LBO of Alarm Services
Balancing Risk and Reward
Nicolas Lindstrom
Samuel Nadeau
Franco Perugini
Mandate
North Village Capital purchase of AlarmServce Inc.
Debt Structure
Mandate
Rationale
Strategic Fit
Valuation
Return
Implementation
Conclusion
Recommendation
Complete LBO of AlarmServe, utilizing 2.5x Debt/EBITDA at entry to realize
a 25% IRR
Mandate
Rationale
Valuation
Implementation
Conclusion
Mandate
Sales secured by contracts
• Low Customer Attrition
Monthly Payment Plan
• Stable Cashflow
Low Capital Intensively
• Low drain on cash
Industry is a good fit for an LBO
Mandate
Rationale
Valuation
Implementation
Conclusion
How NVC can add Value
Expand to new geographic
areas
Focus on higher-margin
accounts
$2 Million Dollars by year 4
Reduce operating cost
Eliminate cost of being
public
NVC can add value to the company through their involvement
Mandate
Rationale
Valuation
Implementation
Conclusion
Decision of debt Level
Return
Probability to
Receive
Financing
Mandate
Rationale
Default Risk
Valuation
Implementation
Conclusion
Decision of debt Level
No leverage
Medium
Leverage
High Leverage
Return
1
4
5
Default
5
4
1
5
4
2
11
12
8
Probability to
Receive
Financing
Total
Default risk is the deal-breaker
Mandate
Rationale
Valuation
Implementation
Conclusion
Decision of debt Level
No leverage
Medium
Leverage
High Leverage
Return
1
4
5
Default
5
4
1
5
4
2
11
12
8
Probability to
Receive
Financing
Total
Medium leverage is the best option
Mandate
Rationale
Valuation
Implementation
Conclusion
How NVC can add Value
Stable industry for LBO
AlermServe is a good
strategic investment
investment for NVC
NVC can add $2 Value
Medium leverage is the
best leverage level
Mandate
Rationale
Valuation
Implementation
Conclusion
Valuation
Valuation Introduction
Income Statement
Projections
Deal
Deal Structure
Returns Analysis
Sensitivities
Debt Ratios
Mandate
Rationale
Exit Multiples
Valuation
Implementation
Conclusion
Assumptions
Income Statement
• Revenue growing at CAGR of 6%
• Flat gross margin profile
• EBITDA Synergies of $2M over 4 years
Deal Overview
• 2.5x total Debt/EBITDA
• 6x entry – 6x exit Multiple
Mandate
Rationale
Valuation
Implementation
Conclusion
Income Statement
Revenues
Growth
COGS
Gross Profit
Margin
Management Fees
Selling Expenses
G&A
EBITDA (Pre-Synergies)
Synergies
EBITDA (Post Synergies)
D&A
Interest (Income)
EBT
Income Tax
Net Income
4,851
18,915
80%
0
10,353
4,073
4,489
0
4,489
2008
28,310
19%
6,237
22,073
78%
0
9,988
5,081
7,004
0
7,004
2,605
97
1,788
626
1,162
3,066
85
3,853
1,349
2,504
2007
23,766
Income Statement
2010
2009
33,900
32,273
5%
14%
7,500
7,594
26,400
24,678
78%
76%
678
0
10,571
10,364
6,102
5,809
9,049
8,506
500
0
9,549
8,506
2011
35,600
5%
7,800
27,800
78%
712
10,783
6,408
9,898
1,000
10,898
2012
38,100
7%
8,400
29,700
78%
762
10,998
6,858
11,082
1,500
12,582
2013
40,700
7%
8,900
31,800
78%
814
11,218
7,326
12,442
2,000
14,442
3,600
1,429
4,020
1,407
2,613
3,700
1,318
4,880
1,708
3,172
4,000
1,184
5,898
2,064
3,834
4,300
1,024
7,118
2,491
4,627
3,134
66
5,306
1,857
3,449
2014 CAGR
6%
44,000
8%
5%
9,700
7%
34,300
78%
880
2%
11,443
6%
7,920
11%
14,058
2,000
14%
16,058
4,600
828
8,630
3,020
5,609
Margin expansion provided by synergies and operating leverage
Mandate
Rationale
Valuation
Implementation
Conclusion
8%
66%
10%
10%
10%
Working Capital
2007
Accounts Receivable
% Sales
DSO
Inventory
% Sales
Accounts Payable
% Expenses
WC
Change
2008
Working Capital
2009
2010
2,300
2,416
7%
7%
26
26
3,300
3,466
10%
10%
1,300
1,322
5%
5%
4,300
4,560
260
2011
2,537
7%
26
3,640
10%
1,367
5%
4,810
250
2012
2,715
7%
26
3,896
10%
1,436
5%
5,175
365
2013
2,901
7%
26
4,162
10%
1,501
5%
5,561
386
Working Capital will require cash from the business
Mandate
Rationale
Valuation
Implementation
Conclusion
2014
3,136
7%
26
4,499
10%
1,590
5%
6,045
484
Deal Structure
Moderate debt levels to minimize risk
Mandate
Rationale
Valuation
Implementation
Conclusion
Debt Schedule
Debt Schedule
2010
2011
2013
2014
Revolver
Revolver Balance Beg
% of AR
% of Inventory
Repaid (Drawn)
Revolver Ending (Cash)
Interest
Prime Rate
0
3,839
1,856
4,032
3,265
4,315
4,151
4,609
4,304
4,983
(1,856)
1,856
0
2%
(1,409)
3,265
93
2%
(886)
4,151
163
2%
(153)
4,304
208
2%
603
3,701
215
2%
Senior
Senior Debt
Repayment
Senior Debt Ending
Interest
17,011
3,402
13,609
919
13,609
3,402
10,207
714
10,207
3,402
6,804
510
6,804
3,402
3,402
306
3,402
3,402
102
4,253
4,253
510
4,253
4,253
510
4,253
4,253
510
4,253
4,253
510
4,253
4,253
510
Subordinated
Sub Debt
Repayment
Sub Debt Ending
Interest
Mandate
2012
Rationale
Valuation
Implementation
Conclusion
Cash Flow
Net Income
Plus: D&A
Less: Change in WC
Operating Cash Flow
Cash Flow Statement
2008
2009
2010
2,613
3,600
260
5,953
2011
3,172
3,700
250
6,622
2012
3,834
4,000
365
7,469
2013
4,627
4,300
386
8,540
2014
5,609
4,600
484
9,725
Capital Expenditures
Investing Cash Flow
(4,407)
(4,407)
(4,628)
(4,628)
(4,953)
(4,953)
(5,291)
(5,291)
(5,720)
(5,720)
Debt Repaid
Dividends Paid
Financing Cash Flow
(3,402)
0
(3,402)
(3,402)
0
(3,402)
(3,402)
0
(3,402)
(3,402)
0
(3,402)
(3,402)
0
(3,402)
Change in Cash Flow
(1,856)
(1,409)
(886)
(153)
603
2007
Debt repayment will be the major cash drain
Mandate
Rationale
Valuation
Implementation
Conclusion
Return Profile
EBITDA
Exit Multiple
Exit Enterprise Value
Returns Analysis
2008
2009
2010
9,549
6.0x
57,294
2011
10,898
6.0x
65,385
2012
12,582
6.0x
75,491
2013
14,442
6.0x
86,652
2014
16,058
6.0x
96,345
Less: Net Debt
Implied Equity Value
19,718
37,575
17,725
47,661
15,208
60,283
11,959
74,693
7,954
88,392
678
678
712
712
762
762
814
814
880
88,392
89,272
2007
Payment
Management Fees
Proceeds From Sale
Total Return
IRR
Multiple on Money
(30,790)
(30,790)
25%
3.0x
25% IRR with a 3x multiple on money
Mandate
Rationale
Valuation
Implementation
Conclusion
Weak 2010 Return Check
EBITDA
Exit Multiple
Exit Enterprise Value
Returns Analysis
2008
2009
2010
7,702
6.0x
46,212
2011
8,879
6.0x
53,275
2012
10,470
6.0x
62,819
2013
12,148
6.0x
72,886
2014
13,419
6.0x
80,514
Less: Net Debt
Implied Equity Value
20,008
26,204
18,863
34,412
17,247
45,572
15,023
57,863
12,134
68,380
613
613
644
644
689
689
737
737
789
68,380
69,169
2007
Payment
Management Fees
Proceeds From Sale
Total Return
IRR
Multiple on Money
(30,790)
(30,790)
19%
2.3x
-5% Revenue growth in ‘10 leads to 19% IRR
Mandate
Rationale
Valuation
Implementation
Conclusion
Return Sensitivity
0
14,492
15,255
16,058
16,860
17,703
4.5x
15%
16%
18%
19%
20%
Exit EBITDA and Exit Multiple IRR Sensitivity
Exit Multiple
5.0x
5.5x
6.0x
6.5x
18%
20%
22%
25%
19%
22%
24%
26%
20%
23%
25%
27%
22%
24%
26%
29%
23%
25%
28%
30%
7.0x
27%
28%
29%
31%
32%
Multiple contraction will still provide sufficient returns
Mandate
Rationale
Valuation
Implementation
Conclusion
7.5x
28%
30%
31%
32%
34%
Implementation
Acquisition Timeline
2009
Q4
Q1
Q2
2010
Q3
Q4
LOI
Access data room
Due Diligence
Legal docs
Sign SPA
Close deal
Focus of due diligence will be on empolyee retention
Mandate
Rationale
Valuation
Implementation
Conclusion
Debt
Sources and Uses
Uses
0 Purchase Price
17,011 Transaction Fees
4,253
30,790
52,054 Total
Sources
Revolver
Senior Debt
Sub Debt
Equity
Total
Unlevered Scenario
Senior Debt
Subordinated
Revolver
Total debt
Debt/EBITDA
2.0x
0.5x
0.0x
2.5x
51,034
1,021
52,054
$ Value
17,011
4,253
0
21,264
2.5x Total Leverage
Mandate
Rationale
Valuation
Implementation
Conclusion
Leverage and Covenants
EBITDA Coverage
EBITDA-Capex Coverage
Debt/EBITDA
Leverage Analysis
2008
2009
2010
128.3x
6.7x
3.6x
2.5x
2.1x
2011
8.3x
4.8x
1.6x
2012
10.6x
6.4x
1.2x
2013
14.1x
8.9x
0.8x
2014
19.4x
12.5x
0.5x
Covenants
EBITDA Coverage
EBITDA-Capex Coverage
Debt/EBITDA
2.0x
2.0x
3.0x
2.0x
2.0x
3.0x
2.0x
2.0x
3.0x
2.0x
2.0x
3.0x
2.0x
2.0x
3.0x
2007
All covenants are very comfortably respected
Mandate
Rationale
Valuation
Implementation
Conclusion
Management Strategies
Focus on higher margin business segments
• Residential/ commercial security
Reduce operating cost
• Focused hiring during expansion
• Optimize cash cycle
Eliminate cost of being public
• Listing cost
• Financial disclosure
• Shareholder relations/Market pressure
New strategies will increase CF to pay down debt
Mandate
Rationale
Valuation
Implementation
Conclusion
Management fees
General Partners
80%
2% of sales
Limited Partners
20%
Management fees will add to returns
Mandate
Rationale
Valuation
Implementation
Conclusion
Exit strategies decision matrix
IPO
Sale
Dividend
recap
Return
Low (19%)
High (25%)
Medium
(23%)
Time
Medium
Medium
Low
Risk
Medium
High
Low
Returns will be the deal maker
Mandate
Rationale
Valuation
Implementation
Conclusion
Sale Timeline
Q3
2013
Q4
Q1
Q2
2014
Q3
Q4
Invite banks to pitch
Review pitches
Select advisors
Prepare CIM
Sign NDA
LOI
Access data room
Due Diligence
Legal docs
Sign SPA
Close deal
A strong CIM will be crucial to strong exit valuation
Mandate
Rationale
Valuation
Implementation
Conclusion