An Alarmingly Good Investment The Leveraged Buyout of AlarmServe Inc. M.H. Capital Partners December...
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Transcript of An Alarmingly Good Investment The Leveraged Buyout of AlarmServe Inc. M.H. Capital Partners December...
An Alarmingly Good Investment
The Leveraged Buyout of AlarmServe Inc.
M.H. Capital Partners
December 2009
Javier Hernandez-Cotton
Franco Perugini
Introduction
Introduction Analysis Valuation Implementation
Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Introduction
Introduction Analysis Valuation Implementation
Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Acquire AlarmServe at a purchase price of $51.0mm at 6.0x
EBITDA using 2.5x total leverage (“Moderate Leverage”) to
realize I.R.R. of 35% and a return on cash of 4.2x by 2015
Situation Overview
Introduction Analysis Valuation Implementation
Proposition $51mm bid for AlarmServe at 6x EBITDA
Key Considerations:
1Uncertain Market
Conditions
2Deal Financing &
Debt Structure
3 Value Creation
4 Exit Strategy
Establish entry strategy that accounts for systemic risk and current debt capital markets conditions
What portion of the deal will be financed through debt & what covenants could be placed on the debt?
How will NVC achieve a target IRR of 30% (min. 20%)?
How will NVC exit its position in 5-7 years?
23.828.3
32.3 33.9 35.638.1
40.744.0
2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F
Revenue EBITDA (Post-Syn.)
AlarmServe as a target
Introduction Analysis Valuation Implementation
Products & Services
Installation & servicing of two way voice communication system
Competitive Advantage: Unique service offering superior to competitors
Value Strong contract base (secured revenues): represent 88% of revenues Company branding is strong, enabling them in a merger to expand services and
offering under the known “AlarmServe” banner
Opportunity: No singular “Industry Leader” at the moment
Financial Snapshot
10.7%
Historic 3-Year Revenue CAGR
18%2007
26%2009
Operating Margins
Assessing the Market
Introduction Analysis Valuation Implementation
Shift over the past years from fragmented to consolidated
Outside large low-cost players, there is ~3600 security alarm providers
Alarm Security Industry
Provides opportunity for companies to consolidate through acquisitions of smaller providers
Leverage requirements for financial institutions has increased since the financial collapse
Debt Capital Markets
While higher leverage is favourable for returns, interest rates ramp up aggressively with increased leverage (senior: 6% to 8%, subordinated 12% to 15%)
Key Takeaway
AlarmServe can acquire add-on companies enabling them to grow customer base, diversify product offerings, and scale business
Take on conservative amount of debt for the deal and provide scenarios for potential covenants offered by the bank
Implications to NVC
Investment Thesis & Strategic Rationale
Introduction Analysis Valuation Implementation
1
2
3
Deal would represent 10% of NVC’s total portfolio During financial collapse, one of the fund’s companies has gone under
Service is a growing necessity amongst consumers & even in recessionary periods is a staple service
Favourability of Industry
NVC
Inorganic: Add-on acquisition Organic: Geographic expansion, product expansion to
higher margin segments
Inorganic & Organic Growth Opportunities
Investment opportunity provides low risk opportunity with expansive growth opportunities through conservative strategic movements
Favourable Return Opportunies
Unlevered: 23% Moderate Leverage: 35% High Leverage: 62%
Valuation Overview
Introduction Analysis Valuation Implementation
Sensitivity
Leverage Levels Multiples
Returns AnalysisIRR Cash on Cash
ProjectionsOperating Sources and Uses
Valuation Inputs
Introduction Analysis Valuation Implementation
• 2010-2014 revenue CAGR of ~7%
• 2010-2014 EBITDA CAGR of 13% pre-synergies
• Capex equal to 13% of revenues
• Additional management fees of 2% of revenues
Operating Projections• 5 year amortizing senior
debt
• 8 year bullet payment subordinated debt
• Revolving operating line of credit
• Assumes excess cash is swept to pay down revolver
Debt Structure• Exit multiple equal to entry
multiple (6.0x base case)
Returns
Income Statement
Introduction Analysis Valuation Implementation
Income StatementFY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Revenue 23.8 28.3 32.3 33.9 35.6 38.1 40.7 44.0COGS (4.9) (6.2) (7.6) (7.5) (7.8) (8.4) (9.0) (9.7)
Gross Profit 18.9 22.1 24.7 26.4 27.8 29.7 31.7 34.3
SG&AFixed (10.4) (10.0) (10.4) (10.4) (10.4) (10.4) (10.4) (10.4)Variable (4.1) (5.1) (5.8) (6.1) (6.4) (6.9) (7.3) (7.9)
EBITDA (Pre-Syn.) 4.4 7.0 8.5 9.9 11.0 12.4 14.0 16.0
Synergies 0.0 0.0 0.0 0.0 0.5 1.5 2.0 2.0EBITDA 4.4 7.0 8.5 9.9 11.5 13.9 16.0 18.0
Depreciation (2.6) (3.1) (3.1) (3.6) (3.7) (4.0) (4.3) (4.6)EBIT 1.8 3.9 5.4 6.3 7.8 9.9 11.7 13.4
7% CAGR
13% CAGR
Synergies scaling to $2mm/annum
Deal Structure – Base Case
Introduction Analysis Valuation Implementation
General Assumptions Sources and UsesCompany Name Alarmserve Inc Sources Uses
Senior Debt 17.0 Purchase of Alarmserve 51.0 2009 EBITDA ($mm) 8.5 Subordinated Debt 4.3 Transaction Costs 2% 1.0 Purchase Multiple 6.0x Bank Line Drawn 3.4 Purchase Price ($mm) 51 Equity from Sponsor 27.4
Total 52.0 Total 52.0
Inputs Leverage InterestScenario Senior Subord. Senior Subord.Unlevered 0.0x 0.0x 0% 0%Moderate Leverage 2.0x 0.5x 6% 12%High Leverage 3.0x 1.5x 8% 15%
Our base case scenario assumes moderate leverage
We factor in additional transaction costs of 2% for due diligence and funding costs
Debt Schedule
Introduction Analysis Valuation Implementation
Debt ScheduleFY2010 FY2011 FY2012 FY2013 FY2014
Senior DebtDebt Beginning 17.0 13.6 10.2 6.8 3.4
Principal Repaid 3.4 3.4 3.4 3.4 3.4Debt Ending 13.6 10.2 6.8 3.4 0.0
Interest Expense 0.9 0.7 0.5 0.3 0.1
SubordinatedDebt Beginning 4.3 4.3 4.3 4.3 4.3
Principal Repaid 0.0 0.0 0.0 0.0 0.0Debt Ending 4.3 4.3 4.3 4.3 4.3
Interest Expense 0.5 0.5 0.5 0.5 0.5
Operating LineBeginning Balance (Cash) 3.4 2.1 0.3 (2.7) (6.5)
Drawn (Repaid) (1.3) (1.9) (2.9) (3.9) (4.7)Ending Balance (Cash) 2.1 0.3 (2.7) (6.5) (11.2)
Interest Expense (Income) 0.2 0.1 (0.0) (0.1) (0.1)
Total DebtBeginning Balance 24.7 20.0 14.7 8.4 1.1
Net Repayment 3.4 3.4 3.4 3.4 3.4Ending Balance 21.3 16.6 11.3 5.0 (2.3)
Interest Expense 1.6 1.3 1.0 0.8 0.5
Operating line used as a cash sweep; cash balances pay 1%
interest
Senior debt amortizes over 5 years at 6% interest
Sub debt priced at 12%
Alarmserve is able to reach net cash by 2014
Cash Flow Statement
Introduction Analysis Valuation Implementation
Capital expenditures at 13% of revenues
Excess cash used to pay down revolver
Cash Flow StatementFY2010 FY2011 FY2012 FY2013 FY2014
EBITDA 9.9 11.5 13.9 16.0 18.0Less: Mgmt Fees 0.7 0.7 0.8 0.8 0.9Less: D&A (3.6) (3.7) (4.0) (4.3) (4.6)EBIT 7.0 8.5 10.7 12.5 14.3Less: Interest 1.6 1.3 1.0 0.8 0.5EBT 8.6 9.8 11.7 13.2 14.8Less: Taxes 3.0 3.4 4.1 4.6 5.2
Net Income 5.6 6.4 7.6 8.6 9.6Less: Chg. In WC (0.1) (0.2) (0.3) (0.3) (0.4)Add: D&A 3.6 3.7 4.0 4.3 4.6Cash from Operations 9.1 9.9 11.3 12.6 13.8
Capital Expenditures 4.4 4.6 5.0 5.3 5.7Cash from Investing (4.4) (4.6) (5.0) (5.3) (5.7)
Dividends 0.0 0.0 0.0 0.0 0.0Principal Repayment (3.4) (3.4) (3.4) (3.4) (3.4)Cash from Financing (3.4) (3.4) (3.4) (3.4) (3.4)
Cash Flow 1.3 1.9 2.9 3.9 4.7Operating Line Drawn/(Repaid) (1.3) (1.9) (2.9) (3.9) (4.7)
Management fees are an additional expense for
Alarmserve
Returns Analysis
Introduction Analysis Valuation Implementation
Returns AnalysisFY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Initial Investment (27)
EBITDA 10 11 14 16 18Exit Multiple 6.0x 6.0x 6.0x 6.0x 6.0xEnterprise Value 59 69 84 96 108Less: Debt (20) (15) (11) (8) (4)Plus: Cash 0 0 3 7 11Equity Value 39 54 75 95 115
Plus: Mgmt Fees @ 2.0% 1 1 1 1 1Plus: Dividends 0 0 0 0 0Cash Flow to Equity 40 55 76 96 116
IRR 46% 42% 42% 38% 35%Cash on Cash 1.5x 2.0x 2.7x 3.5x 4.2x
Ability to realize 35% IRR by 2014
Returns well above 20% hurdle rate;Additional upside exists through paying excess cash out to NVC as a dividend
No dividends assumed
Exit multiple = entry multiple
Leverage Analysis
Introduction Analysis Valuation Implementation
Under the base case, Alarmserve will have no trouble meeting debt covenants
Leverage AnalysisFY2009 FY2010 FY2011 FY2012 FY2013 FY2014
EBITDA 9.9 11.5 13.9 16.0 18.0Capex 4.4 4.6 5.0 5.3 5.7Interest Expense 1.6 1.3 1.0 0.8 0.5Net Debt 20.0 14.7 8.4 1.1 (6.9)
RatiosNet Debt / EBITDA 2.0x 1.3x 0.6x 0.1x -0.4xEBITDA Coverage 6.2x 8.6x 14.0x 21.3x 35.9xInterest Coverage 3.9x 5.9x 10.0x 15.5x 26.7xEBITDA-Capex Coverage 3.4x 5.2x 9.0x 14.2x 24.5x
Maintenance CovenantsInitial Leverage (incl. Revolver) 2.9x 2.9x 3.2x 3.0x 2.8x 2.6xLeverage Buffer 0.5x 0.5x 0.0x 0.0x 0.0x 0.0xAnnual Step-Down -0.2x -0.2x -0.2x -0.2x -0.2xMax Allowable Leverage 3.4x 3.2x 3.0x 2.8x 2.6x 2.4x
Min. EBITDA Coverage 2.5x 2.5x 2.5x 2.5x 2.5x
FCF Coverage 1.5x 1.5x 1.5x 1.5x 1.5x
Covenant Stress Test – 85% Attainment
Introduction Analysis Valuation Implementation
At 85% attainment, we see a leverage and FCF coverage breach
Leverage AnalysisFY2010 FY2011 FY2012 FY2013 FY2014
EBITDA 5.7 7.1 9.3 11.0 12.6Capex 3.7 3.9 4.2 4.5 4.9Interest Expense 1.6 1.4 1.2 1.0 0.6Net Debt 21.7 18.6 14.5 9.6 4.2
RatiosNet Debt / EBITDA 3.8x 2.6x 1.6x 0.9x 0.3xEBITDA Coverage 3.6x 5.0x 7.5x 11.1x 20.6xInterest Coverage 1.3x 2.4x 4.3x 6.7x 13.0xEBITDA-Capex Coverage (FCF Coverage) 1.2x 2.2x 4.1x 6.5x 12.6x
Maintenance CovenantsInitial Leverage (incl. Revolver) 2.9x 2.9x 3.2x 3.0x 2.8x 2.6xLeverage Buffer 0.5x 0.5x 0.0x 0.0x 0.0x 0.0xAnnual Step-Down -0.2x -0.2x -0.2x -0.2x -0.2xMax Allowable Leverage 3.4x 3.2x 3.0x 2.8x 2.6x 2.4x
Min. EBITDA Coverage 2.5x 2.5x 2.5x 2.5x 2.5x
FCF Coverage 1.5x 1.5x 1.5x 1.5x 1.5x
Sensitivities
Introduction Analysis Valuation Implementation
Deal structure provides flexibility with assumptions and leverage to realize adequate returns
IRR Sensitivity to Leverage and ExitExit Multiple
4.0x 5.0x 6.0x 7.0x 8.0x
Unlevered 16% 20% 23% 26% 29%
Moderate 25% 30% 35% 39% 42%
High Leverage 49% 56% 62% 67% 71%Lev
erag
eIRR Sensitivity to Leverage and EBITDA Attainment
EBITDA Attainment - 201410.8 14.4 18.0 19.8 21.6
Unlevered 9% 17% 23% 26% 28%
Moderate 17% 27% 35% 38% 41%
High Leverage 37% 52% 62% 66% 70%Lev
erag
e
An unlevered scenario still surpasses 20% hurdle
Exit EBITDA of $10.8mm (6% CAGR) still provides 17% IRR
Recommended Course of Action
Introduction Analysis Valuation Implementation
Acquire AlarmServe at a purchase price of $51mm at 6x
EBITDA using 2.5x total leverage (“Moderate Leverage”) to
realize I.R.R. of 35% and a return on cash of 4.2x by 2015
1 Deal Schedule
2Company
Management
3 Exit Strategy
Implementation Plan:
Recommended Course of Action
Introduction Analysis Valuation Implementation
1 Deal Schedule
Negotiation Buffer
Contact Banks for Financing
Evaluate Internal Processes
Negotiation range of $51mm – $55mm: $55mm price represents 6.5x EBITDA & provides an I.R.R. of 31% at 6x exit multiple
Contact Major Canadian BanksTarget rates: senior at 6% and subordinate at 12%
Potential to introduce management or optimize operations
Inorganic Growth Opportunity
Introduction Analysis Valuation Implementation
2Company
Management
Potential Consolidation Attempt
Acquisition Target Criteria
Look for target with ~$5mm in EBITDA (half ours) and look to pay ~6.0x
Strong client base outside of AlarmServe’s current network
Ability to scale response workforce: Office integration opportunities
Exiting in ~2014
Introduction Analysis Valuation Implementation
3 Exit Strategy
Initial Public Offering
High return
Difficult to exit full position in a timely manner
Expensive underwriting fee’s
Sale to Strategic Buyer
Optimal as portion synergies can be included into valuation
Likely, considering the industries move to consolidation
Sale to Financial Buyer
Ability to completely exit position
Could pay premium if LBO market is booming
Dividend Recapitalization
Allows NVC to crystalize value, while maintaining control
Could lead to over leveraging
Could exceed investment horizon
Risk and Mitigation
Introduction Analysis Valuation Implementation
Negotiation Issues
Difficulty Securing Financing
Covenant Breach
~$4.0mm in negotiation room
Take on less debt
Establish strict spending policies
Hostile Takeover
Accept higher rate
Renegotiate at higher interest rate
Mitigation ContingencyRisk
Conclusion
1. Introduction
2. Analysis
3. Valuation
4. Implementation
Acquire AlarmServe at a purchase price of $51.0 mm at 6.0x EBITDA using 2.5x total leverage
(“Moderate Leverage”) to realize I.R.R. of 35% and a return on cash of 4.2x by 2015
Backup - Earnout
Earnout structure provides upside to management, in the event that they own a majority interest
Earn-outMinimum MaximumEBITDA EBITDA Excess Max Implied
Year Level Level EBITDA Multiple Addition EV MultipleFY2010 5.7 6.1 0.401 6.0x 2.4 53.4 8.7xFY2011 6.1 6.6 0.429 6.0x 2.6 56.0 8.5xFY2012 6.6 7.0 0.459 6.0x 2.8 58.7 8.4xFY2013 7.0 7.5 0.491 6.0x 2.9 61.7 8.2xFY2014 7.5 8.0 0.526 6.0x 3.2 64.8 8.1x
Total EV w/Earn-out (Current EBITDA) 64.8 7.6x