Issue link: https://read.dmtmag.com/i/31490
SECURITY SYSTEMS NEWS JANUARY 2011 www.securitysystemsnews.com Finding capital in 2011 S By Martha Entwistle ome pretty big deals went down in 2010. Tyco bought Broadview, UTC completed its acquisition of GE Security, and GTCR now owns Protection One. Some nice middle-market deals got done too; Kratos was about to close its acquisition of Henry Brothers at press time, Summit Partners bought Central Security Group, and, Oak Hill Capital Partners bought Security Networks. Activity with smaller deals included: World Wide acquired Rainbow Home Systems and Loud Security made five small acquisi- tions in 2010. Imperial Capital’s managing direc- tor, and co-head of corporate finance John Mack summarized 2010 with three observations. “One, there was a lot more M & A activity; two, in particular, we saw a significant pickup in private equity-backed M&A, and the valuations in those deals are pretty impressive; and, three, the debt capital markets came back stronger than expected in the second half of 2010. What’s the outlook for 2011? On the one hand, it’s certainly not the freewheeling days of 2006 or 2007, but if you’re a well-managed security installer or integrator looking for some capital, experts who spoke to SSN for this story forecasted opportunity—maybe not equal opportunity for all—but opportunity nonetheless, for access to capital in the coming year. “In 2011, you’ll continue to see strong availability of debt financing, particularly for larger businesses with around $10 million in EBITDA or larger, well-established middle market or larger businesses,” Mack predicted. CapitalSource managing director Bill Polk, a commercial lender with a dedicated security group, noted that the very biggest security companies, “the Pro Ones and the Stanleys of the world, have had little problem accessing debt capital.” On balance, the debt markets have bounced back from post-2007 capital markets crisis, he said. Although the market has not returned to the conditions of the mid-decade, “pricing and terms are softening for borrowers, particularly if the deal has a conservative debt structure or if it is rated by one of the debt rating agencies like Standard & Poor’s. Given the institutional debt investors demand for rated senior debt, the syndicators of larger middle market and large cap loans are find- ing their loans oversubscribed, in some cases by a factor of two- to three times,” Polk said. Well-performing RMR-based middle market security alarm com- panies with $500,000 to $5 million in RMR are also finding a number of lenders willing to provide capital to them, especially if they are looking for loans leveraged below 20x RMR, Polk said. Often these borrowers are working with members of the “club” of lenders with dedi- cated secu- rity lending teams, he said. It’s a different situation if “lever- age levels are relatively high or the n For a more robust version of this story, see: WWW. SECURITYSYSTEMSNEWS.COM SPECIAL REPORT 27 credit is viewed as more marginal,” Polk said. In these instances, money is available but it “gets more expensive and you find more resis- tance.” Non-RMR-based sys- tems integrators are in a tougher spot. “Capital is more expensive and harder to get,” Polk said. They do have options, however, whereas “18 months ago the loan market for these kinds of borrowers was virtu- ally closed for business.” CapitalSource has traditionally made loans in the $10-30 million range, but this year it also moved into the lower end making a number of loans in the $1 to $5 million range. Alarm Financial Services makes loans between $150,000 and $2 million. It also makes account pur- chases. Jim Wooster, AFS president, said his loan business has picked up in the second half of the year and business is up 30 percent in 2010 over 2009. “I’m encouraged to see that more and more the reason why alarm companies are coming to us to borrow money is for acqui- sitions or for growth as opposed to refinancing existing debt,” he said. SSN