signature Security (Australia)

2010 Ascent Media – Monitronics RockBridge – Connect America (PERS), Protect America Summit Partners – Central Security Group Oak Hill – Security Networks ADT - Broadview GTRC – Protection One



Dealer Programs/Bulk Sales Significant factor in the industry today Approximately 1 million accounts purchased in 2011

Doesn’t include company acquisitions (like Broadview) Dealer program purchases

Weekly or monthly closings Typically newly created accounts

Bulk sales Accounts only Aged accounts Usually one off transaction Seller stays in business



Dealer Programs/Bulk Sales

0

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011

690 710 620

740 850

1,000 Number of accounts purchased (in 000s)

ALARM INDUSTRY VALUATIONS



Key Valuation Metrics Cash flow margin from existing customers

Adjusted EBITDA and SSCF Attrition rate

Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding

Creation cost of new customers Total direct and indirect cost associated with new

account creation, less upfront revenue, divided by newly created RMR

“Net Creation Cost” – before allocation of corp. overhead “Gross Creation Cost” – after allocating corp. overhead

Growth rate



Cash Flow Adjusted EBITDA

Reported EBITDA - earnings before interest, depreciation, amortization and taxes

Adjusted to exclude all creation costs Example: Monitronics vs. ADT

Adjusted EBITDA margin – EBITDA as a % of revenue Steady State Cash Flow

Adjusted EBITDA reduced by the cost to replace attrition This is the sustainable or steady state cash flow the

business is generating SSCF margin – SSCF as a % of revenue

Free Cash Flow After all investment in creation



Average Industry Metrics Margins on existing customers

Adjusted EBITDA of 50% to 65% for companies with scale

Attrition rate 8% to 12%

Creation cost Gross Creation Cost 25x to 35x Net Creation cost 20x to 30x

Growth rate 10% to 30% organic Summer programs - can be much faster Dealer programs – can be much faster



Other Valuation Drivers

Size of transaction Company reputation Ease of reprogramming/line swing Sales approach to generation customers Credit score profile/amount of upfront payment RMR per account Volume of account generation Critical mass per market/geography Quality of account and financial data



Other Valuation Drivers (cont.)

Scanned and original contracts Standard contract form and term

Automatic renewals, appropriate disclaimers Quality of installs Service call rates Billing profile Homogeneity of accounts Age of accounts Type of RMR (residential vs. commercial)



RMR Multiples for Alarm Sale Transactions

38.0x 45.0x 45.0x

64.0x

32.8x 37.4x 38.4x

42.9x

25.0x 30.0x 27.0x

30.8x

0.0x

10.0x

20.0x

30.0x

40.0x

50.0x

60.0x

70.0x

< $50K $50K-$100K $101K-$500K > $500K $ RMR per transaction

(minimum, average and maximum multiples paid 2002-2012)



Under 50k in RMR Transactions Fewer than 2,000 accounts Buyers are typically local or regional companies Too small for national buyers or PE firms

Not enough scale to support financial reporting requirements

Angel investors provide equity to the extent available Friends and family

Multiples in the 20’s for smaller end, low 30s for larger end

71% of all deals involve fewer than 300 accounts (SDM)



$50k to $100k in RMR Transactions 2,000 to 4,000 accounts Very similar buyers to under $50k transactions

Local/regional firms Too small for national buyers or PE firms Angel investors provide equity to the extent available

Friends and family Multiples typically in the 30s

Occasionally approaching 40x in frothy markets



$100k to $500k in RMR Transactions 4,000 to 20,000 accounts Sweet spot for regional consolidators Smaller PE firms also like this size transaction

Equity checks of $2M to $8M Big enough to afford CFO $200k and up - good size for industry focused lenders

Nationals take an interest in these deals If they buy, typically just for accounts Shut down seller’s operations

Multiples mid 30’s to mid 40s Depends on market conditions Quality of management and accounts



Over $500k in RMR transactions Over 20,000 customers Buyers are nationals, non-industry strategics and

larger PE firms Nationals still likely to consolidate or shut down

operations Non-industry strategics and PE firms keep operation

and management Becomes a platform for add-on acquisitions

Multiples over 40x unless distressed or underperforming operation Not many data points each year, so significant swings in

the data

CAPITAL MARKET CONDITIONS



Debt Markets Very favorable for middle market and lower middle

market transactions Loan facilities under $250 million

Lots of experienced and interested industry lenders Banks, specialty finance companies, hedge funds

However, most industry leaders require a minimum deal size of $5 million to $10 million Alarm Financial Services (AFS) - $200,000 to $1.5

million CapitalSource - will go as low as $3 million if

transaction is very straight forward Local/regional banks will lend smaller amounts

Lack of industry understanding – low advance rates



Typical Experienced Lender Deal 2-3 year revolver

Some facilities term out over five to seven years Borrowing base with advance rate of 22-26x RMR

Stretch senior advance rates up to 30x Pricing 4% to 6% (LIBOR + 300 to 500 with 1% floor) Covenants typically include:

Debt/RMR Permitted attrition rate Permitted creation cost Debt service coverage Capital expenditure



Typical Subordinated Debt Deal 5 to 7 year term debt

Bullet maturity or amortization beginning in year 5 Maximum advance rate of 26-32x RMR Current coupon 8-12% Additional PIK interest of 2% to 4% May required warrants or other yield enhancement

Designed to push all-in return to 15% to 20% Unsecured or second lien position Similar covenants to senior debt with an additional

cushion



Equity Markets Also very favorable Over 2,000 private equity firms in the US

Firms come in all sizes Close to $500 billion in money to spend Many more PE firms interested in the alarm industry

Industry performed well through 2008/2009 recession Viewed as safe harbor with good upside potential

Favorable debt market conditions help valuations Not many public alarm companies

Very expensive to be a small public company (market capitalization of less than $500 million)

Markets don’t really understand alarm industry accounting



Strategic Buyers Large alarm industry firms are acquisitive

ADT, Protection One, Monitronics, Stanley Midsize firms too

Security Networks, ASG, CSG, Guardian, Vector Non industry strategics looking more closely

Ascent Media bought Monitronics Stanley entered the alarm market several years ago Phone companies, cable companies dabbling again

BUYING/SELLING ALARM BUSINESSESS/ACCOUNTS



Key Considerations Market timing

Timing makes a huge difference Be prepared

Good data, good performance Benefit from experienced advisors

Investment bankers Accountants/due diligence experts Lawyers

Mistakes can be very costly If seller, could leave a lot of money on the table If buyer, might not get what you think you’re getting or

pay too much



Key Considerations Valuations very much affected by capital market

conditions Debt and private equity markets are currently very

favorable Supply and demand – very health supply at the moment Cost and terms

Need to know what your business is worth if you’re selling

Need to know what the market is and what you’re getting if you’re buying

IT’S A SELLER’S MARKET TODAY Still good opportunities for buyers if selective

QUESTIONS AND ANSWERS

© The Edmonds Group, LLC Materials may be freely distributed if unaltered as long as

they are fully credited and sourced to The Edmonds Group.

Contact Information

Henry Edmonds The Edmonds Group, LLC

16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649

Email: [email protected] Website: www.theedmondsgroup.com

mailto:[email protected]�

http://www.theedmondsgroup.com/�

TEG Presentation to AAGSTL 1-17-12forweb

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