Brink's Friday will complete a tax-free spinoff of its home-security division to shareholders. Already, investors can choose between Brink's, the transport-security firm known for its armored cars, and Brink's Home Security. They will trade independently under the BCO and CFL symbols once the deal is completed on Oct. 31.
The spinoff was management's response to pressure from activist shareholders. Hedge funds MMI Investments and Steel Partners II both complained that Brink's management was not doing well by its investors. It wasn't enough that Brink's had been steadily growing revenue and earnings. It wasn't enough that the Brink's armored- transport unit had grown into an international brand, now deriving 70% of its revenues from overseas. Or that home security was a highly profitable, steady grower.
MMI launched a proxy battle to sit on the Brink's board. Steel Partners wanted a spinoff or outright sale of Brink's to new owners.
Spin-Off Rationale
With the hedge funds breathing down his neck, chief executive Michael Dan chose the spin-off option. He now echoes the standard Wall Street mantras. The spinoff will result in "a more efficient capital structure," he said. "Management incentives will be aligned," he added.
Stephen Velgot, analyst for Susquehanna International, put it this way: "The company chose to avoid a proxy fight. This is the last thing the company can do other than outright selling itself to realize more value."
CEO Dan insists he might have done the spinoff even if he hadn't been pushed. "It would have been a close call," he mused.
So be it. Investors can now choose between the home-security business and the parent armored-transport company. The home-security business has enjoyed steady revenue and profit growth of roughly 10%, noted Yvonne Varvano, analyst with Jefferies & Co. In the second quarter, home-security revenues grew by 12% to $134 million. Operating profit surged by 15% to $36 million.
The alarm business, which serves both home and business customers, is highly profitable, says Dan. Pre-tax operating margins average 21% to 25%, he says. "It is very consistent, very predictable," said Varvano. And there's room for more growth. Home-security systems still have "fairly low" market penetration, she noted. And as most customers pay monthly fees, Home Security enjoys the stability of recurring revenue, which grew by 12% in the second quarter to $39.3 million.
Central to the logic of the deal is the notion that Brink's Home Security will command a higher market multiple. Varvano thinks Brink's Home Security could eventually settle at nine to 10 times EBITDA. Brink's should command a seven-times EBITDA multiple.
The transport unit, its idling trucks a familiar site at banks, supermarkets and ATMs, will become Brink's Inc. With strong growth overseas, the armed-transport business grew revenue by 21% in the second quarter to $798 million. International business now accounts for 70% of revenue.
Dan has targeted high single-digit growth for the transport unit. He also hopes to bolster operating margins a bit -- to 9% -- for all of 2008, he told analysts in a conference call last summer.
Even so, the transport business is nowhere near as profitable as home security. Second-quarter operating profits were just 8.5% of sales. In North America, pricing pressures, along with rising labor and fuel costs, dragged down year-over-year profit by 26%.
"It's definitely a price-competitive business," noted Brink's director of investor relations, Edward Cunningham. "Everyone with a van and a handgun" thinks they can provide armored transport, he quipped. Brink's claims to offer the best service. And it demands top pricing for those services.
But, as Dan observed, many banking customers are hearing cost-cutting pitches from Brink's rivals.
"We've got some pretty desperate competitors out there," he told IBD. Dan will not always try to match low-ball rivals. "There's a point you have to say "no' and walk away," he said.
Brink's did just that with Washington Mutual. The struggling bank had demanded lower prices from Brink's, said Dan. Brink's declined. It was a good decision. Last month, regulators seized the troubled bank and arranged its sale at a cut-rate price to JPMorgan Chase.
But in dangerous areas overseas, Brink's has a better grip on pricing. "The more dangerous the area of the world, the higher the margins," said Dan. And why is that? "People appreciate security," he replied.
Brink's has a major presence in Latin America -- in Brazil, Colombia, Venezuela, Chile and Argentina. It has long been ensconced in India and is building a footprint in China. And with "all that wealth pouring in," Dan sees opportunity in Islamic countries.
Apart from armored transport, the core Brink's business has been expanding its offerings of value-added services. Brink's, for example, offers customers computerized on-site vaults. Instead of hauling cash to the bank every day, a retail customer can simply deposit the day's proceeds in an on-site vault. The vault communicates with the retailer's bank. Same-day credit is given for deposits. "The money could still be in the store, and you're getting credit for it," said Cunningham.
Housing Slump
To this point, Brink's Home Security has weathered the housing meltdown. A slowdown in housing sales usually means fewer new alarm systems. But that can also be a plus. Typically, Brink's loses money on new installations. Profit is made on the recurring monthly payments. So fewer alarms installed mean less up-front loss for Brink's, at least in the short run.
Meanwhile, with fewer people leaving their homes, fewer are shutting off Brink's service. Brink's reports its disconnect rate has actually fallen from 8% a year ago to 7.1% in the second quarter. "When the growth rate slows, the margins improve," summed Dan.
Brink's Home Security will only be allowed to use the Brink's moniker for three years. Hence, it will be spending during that period to "re-brand" under a new name.
And for five years, the two companies must honor a noncompete agreement. After that, Dan hints, Brink's may choose to compete with the spinoff, especially for commercial customers. But it may not be in the U.S. "I'm more excited about opportunities in the commercial alarm business in Latin America and Asia," he said.
