1. An Alarmingly Good Investment
The Leveraged Buyout of AlarmServe Inc.
M.H. Capital Partners
December 2009
Javier Hernandez-Cotton
Franco Perugini

2. Introduction
Introduction
Analysis
Valuation
Implementation

3. Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Introduction
Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Introduction
Analysis
Valuation
Implementation

4. Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Introduction
Should North Village Capital (“NVC”) buyout AlarmServe Inc.?
Acquire AlarmServe at a purchase price of $51.0mm at 6.0x EBITDA using 2.5x total leverage (“Moderate Leverage”) to realize I.R.R. of 35% and a return on cash of 4.2x by 2015
Introduction
Analysis
Valuation
Implementation

5. $51mm bid for AlarmServe at 6x EBITDA
Situation Overview
Proposition
$51mm bid for AlarmServe at 6x EBITDA
Key Considerations: 1
Uncertain Market Conditions
Establish entry strategy that accounts for systemic risk and current debt capital markets conditions 2
Deal Financing & Debt Structure
What portion of the deal will be financed through debt & what covenants could be placed on the debt? 3
Value Creation
How will NVC achieve a target IRR of 30% (min. 20%)? 4
Exit Strategy
How will NVC exit its position in 5-7 years?
Introduction
Analysis
Valuation
Implementation

6. Analysis
Introduction
Analysis
Valuation
Implementation

7. Historic 3-Year Revenue CAGR
AlarmServe as a target
Products & Services
Installation & servicing of two way voice communication system
Competitive Advantage: Unique service offering superior to competitors
Value
Strong contract base (secured revenues): represent 88% of revenues
Company branding is strong, enabling them in a merger to expand services and offering under the known “AlarmServe” banner
Opportunity: No singular “Industry Leader” at the moment
Financial Snapshot
10.7%
Historic 3-Year Revenue CAGR
Operating Margins
26%
2009
18%
2007
Introduction
Analysis
Valuation
Implementation

8. Alarm Security Industry
Assessing the Market
Leverage requirements for financial institutions has increased since the financial collapse
Debt Capital Markets
Shift over the past years from fragmented to consolidated
Outside large low-cost players, there is ~3600 security alarm providers
Alarm Security Industry
Key Takeaway
While higher leverage is favourable for returns, interest rates ramp up aggressively with increased leverage (senior: 6% to 8%, subordinated 12% to 15%)
Provides opportunity for companies to consolidate through acquisitions of smaller providers
Implications to NVC
Take on conservative amount of debt for the deal and provide scenarios for potential covenants offered by the bank
AlarmServe can acquire add-on companies enabling them to grow customer base, diversify product offerings, and scale business
Introduction
Analysis
Valuation
Implementation

9. Investment Thesis & Strategic Rationale
NVC
Deal would represent 10% of NVC’s total portfolio
During financial collapse, one of the fund’s companies has gone under 1
Favourability of Industry
Service is a growing necessity amongst consumers & even in recessionary periods is a staple service 2
Inorganic & Organic Growth Opportunities
Inorganic: Add-on acquisition
Organic: Geographic expansion, product expansion to higher margin segments 3
Favourable Return Opportunies
Unlevered: 23%
Moderate Leverage: 35%
High Leverage: 62%
Investment opportunity provides low risk opportunity with expansive growth opportunities through conservative strategic movements
Introduction
Analysis
Valuation
Implementation

10. Valuation
Introduction
Analysis
Valuation
Implementation

11. Valuation Overview Introduction Analysis Valuation Implementation
Projections
Operating
Sources and Uses
Returns Analysis
IRR
Cash on Cash
Sensitivity
Leverage Levels
Multiples
Introduction
Analysis
Valuation
Implementation

12. Operating Projections
Valuation Inputs
revenue CAGR of ~7%
EBITDA CAGR of 13% pre- synergies
Capex equal to 13% of revenues
Additional management fees of 2% of revenues
Operating Projections
5 year amortizing senior debt
8 year bullet payment subordinated debt
Revolving operating line of credit
Assumes excess cash is swept to pay down revolver
Debt Structure
Exit multiple equal to entry multiple (6.0x base case)
Returns
Introduction
Analysis
Valuation
Implementation

13. Synergies scaling to $2mm/annum
Income Statement
7% CAGR
13% CAGR
Synergies scaling to $2mm/annum
Introduction
Analysis
Valuation
Implementation

14. Deal Structure – Base Case
We factor in additional transaction costs of 2% for due diligence and funding costs
Our base case scenario assumes moderate leverage
Introduction
Analysis
Valuation
Implementation

15. Debt Schedule Senior debt amortizes over 5 years at 6% interest
Sub debt priced at 12%
Operating line used as a cash sweep; cash balances pay 1% interest
Alarmserve is able to reach net cash by 2014
Introduction
Analysis
Valuation
Implementation

16. Cash Flow Statement
Management fees are an additional expense for Alarmserve
Capital expenditures at 13% of revenues
Excess cash used to pay down revolver
Introduction
Analysis
Valuation
Implementation

17. Returns Analysis Exit multiple = entry multiple No dividends assumed
Ability to realize 35% IRR by 2014
Returns well above 20% hurdle rate;
Additional upside exists through paying excess cash out to NVC as a dividend
Introduction
Analysis
Valuation
Implementation

18. Leverage Analysis
Under the base case, Alarmserve will have no trouble meeting debt covenants
Introduction
Analysis
Valuation
Implementation

19. Covenant Stress Test – 85% Attainment
At 85% attainment, we see a leverage and FCF coverage breach
Introduction
Analysis
Valuation
Implementation

20. Sensitivities An unlevered scenario still surpasses 20% hurdle
Exit EBITDA of $10.8mm (6% CAGR) still provides 17% IRR
Deal structure provides flexibility with assumptions
and leverage to realize adequate returns
Introduction
Analysis
Valuation
Implementation

21. Implementation
Introduction
Analysis
Valuation
Implementation

22. Recommended Course of Action
Acquire AlarmServe at a purchase price of $51mm at 6x EBITDA using 2.5x total leverage (“Moderate Leverage”) to realize I.R.R. of 35% and a return on cash of 4.2x by 2015 1
Deal Schedule 2
Company Management
Implementation Plan: 3
Exit Strategy
Introduction
Analysis
Valuation
Implementation

23. Acquiring AlarmServe 1 Deal Schedule Introduction Analysis Valuation
Implementation

24. Recommended Course of Action1
Deal Schedule
Negotiation Buffer
Negotiation range of $51mm – $55mm: $55mm price represents 6.5x EBITDA & provides an I.R.R. of 31% at 6x exit multiple
Contact Banks for Financing
Contact Major Canadian Banks
Target rates: senior at 6% and subordinate at 12%
Evaluate Internal Processes
Potential to introduce management or optimize operations
Introduction
Analysis
Valuation
Implementation

25. Inorganic Growth Opportunity2
Company Management
Potential Consolidation Attempt
Acquisition Target Criteria
Look for target with ~$5mm in EBITDA (half ours) and look to pay ~6.0x
Strong client base outside of AlarmServe’s current network
Ability to scale response workforce: Office integration opportunities
Introduction
Analysis
Valuation
Implementation

26. Exiting in ~2014 3 Exit Strategy Initial Public Offering High return
Difficult to exit full position in a timely manner
Expensive underwriting fee’s
Sale to Strategic Buyer
Optimal as portion synergies can be included into valuation
Likely, considering the industries move to consolidation
Sale to Financial Buyer
Ability to completely exit position
Could pay premium if LBO market is booming
Dividend Recapitalization
Allows NVC to crystalize value, while maintaining control
Could lead to over leveraging
Could exceed investment horizon
Introduction
Analysis
Valuation
Implementation

27. Difficulty Securing Financing
Risk and Mitigation
Risk
Mitigation
Contingency
Negotiation Issues
~$4.0mm in negotiation room
Hostile Takeover
Difficulty Securing Financing
Take on less debt
Accept higher rate
Covenant Breach
Establish strict spending policies
Renegotiate at higher interest rate
Introduction
Analysis
Valuation
Implementation

28. Conclusion Introduction Analysis Valuation Implementation
Acquire AlarmServe at a purchase price of $51.0 mm at 6.0x EBITDA using 2.5x total leverage (“Moderate Leverage”) to realize I.R.R. of 35% and a return on cash of 4.2x by 2015
Introduction
Analysis
Valuation
Implementation

29. Backup - Earnout
Earnout structure provides upside to management, in the event that they own a majority interest