Just three weeks after Johnson Controls announced plans to merge with Tyco, the security industry was once again rocked with news of another major deal on Tuesday, as ADT disclosed that it has agreed to be acquired by an affiliate of private equity firm Apollo Global Management LLC. Upon completion of the deal, ADT will be merged with Protection 1, which along with Maryland-based ASG Security, was acquired by Apollo and its affiliates last May.
The combined company is expected to generate more than $300 million in recurring monthly revenue with total annual revenues in excess of $4 billion. The headquarters of the combined company will remain in Boca Raton, Fla., and will operate primarily under the ADT brand.
ADT is already the largest pure-play home security provider in North America, with more than six million customers. The merge of Protection 1’s customers would add another two million to that total. “The joining of the two companies obviously provides a huge market lead in the residential security market, as compared to where some of the other competing home security and monitoring companies would be,” says Konkana Khaund, a principal consultant with market research firm Frost & Sullivan. “The ability for P1 to actually gain the Canadian market is very big for them.”
Blake Kozak, principal analyst for security and building technologies at IHS, says the merger would combine the top ranked residential monitoring company in the Americas in ADT with the fourth-ranked firm in Protection 1, according to the research firm’s estimates. For the small–to-medium commercial side, Kozak says ADT remains the top player, with ASG falling in the top ten for large commercial monitoring.
“Merging ADT and Protection1 is going to be a big job, but their regional and market strategies should result in improved operational efficiencies for both companies,” Kozak says. "Since 2015 was a tough year for the alarm sector, the merging of these companies may help reduce fragmentation and confusion while improving attrition rates."
The acquisition, which has been unanimously approved by the ADT Board of Directors, is expected to be completed by June 2016. The transaction is subject to the conclusion of the applicable antitrust waiting periods in the U.S. and Canada, ADT stockholder approval and other customary closing conditions. Protection 1 President and CEO Timothy J. Whall will be the CEO of the combined business following the deal’s closing.
Michael Barnes, founder of advisory and consulting firm Barnes Associates, believes the merger is great for both companies and provides ADT with the perfect opportunity to reenter the commercial market in a significant way. “Since its separation from Tyco in 2012, ADT has been preparing for a reentry into the commercial market segment, and Protection 1 effectively gets them there quickly and efficiently. Also, Protection 1’s commercial capability is more focused on RMR oriented segments and arguably dovetails better with ADT,” Barnes says.
Barnes adds that while the merger will obviously create a very large company, the combined RMR of the new entity will be roughly the same as the previous combination of ADT and Tyco Integrated Security in North America. “Since the industry has grown, the resulting market share is slightly lower,” Barnes explains. “From an industry perspective, this is not much different than before the ADT/Tyco split. Having said this, I think the combined capability of Protection 1 and ADT is arguably more rational.”
The deal also means that ADT will become a private company which, according to Barnes, has its advantages. “In addition to the business having a degree of complexity, the accounting for much of the activity is less than informative which results in a difficult messaging environment for public alarm companies," he says.
"Try explaining why accounting for the costs of an internal sale are treated completely different from the costs of buying an account through the dealer program − even if the customer and its RMR is exactly the same − and do it in the brief amount of time Wall Street investors and analysts will allow. You quickly get a sense of the problem,” Barnes continues. “As a private company, the pressure for immediate results and simple sound bites goes away, particularly with sophisticated owners like Apollo. The focus can go back to long-term value creation, with the particular need for ADT to more aggressively pursue increased internal growth and lowering attrition.”
Impact on Dealers
Merlin Guilbeau, executive director and CEO of the Electronic Security Association (ESA), believes the merger will have little impact on the dealers who have competed against them for years; however, what the deal means in terms of increased private equity funding flowing into the industry may be more significant. “We’re seeing an unprecedented flow of capital from private equity firms into the security space and I think that signals that this industry will continue to see expansion,” Guilbeau says. “Consumer marketing has increased dramatically and I think that’s building more of a demand for this industry.”
While the evolution of smart home technology has obviously had a tremendous impact on sparking the interest of consumers who may not have otherwise adopted home security technology, Guilbeau believes the attractiveness of the industry to new investors is rooted more in the business model than in the proliferation of connected devices. “They see this recurring revenue model and are really grasping onto the concept of how it can build a pretty substantial portfolio for their investors,” he says.
While the merger may spark concerns among existing ADT and Protection 1 dealers about what the future holds for their businesses, Guilbeau says many of them have already lived through previous deals of this size and actually ended up being just as successful as they were before. “When Tyco bought ADT I think a lot of people asked the same question: ‘What’s that going to do to the dealer program?’ When Tyco bought DSC, there were the same thoughts, as well as when (ADT) bought Brinks − but it seems many of those dealers who were successful continue to be successful and those that aren’t are typically weeded out,” Guilbeau says. “I think the dealer program survives mainly because they have some top-tier dealers who are doing some pretty incredible work – their process and go-to-market strategy – they understand their niche and they are laser-focused on what they are doing.”
Additionally, Guilbeau says these dealers should not rush to judgement, adding that these types of deals take time and they need to see how everything unfolds. “There may be some great advantages to this consolidation and there may be some disadvantages, but they shouldn’t rush to any conclusions,” he says.
Guilbeau recommends that all dealers figure out what they are good at and not try to be all things to all people if they want to experience sustainable growth. “The days of just sitting back and allowing the business to kind of run itself, in my opinion, are waning," he says. "This is why we put such an emphasis on education programs at our leadership summit and at ESX, where we are trying to deliver more of a business-training environment to try to help these dealers understand that the business climate in this industry is changing.
“The dealers who understand that and participate in that type of training of how to be a better business and how to grow their business will succeed," Guilbeau adds. "Those who are happy with the account base they have and try to maintain that will likely be the ones that sell in the near future or unfortunately may even go out of business.”
Rise of the Connected Home
For Khaund, this deal marks what could be a shift in the priorities for connected home customers. “The ability for these companies to monetize their customer base for additional products and services is huge,” she says. “This is (one of the major reasons) these companies are trying to come together.”
In the connected home, security – according to Khaund – has always occupied the third space or priority, behind entertainment and energy solutions. “This could potentially change things and disrupt that,” she says. “It potentially gives more choices to the customers.”
According to Kozak, the deal will provide ADT, which already has one of the strongest smart home brands in North America with its Pulse platform, an opportunity to saturate the market even further. “This acquisition will enable ADT to bring Pulse to a wider audience than ever before,” Kozak says. “Fragmentation is one of the largest barriers to the smart home industry; however, as the early-adopter phase of the smart home comes to a close, the winners will be those who have managed to find the larger footholds in preparation for the mass market adoption of smart home systems."
Joel Griffin is editor of SecurityInfoWatch.com. Paul Rothman is editor-in-chief of Security Dealer & Integrator (SD&I) magazine. Access the current issue of SD&I, along with archives and subscribe to the print or digital versions of the magazine at www.secdealer.com.
