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Brink’s Company: Activists push

for a spin-of
Masters in Finance | Applied Corporate Finance
Duarte Marques 989
Mafalda Oom Torres 948
Teresa Botelho Neves 1029
Francisco Vieira de Campos
• April 20th 2015 960
Gonçalo Pereira de Almeida
1034

Nova School of Business and Economics

Agenda

Executive Summary

Industry Overview

Brink’s Company

Conglomerate Discount

Activists

Issues being target my activists

Brinks is undervalued by the Markets

Alternatives to Spin-ofs

Value created by Spin-ofs

Valuation

Final Recommendation

Agenda

Executive Summary

Industry Overview

Brink’s Company

Conglomerate Discount

Activists

Issues being target my activists

Brinks is undervalued by the Markets

Alternatives to Spin-ofs

Value created by Spin-ofs

Valuation

Final Recommendation

Executive Summary

The decision of performing a spin-off follows pressure on the company
from three activist shareholders who felt that Brinks has been chronically
undervalued and separately it would be worth more than combined

Since Top Management and activist shareholders were not align in terms
of what was best for the company, the case presents both sides.
Moreover, an assessment of the arguments was performed

Nevertheless we have to bear in mind that Brink’s Company is made of
two different business that seem to share very few operational synergies,
which may be explained by the conglomerate discount that the
companies was under
Also alternatives to the spin-off were take into account, however we did
not exploit in so detail as the spin-off, since it was the main issue in the
case

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

14% competitor with 30% Securitas.Brink’s Inc.Industry Overview. 50% 4Securicor. 6% Primary factors in attracting Brinks 4Securicor and retaining customers in the industry: Securitas Prosegur • Reputation Smaller Competitors • Service Quality • Price . Globally United States $14bn 35% Mark • Global market for security logistics et • Projections to grow Shar Global Market Share e Brinks. 17% Largest Smaller Competitors. 13% market share Prosegur.

High quality and reliable insurance coverage as an important factor in attracting and retaining customers and risk management .Industry Overview – Brink’s Inc. in particular to retail activity. industry Cost structure Employ ee Service Wages benefits Standar Revenue Overall ds 5%< growth for the >9% level of security industry Drivers for growth in the particular industry: • Overall level of economic activity. • Amount of paper currency in Cost Structure circulation.

is the largest company in the market (estimated market share of 30%). V. II. Sale Leasi Installati Monitori Servi s ng on ng ce $30 billion globally where US accounted for nearly US Rest of half of total annual revenues. Stanley Convergent Security Solutions of 2% and Monotronics International of 1%. a subsidiary of Tyco International. the World • The North American Market is highly fragmented with the top five companies accounting for only 40% of the market which enables attractive opportunities for the M&A industry. IV. • ADT. BHS states a market share of 3%. Protection One of 2%. Company Service and Product Pric reputation quality e Ability to identify and solicit prospective Market costumers visibility . Following ADT. Industry Overview – Brink’s Home Security Market for Electronic Security System I. III.

Industry Overview – Brink’s Home Security Market for Electronic Security System Factors driving industry growth Heightened Increase in dual Higher capital security income spending awareness households Higher capital Demographic Higher capital spending by changes spending business Growth in home and commercial security system installation and monitoring expected to grow at 3% annually from 2009 until 2014 in the US .

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

1859. Brink’s Inc. 2000= Activists investors were Brink's horses and wagons were saved calling for Brink’s to sell its BAX and the company was back in unit which ended up happening in operation within a week. by then known as an buildings. the Great 1962= Pittston Company acquires Chicago fire destroyed some 18. November 2006 for $1. Miraculously. hotels. – worldwide provider of secure Perry Brink BRINK’S transportation Brink’s Home Security – Residential Alarm company . Brink used his single wagon to transport travelers' luggage between Chicago rail stations and 1981= Payrolls deliveries.Brink’s Company Brinks was founded in Chicago on May 5th .  In the early days.1 billion to Deutsche Bahn Group. In 1871. including the headquarters armored car company. when Perry purchased a horse-drawn wagon and made his first delivery. of Brink's City Express. a transportation and logistic company. As a curiosity.000 Brinks.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

A conglomerate is likely to disclose less information than standalone businesses. compared to standalone businesses increases costs. conglomerates: with and BHS) There are few synergies between unrelated business. Usually there is a parent company (Brink’s Company) with one or more subsidiaries (Brink’s Problems Inc. Conglomerates usually are traded at discount . rather than separately for each business. Management are very unlikely to have real expertise in all areas of the business. The extra layers of management needed. The complexity of a conglomerates' accounts can make them harder to analyze .and makes it easier for management to hide things. leaving it more difficult to align interests. Conglomerate Discount Conglomerate: Company that comprises multiple different corporations that operate in a wide rang of business. many numbers are disclosed consolidated.

Its name derives valuation essentially for that tendency of the stock market to undervalue the stocks of a conglomerate business. Investors often point to the conglomerate discount as a market inefficiency and view the discount as a way to buy undervalued stocks. and the actual value the parts market places on the conglomerate. Company security . Market cannot understand multi-division firm and attach a Stock Market correct multiple to its earnings or cash flow Explanations Companies don’t allocate analysts from each market segment to study conglomerate firm Value of Value of Value of Brink’s Conglomera Brink’s Brink’s te Discount home Inc.Conglomerate Discount Why do conglomerated typically trade below their sum of the parts? V(A+B) < V(A) Conglomerate discount: is the difference between what the + V(B) Sum-of- businesses are worth separately.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

Hedge Funds Private Wealth Equity Individu Firms als Exampl es of activist s . Target: Activist investors look for companies that are being mismanaged. Activists deliberately accumulate substantial stakes in undervalued companies to force changes that will increase the share price so they can sell at a profit. Activists Activist investor: An individual or group that purchases large numbers of a public company's shares and/or sought to obtain seats on the company's board with the goal of effecting a major change in the company. could be run more profitably as a private company or have other kind of problems that the activist investor believes is able to fix to make the company more valuable. have room to cut costs.

• U. directors Steel Partners Litchtenstein LCC • Invest in small-cap value stocks where they felt they could create value through active relationships with managements .-based hedge fund was Pirate founded in 2002 by Tom Hudson Activists Capital • Their strategy was to buy stocks and take on management to drive stock prices in the company’s favor. • One seat at Brink’s board of • Hedge fund founded by Warren G.S.Activists • Private Investment Fund run by MMI Clay Lifflander Investme • Known for gaining positions in nts companies shortly before buyout deals were made and had a reputation for its “buyout touch”.

• They want to increase their wealth by increasing stock performances and make money out of that. In this case. . • They believed that the company was undervalued. they want to change the actual strategy of the firm because they believe that the actual strategy does not increase shareholders wealth. in order to drive the strategy of the company to their benefits.Activists Active on Increase Activist firm’s Stock shareholder manageme Performanc nt es How do activists expect to make money? • Activists shareholders try to be active on firm’s management.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

5% compared to 15. • Pirate Capital was seeking for return because 2006 was the worst performance of the fund (only returns of 9. • Instead. • MMI became the second largest stakeholder in BCO and given its frustration it was nominating 4 directors for election to board at BCO’s 2008 annual meeting. Brink’s Inc. Brink’s Tax-free Compa split.up Brink’s ny Home Security . • They were frustrated that the board and management remained committed to its growth strategy.8% from S&P500) • Steel Partners was making pressure to Brink’s Company pursue strategic alternatives recommended by it. they wanted Brink’s to pursue strategic options to improve the stock price.Issues being target by activists • Brink’s was trading as much as 35 % below its intrinsic value.

Issues being target by activists MMI Investments Recommendations November MMI announced November November that it was MMI increased BCO sold BAX nominating four its ownership unit directors for in BCO to 6. off loss of $50 mm over the splitting up BCO.7% election to board at BCO’s 2008 200 200 200 annual meeting 5 6 7 April December July Submitted a letter Four strategic Refined its recommending that it alternatives: a analysis and divest its BAX unit strategic recommended acquisition. a a tax-free spin- BAX had a cumulative net leverage buyout. last 5 years and a leveraged This was underpricing the recapitalization company .

They requested that Announced that Tom Hudson be Hudson would appointed to the take a seat on the board immediately board 200 200 6 7 August January August Letter to the board Letter asking for Conduct a survey of encouraging BCO’s to a detailed report the 100 largest take immediately steps about MMI shareholders to to unlock long-term Investment determine the shareholders value by strategies interest of a Spin-off retaining an They also 49 % were in favor investment advisor to recommend that of the spin-off and explore the sale of the they should have another 18 % company BCO failed to do what two members on interest in spin-off Pirate Capital asked the board but they wanted a deeper analysis by . Issues being target by activists Pirate Capital Recommendations November Recommended to initiate a Dutch tender saying that was an opportune February time.

They also say that due to the undervaluation. Issues being target by activists Steel Partners LLC Recommendations 200 8 January Send a letter to the board saying that the company is significantly undervalued and were disappointed that the strategies implemented by the company didn’t consider their and the other shareholders recommendations. they demand that Brink’s pursue an immediately sale of the company that maximizes value for all shareholders. . the company should be aggressively buying back shares and should significantly increase its repurchase program. If Brink’s will not pursue a spin-off or other strategic alternative.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

recent multiples EBITDA in comparable deals multiples BCO chronically undervalue d Why? n s in la tio ing alcu ollow C ef s th slide .Brinks is undervalued by the markets Trading basis: Strategic 40% Transaction Basis: undervalued vs. public peers 35% undervalued based on 2006 vs.

Brinks is undervalued by the markets Key Valuation drivers that may not have been considered Possible Synergies Decreasing Legacy BAX Global former healthcare sale operations liabilities expenditures Growth prospects Secure both business domestically model and Abroad Aggressive BHS growth .

to fuel growth spending at Brink’s Home as well as leverage the strong Brink’s brand name BAX Global sale • Reduced the required funding for legacy liabilities by $225mm Decreasing former operations expenditures • Declining required funding in legacy healthcare liabilities related to coal as the beneficiary group ages. since the company is no longer involved in this business Growth prospects both domestically and abroad • New opportunities to expand to other markets (Asia) • Industry’s revenues growth in the mid-to-high single digit range Aggressive BHS growth • Growth drives future revenue but starves current free cash flow • BHS continued to gain market share within this highly fragmented industry • Economies of scale could be achieved (by leveraging the infrastructure of monitoring stations over more subscribers) • Potential for higher operating margins as little additional overhead is required to support additional subscribers • Opportunities to increase its under-presence in the commercial Secure marketbusiness model • Strong cash flows and prudent level of self-insurance (low risk expense) .Brinks is undervalued by the markets Synergies • Ability to use the strong cash flow generation from Brink's Inc.

Brinks is undervalued by the markets Other explainable reasons for Brink’s undervalued Industry’s unfavorable characteristic s Deceptive association Missed with the air Expectations freight industry Uncertainty Activist relating to Shareholders the demands company’s strategies .

which might lead to a lower stock price • Lack of short-term measures to increase shareholder’s value – company’s low leverage might be seen as a sign of lack of effort to invest in business operations and increase value for shareholders Uncertainty relating to the company’s strategies • It might scare away buyers who buy shares they are more comfortable with .Brinks is undervalued by the markets Other explainable reasons for Brink’s undervalued Industry’s unfavorable characteristics may lead share price declines • Sensitive to overall level of economic activity and to retail activity in particular • Highly competitive and fragmented market • Pricing pressures from its competitors • Currency fluctuations impact on revenues since 70% came from outside the US Missed Expectations • Failure in meeting earnings expectations due to Brink’s growth efforts puts it vulnerable to sharp price declines because markets tend to have a high expectation for future earnings growth Deceptive association with the air freight industry • Association with previous air freight industry’s high capital costs and cyclicality might be lowering valuation • BAX Global unit underperformance was an over-hang on the stock Activist Shareholders demands • Activist Shareholders unsatisfaction and pressure it is not well seen by the market.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

Leverag Sale to a Share e LBO strategi Buyback Recapita c buyer lization .Alternatives to Spin-of We believe that there are strategic alternatives that the company should take into account that can benefit from the current strength of the mergers and acquisitions market as well as the equity and credit markets in order to achieve the true value of the company.

So if you’re an investor who relies on dividend checks for income. this helps the company to beat market expectations and helps drive a higher stock price. • Increases shareholders value by increasing the percentage of ownership held by each investor and reducing the total number of shares outstanding. ramping up marketing. Alternatives to Spin-of | Shares Buyback A share buyback is a company buying back its shares from the marketplace. it can be done through a tender offer or through the open market. the buyback means there are fewer shares trading on public markets and this tends to strengthen the share price. or otherwise investing that money to grow the business. whichdollar can be translated used in an to buy up upward stock is a swing dollar in theisn’t that stock price. which can dilute the value . • With fewer shares trading. acquiring a competitor. • The rise in stock price may help the stock hit a target price the managers need to exercise their options. at least in the short term. since the company has less cash to hand out in dividends. • Companies spend a lot of money buying up shares and then cut their dividend as a result. •• Signs Signalsthe market that to investors thatthe company there are notbelieves it is undervalue other profitable and opportunities has confidence to grow in itself. Typically.Every the business. the EPS tends to rise. developing a new product. hiring more employees. • Boost Share Price. this could hit you in the pocketbook.

• Unlocks value to shareholders. Alternatives to Spin-of | Leverage Recapitalization In a leveraged recap. firms announce a debt issuance and one-time distribution of extraordinary dividends simultaneously and where the distribution is material and is executed over a short period. and moreover the investors will have to pay personal taxes over the dividends received • May leave it without the ability to adequately fund day-to-day working capital needs and may impair future growth opportunities or the ability to respond to and weather unanticipated business downturns • Future debt issuance will suffer a higher cost of financing because the amount od debt had increased . • Cash flow savings from the “tax shield” attributable to the tax deductibility of interest payments on the newly issued debt • Dividends are not tax deductible. • Provides liquidity for the fund’s investment without losing control or the ability to capture the benefit of the company’s future sales and earnings growth.

traditional bank loans. etc. • No need to publish information • There is a dilution/loss of ownership stake for current investors • Different perceptions of value to the target firm and PE firm • Cost-cutting measures my hurt the business and reputation of the company • High costs and time expenditure in due dilligence • High risk of bankruptcy given the large amount of debt • It can lead to hostile takeovers. because interest expenses are tax deductible. .) or debt to finance its acquisition.. • The LBO can create a valuable tax shelter for the target company. Alternatives to Spin-of | LBO A leveraged buyout or LBO is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds. • Usually PE companies can offer the highest price to the company • Massive restructuring of the company • The large interest payments force the company's management team to increase operating efficiency.

e. • May provide highest valuation for shareholders in the near term • May enable the entrepreneur to completely walk away (i. may be able to close much faster • Qualified buyers may not be constrained by financing contingencies or be at the mercy of the credit markets • Management may lose autonomy. are focused on enhancing their existing business model and the resulting financial return to their shareholders from the purchase of the target company. . facilitating due diligence and closing. companies already in similar lines of business. obtain the greatest liquidity) • Potential operating synergies can improve the business • Typically. strategic buyers are very knowledgeable from an operational and business perspective. lose their jobs. Alternatives to Spin-of | Sale to a strategic buyer Strategic buyers. or have their roles diminished • Possible negative impact on culture and morale • May affect customer loyalty • Upside value potential may be sacrificed (unless there is significant stock or earnout consideration) • Key concern is being caught up in bureaucratic delay— “decision paralysis” • A secondary concern is related to access to competitive information.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

Value Created by Spin-ofs Spin-offs Just like M&A.. on average. • M&A deals are carried under the belief that the combination of the two entities may generate a new entity whose value is greater than the sum-of-the-parts • Spin-offs are carried out when a firm believes that its overall value would increase separately (sum-of-the-parts > combined firm) • From as investor’s point of view.. increase in value after separation How do they create value to shareholders? • Straightforward method to redeem the value embedded  eliminate conglomerate discount • Increase of business/management focus  restructuring opportunities • Variable compensation more linked to the unit’s performance • Efficiency boost of the spun off unit  more close supervision by shareholder of top management • Asymmetry of information between the conglomerate’s management team and the market • Seems a good solution to manage agency issues . one advantage brought about by a spin-off is the ability to manage separately their exposure to different businesses • May not fit their investment policy thus lowering the initial price when selling • There is empirical evidence that both mother company and spun-of one. but the other way around.

we should do a sum-of-the-parts valuation • value them separately (value them differently or give them weights) • Based on publicly traded • Based on precedent transaction companies • It may involves minorities. Value Created by Spin-ofs So. control and BHS mayeffect) misleading require different valuations results as separate companies. control comparable prices (on the premium stock) • The market timing may • reflect transactions affect the multiples used. without control (net of which may drive to every Brink’s Inc. given the discrepancy in M&A deals and trading multiples for these businesses . why conglomerates still exists? • Crate value by exploiting synergies between the units they are made up of What valuation could be expect at each company? • Since the company operates in 2 different businesses. in • These are multiples of other words.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

Valuation | Publicly Traded Companies .

Valuation | Publicly Traded Companies • This valuation is based on 2006 and 2007 figures Assuming the • The conglomerate multiples were weighted based on weighted average of all security EBITDA companies • Clear evidence of a conglomerate discount multiples based on • Sum-of-the-Parts have an implied multiple slightly > EBITDA weights Conglomerate fair value It seems that. in fact. there is a discount over the conglomerate and therefore the Sum-of-the-Parts is higher than Conglomerate market value .

. Valuation – Publicly Traded Companies From a Bottom-Up analysis. we believe this is based on the industry fundamental and what is relevant to see which business if dragging the valuation down is the comparison of the implied multiple for each unit with the median and/or average of the relevant peers . quantitatively.. Then. It seems that the main responsible. appears to be BHS given that is trading way below industry multiples in both years . the BCO is trading at lower multiples than the industry.. Note the multiples among the two Vs businesses are different and security services seem to have higher multiples. ..

due to: • Potential impact of the Dot-Com Bubble on transaction multiples • Market Timing • Industry Median Multiples were chosen to perform the sum-of-the-parts valuation given it’s lower sensitivity to outliers • The monitoring industry transaction multiples seem to reflect some control premium • However.. in the security services multiples may imply some sort of discount.. Once again it is shown that the company is being undervalued .Valuation – Precedent Transactions • Only transactions after 2003 were considered.

Agenda Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation .

Final Recommendation Given the trend of consolidation within Security Services. perceived different • Different geographic without the Brink’s brand footprints association (or Royalties fees) • Different skillset required Gains could be taken from a tax-free spin-on • Through the valuations performed. and after looking to other potential “exit” strategies. • We believe that there is only such as access and cost of few synergies that do not offset capital to sponsor expansion the discount growth. we believe the spin-of route to be the most appropriate one . BCO’s businesses are diferent in many ways and it would be more efficiently run separately • Even with some drawbacks. the split-up in two companies may be worth $80 to $85 per share • An increase between 30 to 40% • Securitas’ stock increased 21% from on month prior to the split Concluding.

Thank you for your attention. April 20th 2015 Nova School of Business and Economics .