Apollo Global Management; market cap as of 19/02/2016: $2.70bn
ADT Corporation; market cap as of 19/02/2016: $6.59bn
US private equity firm Apollo Global Management has agreed to buy ADT, an American home-security company, paying c.$11bn for a total enterprise value in the so far biggest leverage buyout of this year. Apollo aims to merge ADT with its subsidiary Protection 1, a small security player the private equity firm bought last year in a move into the alarm monitoring services industry.
About Apollo Global Management
Apollo Global Management (NYSE: APO) is a New-York based private equity firm specialized in leveraged buyouts and purchases of distressed assets. The company has three main business segments: the Private Equity business, which had $38bn of assets under management as of September 2015, the Credit business which invests mainly in Structured Credit, Opportunistic Credit, Non-Performing Loans and the Real Estate segment which focuses mainly on acquisition and recapitalization of real estate portfolios, platforms and operating companies and distressed for control situations.
With its Private Equity managed funds Apollo invests mainly in industrial, media, leisure, distribution, consumer and services companies. Among the most notable companies in its portfolio are Core Media Group (American Idol), the gaming company Harrah’s Entertainment and McGraw-Hill Education unit.
About ADT Corporation
The Florida based ADT Corporation (NYSE:ADT) is the largest security business in the US, providing electronic security, automation, monitoring services, video surveillance systems and fire protection for homes and businesses. With a 6.5m customer base, ADT boasts a market share of 25% for the residential market and 13% for the small business market in the US.
Having a long history of M&A, the company’s management was prone to the buyout crafted by Apollo.
In 1997 the company was acquired by Tyco International, in 2010 ADT acquired its competitor Broadview Security while in 2011 Tyco decided to split its company in three different businesses, with ADT ending up being one of the three. Despite ADT’s recent loss of its M&A head, the company’s most recent sizeable acquisition was last year’s purchase of Reliance Protection, a monitored security services provider based in Canada, in a $500m deal.
About Protection 1
Protection 1 is another US company which operates in the same business as ADT, providing security systems both for businesses and residential units with more than 2m customers. The company positions itself as a player in the smart-home market, which aims to connect consumers wirelessly to various household devices. Protection 1, as its rival ADT, has a relevant track record of M&A: it was first merged with IASG (another security systems company) in 2007 and three years later it was acquired by GTCR, a private equity fund, which delisted the company. In May 2015 Apollo Global Management acquired Protection 1 for an undisclosed amount.
ADT has been an appealing target for private equity firms given its steady stream of monthly income. In fact, it has contractual agreements with its customers, which guarantee its cash flow to be relatively stable over time. The adjusted EBITDA was $1.6, $1.7 and $1.8bn during the last three years while the Cash Flow from Operating Activities was $1.6, $1.5 and $1.6bn during the same periods. Moreover, given that people get used to using a certain kind of security and monitoring system, they are not prone to changing it for long periods of time, showing a great loyalty with respect to the product, once again helping the company to have stable cash generation.
The proposal of Apollo is to merge ADT with the other security business in its portfolio, Protection 1, which will operate under the name of ADT and will be based in Florida. ADT is expected to benefit from Protection 1’s robust commercial presence, which should speed up company’s expansion into the sector. According to the company, the newly created company will generate a combined $318m in recurring monthly revenue and total annual revenue in excess of $4.2bn, placing the businesses in a strong position to drive innovation and to capitalize on growth opportunities in the future.
Apollo has agreed to acquire ADT for $6.94bn (equity value), offering $42 per share, which represents a premium of 56.3% over the closing share price of $26.87 as of February 15th, and a premium of 45.5% over the share price as of one month before. As of February 2016, ADT reported $4.7bn of net debt, representing a total enterprise value of c.$11bn. For FY 2015 the EV paid by Apollo represents 6.4x EBITDA.
The merger agreement includes a “go-shop” period of 40 days, during which ADT may consider alternative proposals. In fact, if ADT receives a better offer from another buyer, Apollo will have 3 days to make adjustments to the current equity value offered and the former will be subject to a termination fee of $230m (around 3% of the implied equity value) in case of a break-up. In such a scenario, the deadline for the closure, which is now scheduled for mid July, could be extended to November.
The offer made by Apollo is all cash, which is going to be financed through $4.7bn in new debt ($1.56bn in new first lien term loans and $3.14bn in second lien loans), an equity contribution of $4.5bn by Apollo and co-investors and via an issuance of $750m in preferred securities to its affiliate of Koch Equity Development LLC. Amid current market volatility, the high-yield debt funds, which used to back LBOs, are lacking liquidity. Therefore, it is not a wonder why Apollo is turning to a more expensive alternative of raising debt, mainly issuing equity. Moreover, such a deal structure makes the purchase of ADT feasible without refinancing $3.75bn of existing bonds, something that would be not an easy task in current market conditions.
On the one hand, Apollo’s deal could be seen as a renewed interest from private equity investors in seizing assets at better valuations, following recent fall in public markets. On the other hand, the deal comes at a time of increased competition in the home security market, which is forecast to grow globally from $31.4bn last year to $47.5bn in 2020, according to global research firm Marketsandmarkets. Therefore, given that the US home-security market represents 60% of the total figure, the deal seems to be strategically well thought out. If the deal goes through, only with the time we will know if a more powerful ADT will manage to withstand the arrival of recent entrants (AT&T, Comcast, Verizon, Google with its own Nest Cam security camera) and prove to be a lucrative investment.
Financing will be provided by a syndicate of investment banks advising Protection 1 including Barclays, Citigroup, Deutsche Bank and RBC, while the financial advisors for ADT are Goldman Sachs and Bank of America Merrill Lynch.
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