Looking at the Monitronics acquisition

What does Ascent’s $1.2b investment in security mean?
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Wednesday, December 22, 2010

YARMOUTH, Maine—Santa Monica, Calif.-based Ascent Media Corporation announced Dec. 17 it had bought Monitronics International, one of the largest third party monitoring companies in the U.S. with more than 650,000 accounts, in a deal worth $1.2 billion.

While many of the finer details of the deal are as yet unrevealed, industry observers have come forward to discuss the information made publicly available in a Dec. 20 Ascent investor call.

Jennifer Holloway, president of Holloway Security Consulting, and formerly with account acquisitions at Protection One, spoke with Security Systems News about Ascent’s purchase of Monitronics and the Dec. 20 investor call.

“Ascent and Monitronics did not share many figures with regards to operations or free cash flow. Unfortunately we only have a few numbers to determine the value of the transaction,” Holloway told SSN. “While many alarm companies view success by the multiple of RMR received when they sell their business, I doubt the multiple of RMR was mentioned during the negotiations. It was likely discussed as a factor of adjusted EBITDA or cash flow.” She said that the publicly available numbers, including a $1.2 billion sale price, and RMR of $23.2 million (derived from 665,000 customers averaging $34.85) led to a multiple of 51.77x.

According to an Ascent press release, Ascent on Nov. 24 announced the execution of an agreement to sell the Creative Services and Media Services businesses of AMG, Ascent’s current operating subsidiary, to Deluxe Entertainment Services Group for an aggregate net cash consideration to Ascent of approximately $68 million. The sale of the Creative Services and Media Services businesses to Deluxe is expected to close on or about Dec. 31. On Dec. 3, Ascent announced execution of a definitive agreement to sell the Content Distribution business of AMG to Encompass Digital Media for an aggregate net cash consideration to Ascent of approximately $113 million. The sale of the Content Distribution business to Encompass is subject to shareholder and regulatory approval, and is expected to close on or about Feb. 28, 2011. Monitronics will then become the sole operating subsidiary of Ascent.

“It would be logical to wonder why Ascent would sell AMG and invest in a new operating company, Monitronics,” Holloway said. “While the cable and residential security industries are both subscription based businesses with similar attributes, the cable industry has unpredictable costs like programming, whereas security has very predictable cash flows with lower attrition than cable.”

Ascent CEO William Fitzgerald in the Dec. 20 investor call discussed the security industry’s stability, fragmentation and low penetration rate, all factors Ascent found attractive. Based on such factors, Ascent EVP John Orr said the decision to buy Monitronics was an easy one.

“We looked at it as being very consistent with the types of assets we were looking to acquire: specifically businesses with good recurring cash flow, predictable revenue streams, leveragable cash flow, good management teams and business that could serve as a foundation for Ascent going forward as we look for other acquisition opportunities,” Orr said. “We really like Haislip and Meyers. We really like this business model and feel it’s one we can wrap our arms around and get comfortable with. It was a pretty easy decision for us.”

In August 2010 Security Systems News investigated rumors that long-time Monitronics owner Abry Associates was getting ready to sell the Dallas-based company. In an interview with Security Systems News at that time, Holloway predicted Abry would sell before the end of the year.

“The other thing to consider is the capital gains tax laws are likely to change. So cap gains right now are at 15 percent, but will be unknown after the end of the year,” Holloway said in August. “If you're planning on taking your chips off the table, before year’s end would be a good time to do that.”