Presentation to Alarm Association of Greater St.

Louis
January 17, 2012

© 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.

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

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© 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.

INTRODUCTION

Henry Edmonds
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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
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Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans $2B in transactions in the airline industry

Wall Street investment banker (1985-1990)

 

MBA, Harvard Business School BS, with distinction, civil engineering, University of Virginia
© 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.

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The Edmonds Group

Investment banking services

Capital raising and mergers/acquisitions advisory Average transaction size about $50 million Sweet spot $10 million to $300 million

Approximately 40 transactions closed
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$2.0 billion transaction value Focused on security alarm industry Broad experience representing buyers, sellers, borrowers and capital providers High level of client service

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© 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.

ALARM INDUSTRY OVERVIEW

North American Alarm Industry

20% household penetration

36 million households of 180 million 3 million businesses of 6 million

50% business market penetration

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?
© 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.

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Total Alarm Industry Revenue
60 50 40 30
$22.3 $29.5 $24.1 $25.4 $25.5 $32.3
(methodology change between 2007 and 2008)

$48.5

$44.7

$43.9

$43.9
estimated

($ billions)

20 10 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: SDM Magazine

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© 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.

Security Monitoring and Service Revenue
$18 $16 $14 $12
($ billions) $17.0 $15.2
estimated

$16.7

$17.1

$10 $8 $6 $4 $2 $0

$10.3

$10.7
(methodology change between 2007 and 2008)

2006

2007

2008

2009

2010

2011

Source: SDM Magazine 9
© 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.

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 Would be on the list if they did

A number of companies don’t submit data to SDM

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

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North American Alarm Industry Recurring Revenue Market Share
2010 Estimated Market Share
ADT Security Services 29%

Other 49%

Protection One 3% Monitronics Int. 3%

6-100 12% Stanley 2%
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© 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.

Vivint 2%

SDM 100 Ranked by RMR – Top 10

Source: http://www.sdmmag.com

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© 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.

SDM 100 Ranked by RMR – Second 10

Source: http://www.sdmmag.com

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© 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.

SDM 100 Ranked by RMR – Last 10

Source: http://www.sdmmag.com

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© 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.

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 Quarterly growth expectation for Wall Street

Likely means each will be more acquisitive

 

More transparent public data How long with ADT NA Residential stay public
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Public market discount for RMR business Takeover target
© 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.

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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
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Entire companies Dealer programs Bulk sales of accounts only

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Larger (more efficient) buyers get predictable and significant economies of scale by acquiring Transactions trade based on buyer’s cash flow not seller
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Hence RMR multiples Still all about cash flow
© 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.

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Major M&A Transactions

2012

BV Capital Partners - DTT Bain Capital – Securitas Direct (Europe) Stanley Works – Niscayah (Europe), Microtech (Canada) Tyco/ADT – Signature Security (Australia) Ascent Media – Monitronics RockBridge – Connect America (PERS), Protect America Summit Partners – Central Security Group Oak Hill – Security Networks ADT - Broadview GTRC – Protection One
© 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.

2011
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2010
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Dealer Programs/Bulk Sales
 

Significant factor in the industry today Approximately 1 million accounts purchased in 2011

Doesn’t include company acquisitions (like Broadview) Weekly or monthly closings Typically newly created accounts Accounts only Aged accounts Usually one off transaction Seller stays in business

Dealer program purchases
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Bulk sales
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© 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.

Dealer Programs/Bulk Sales
Number of accounts purchased (in 000s)

1,000 800 600 400 200 0 2006 2007 2008 2009 690 710 620 740

1,000 850

2010

2011

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© 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.

ALARM INDUSTRY VALUATIONS

Key Valuation Metrics

Cash flow margin from existing customers

Adjusted EBITDA and SSCF Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding 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

Attrition rate

Creation cost of new customers

 

Growth rate

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© 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.

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 After all investment in creation
© 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.

Free Cash Flow

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Average Industry Metrics

Margins on existing customers

Adjusted EBITDA of 50% to 65% for companies with scale 8% to 12% Gross Creation Cost 25x to 35x Net Creation cost 20x to 30x 10% to 30% organic Summer programs - can be much faster Dealer programs – can be much faster
© 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.

Attrition rate

Creation cost
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Growth rate
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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

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© 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.

Other Valuation Drivers (cont.)
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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)

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© 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.

RMR Multiples for Alarm Sale Transactions
(minimum, average and maximum multiples paid 2002-2012)

70.0x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x < $50K $50K-$100K $101K-$500K $ RMR per transaction 38.0x 32.8x 25.0x 45.0x 37.4x 30.0x 45.0x 38.4x 27.0x

64.0x

42.9x 30.8x

> $500K

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© 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.

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 Friends and family

Angel investors provide equity to the extent available

 

Multiples in the 20’s for smaller end, low 30s for larger end 71% of all deals involve fewer than 300 accounts (SDM)

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© 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.

$50k to $100k in RMR Transactions
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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 Occasionally approaching 40x in frothy markets

Multiples typically in the 30s

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© 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.

$100k to $500k in RMR Transactions
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4,000 to 20,000 accounts Sweet spot for regional consolidators Smaller PE firms also like this size transaction
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Equity checks of $2M to $8M Big enough to afford CFO $200k and up - good size for industry focused lenders If they buy, typically just for accounts Shut down seller’s operations Depends on market conditions Quality of management and accounts
© 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.

Nationals take an interest in these deals
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Multiples mid 30’s to mid 40s
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Over $500k in RMR transactions
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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

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© 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.

CAPITAL MARKET CONDITIONS

Debt Markets

Very favorable for middle market and lower middle market transactions

Loan facilities under $250 million Banks, specialty finance companies, hedge funds

Lots of experienced and interested industry lenders

However, most industry leaders require a minimum deal size of $5 million to $10 million
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Alarm Financial Services (AFS) - $200,000 to $1.5 million CapitalSource - will go as low as $3 million if transaction is very straight forward Lack of industry understanding – low advance rates
© 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.

Local/regional banks will lend smaller amounts

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Typical Experienced Lender Deal

2-3 year revolver

Some facilities term out over five to seven years Stretch senior advance rates up to 30x

Borrowing base with advance rate of 22-26x RMR

 

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

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© 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.

Typical Subordinated Debt Deal

5 to 7 year term debt

Bullet maturity or amortization beginning in year 5

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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

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© 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.

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
© 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.

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Strategic Buyers

Large alarm industry firms are acquisitive

ADT, Protection One, Monitronics, Stanley Security Networks, ASG, CSG, Guardian, Vector Ascent Media bought Monitronics Stanley entered the alarm market several years ago Phone companies, cable companies dabbling again

Midsize firms too

Non industry strategics looking more closely
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© 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.

BUYING/SELLING ALARM BUSINESSESS/ACCOUNTS

Key Considerations

Market timing

Timing makes a huge difference Good data, good performance Investment bankers Accountants/due diligence experts Lawyers 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
© 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.

Be prepared

Benefit from experienced advisors
  

Mistakes can be very costly
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Key Considerations
 

Valuations very much affected by capital market conditions Debt and private equity markets are currently very favorable
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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
© 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.

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QUESTIONS AND ANSWERS

Contact Information

Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: hedmonds@theedmondsgroup.com Website: www.theedmondsgroup.com

© The Edmonds Group, LLC Materials may be freely distributed if unaltered as long as they are fully credited and sourced to The Edmonds Group.

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