Kessler on the Stanley/Niscayah numbers

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Thursday, June 30, 2011

NEW YORK—Stanley Black & Decker definitely upped the ante with its $1.2 billion bid, announced this week, for Niscayah. It’s a bid that’s been called generous by some, but is Stanley offering a premium price?

Imperial Capital’s Jeff Kessler calls the Stanley bid “not cheap, but not expensive.”

The bid comes in at 31x RMR, but as Kessler points out, “that’s not a very meaningful metric because only 22 percent of Niscayah’s RMR is monitoring, the rest is maintenance and service contracts.” Maintenance and service contracts are fine, but that’s not the “high margin RMR that people pay high multiples for,” he explained.

Integrators are starting to learn that services matter, he said. That’s why Adesta, which Kessler called the “best of the best” in its vertical markets, only sold for 65 percent of revenue. “There was no RMR. It was all installation.”

The metric Kessler likes to look at is EBITDA, and the Stanley bid for Niscayah comes in at “13x to 14x EBITDA on an actual basis and about 7.5 x EBITDA when all the synergies are included,” which Kessler guesses would be after about two years.

When Securitas bid $907 million for Niscayah, “it wanted the company back in the fold and it has a bargain,” Kessler said. On the other hand, when Stanley made its $1.2 billion all-cash offer, “it saw much more than a bargain ... they look at the potential for Niscayah under their wing.”

Stanley sees three “basic pillars of why it wants to buy Niscayah,” Kessler said.

First, it sees vertical markets that complement Stanley’s verticals. In particular, Niscayah is deep into the financial vertical, which Kessler said Stanley has “desperately tried to get into, but it couldn’t crack,” lacking feet on the street and other specific know-how. As it turns out, however, while the financial services market can be a great business, it “can also be terrible if the financial system collapses like it did [in 08 and 09].”

So, while it’s a good business to be in, it’s been tough in the past couple of years for companies like Niscayah that specialized in that vertical.

Secondly, Stanley sees a way to return on cash that is has “trapped in Europe.” Stanley plans to use offshore cash to fund the all-cash acquisition. If Stanley were to bring the cash back into the U.S., it would have to pay a tax of 25 percent to 35 percent, and as it now sits in Europe, Stanley is earning half a percent, Kessler said.

Thirdly, it sees the ”ability to have much better geographic balance and great scale over the cost of operations.”