Digging Deep in the RMR Valuation Landscape

Agenda
Market Overview
Components of Value
Focus on RMR
Buyers and Sellers
The Future
Q&A

Some Shameless Self Promotion

BARNESASSOCIATES
www.barnesassociates.com

Advisors & Consultants

26 years of security alarm industry focus
230+ transactions$11 Billion
Co-Sponsors of The Barnes Buchanan Conference
18th year in February 2013
The Breakers, Palm Beach Florida
www.barnesbuchanan.com

Market Overview

Market Characteristics
Stable and Liquid
Across all sizes and geography
Residential and commercial oriented companies

Discriminating
Larger valuation spreads
Risk aversionon both sides

Kiss Your Banker!!!

Predominant Market Tension

SELL SIDE

BUY SIDE
ADT Spin-Out valuation

Fewer post-sale options

Economy double dip

What to do with the $s

Preference for internal

growth

Tension

Cost of pursuing a
transaction
Fear of a failed process

Integration concerns

Post recession optimism

Attrition fears

Predominant Market Tension

SELL SIDE

BUY SIDE
ADT Spin-Out valuation

Fewer post-sale options

Economy double dip

What to do with the $s

Preference for internal

growth

Tension

Cost of pursuing a
transaction
Fear of a failed process

Integration concerns

Post recession optimism

Attrition fears

New Players

Probability
of Change
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Tax Rates

$100k - $10m RMR Transactions

As Many Dealers Below 30xas Above 50x

Recession Periods

$1m - $10m RMR Transactions

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Total Volume of Last 3 Years

300+/- M&A deals per year
2010 an extraordinary year (Broadview, P1, Monitronics)
2011no large deals
Strong, deep Dealer Program
Acquisition Activity in $ millions
2009

M&A

2011

RMR

Value

Multiple

RMR

Value

Multiple

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$ 385

34x

$ 108

$4,726

44x

25

834

34x

28

948

34x

36

$1,219

34x

$ 136

$5,674

42x

Dealer Program
Total

2010

11

RMR

Value

Multiple

$ 163

37x

28

962

34x

33

$ 1,125

34x

Components of Value

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Two Basic Components of Value

Growth Engine

Customer Base
Sales & Installation capability

Customer Base
Uncoupled Indicators
Dealer Program market34x RMR
Bulk account sale transactionsrarely at or above 40x
Recession/slow-growth periodslower valuations
Sale of pure Originator operations [ NEW ]
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Favorable Growth Engine Characteristics

Year on year increase in originations
High quality accounts generated
Low Creation Multiplewith low volatility
Documented and articulated
Processes
Revenue and cost components
Accounting impact

FOCUSEDand scalable

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Example:

Size of Market
Square
Miles
Population
57

163,410

Originated
Number
Accounts

RMR

Cost
Multiple

2,524

$100,783

25x

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Focus on RMR

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The Best Account

Customer: General Electric
As Manager for Joint DOE/NIH/
MIT Facility
Address:

MIT Campus Warehouse

Boston, MA

System:

Intrusion and Fire (Leased)

RMR:

$2,200 (Service on T&M basis)

Quarterly Billing

Good Geography
Excellent Installation

Contract: 10 Year Automatic 10 Year

Renewals
Status:

Experimental Long Term Storage Warehouse for

Low Level Medical Related Nuclear Waste

Leased System
Accepts Rate Increases

Considering Managed Access

Control and Video System

Upgrades/Enhancements
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The Worst Account

Customer: Mr. & Mrs. & Mrs. & Mrs. Smith
Address:

666 Jihadist Lane

Abbottabad, PK

System:

Intrusion and Fire

RMR:

$49.99 (4,724 Rupee)

Including Maintenance
Annual Billing

X Bad Geography

Contract: 3 Year Automatic Renewal

Still in first term

X Poor Installation

History:

X Behind on Payment

X False Alarm Problem

Account acquired from

summer sales company

X Status Unknown
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RMR Valuation Related Variables

Documentation
Quality of customer
Quality of installation
Coherence (location, fit, etc.)
Services provided and margin potential
Maintenance profile (probable costs and revenue)
Attrition profile

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Spectrum of Potential Margin

Lower

Higher

Maintenance

Test & Inspect

Non-POTS
Communication

Monitoring

Interactive/Managed
Services

NOTE: high degree of variances in above

Its the entirety of the account that matters

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System Lease/
Subsidization

AccountPool AttritionMoneyball in the Alarm Industry

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The Cost of Bad Credit Customers

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The First Term Renewal Spike

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A 15 Year View Residential Accts

Industry Composite by Year

[A big thank you to Monitronics]

10

11

12

13

14

15

Cumulative Percentage Cancelled

3%

10%

21%

41%

52%

60%

66%

71%

75%

78%

81%

83%

85%

87%

88%

Example Unit/RMR Roll Forward

Beginning of Year
Cancelled
End of Year
Attrition Rate (Based on BOY)
Attrition Rate (Based on Average)

1,000
(30)
970
3%
3%

970
(70)
900
7%
7%

900
(110)
790
12%
13%

790
(200)
590
25%
29%

590
(107)
483
18%
20%

483
(80)
403
17%
18%

403
(63)
340
16%
17%

340
(50)
289
15%
16%

289
(40)
249
14%
15%

249
(33)
217
13%
14%

217
(26)
190
12%
13%

190
(22)
169
11%
12%

169
(19)
150
11%
12%

150
(17)
133
11%
12%

133
(15)
118
11%
12%

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Buyers & Sellers

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The Buy-Side is SolidBut Cautious

2 of the 3 types of buyers are active
Existing industry players
Financial buyers

The 3rdStrategic New Entrants just looking (for the time being)
Debt markets highly supportive
Industry in favor

The Sell-SideHigh Expectations/Requirements

SURVEY: What multiple would convince you to sell?

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The Future

28

Bellwether Issues/Indicators
ADT Spin-Out Valuation
Success of Telco/MSOs
Economy
Continued support of the debt markets

29

Questions & Answers

BARNESASSOCIATES
Michael Barnes

Mark Gronowski

Partner

Partner

mbarnes@barnesassociates.com

mgronowski@barnesassociates.com

For our annual conference: www.barnesbuchanan.com

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