Ascent explains purchase of Monitronics to investors

Investors call shares some of key numbers and motivations behind purchase of alarm monitoring company

Dec. 20, 2010 – With Ascent Media Corporation's purchase of residential security alarm monitoring company Monitronics for $1.2 billion, a former cable industry holding company now turns to security for their RMR-driven business, and an investor call held this afternoon reassured investors that the purchase was a good one for Ascent's investors.

Ascent CEO William Fitzgerald called Monitronics' business "financially predictable," and said the acquisition of Monitronics (which would be the primary operating company of Ascent) means they now have "an attractive first step for a platform of financial growth." Fitzgerald said that Monitronics was the second largest residential security monitoring company in the nation (ADT is the largest) and was experiencing strong growth. According to Fitzgerald, Monitronics had seen revenue grow organically for 16 consecutive years.

Monitronics serves over 665,000 customers nationally from its home base in Dallas, Monitronics President Mike Haislip said. Haislip added that 93 percent of the accounts were residential, with the remainder in small commercial. Monitronics operates as a pure dealer program in that the company does not sell, install or service its accounts; all of those activities are provided by dealers in its network, who then offer to sell their new accounts to Monitronics. Monitronics then "owns" those accounts and provides monitoring. Physical system service is contracted back out to Monitronics' dealers, and Monitronics pays their dealers for those services as needed.

That model makes the company different from most monitoring companies, which often have their own in-field and in-house sales and service staff, and thus their own fixed assets beyond the monitoring center operations. A number of companies, including ADT, the largest in the industry, use both a dealer-program model and an in-house model for account acquisition and service.

Jeff Kessler, the managing director for Imperial Capital and a participant in the open investors call, said that it was too early to know whether this was a good buy or not. He said that there were a number of financial numbers that weren't disclosed on the call that would help identify the value of this transaction, including the "steady state" cash flow, as well as the price paid to the dealer to acquire a new account and the company's overall attrition.

"If you just go by stated RMR, you come out to a number that is over 50 times RMR," said Kessler in an interview with SecurityInfoWatch. "If you go by stated EBITDA, you are about 6.4 or 6.5 times the EBITDA. But the accounting is different [for the purchase of Monitronics] than it would be for a normal alarm company. In a normal alarm company, you have to expense the cost of a new subscriber. In the case of a dealer program, when you are acquiring accounts from a dealer, you can amortize the cost of that acquired asset over the expected life of the customer. The EBITDA profitability looks higher than it actually is. We try to find out what cash cost of acquiring those accounts is and subtract that from the stated EBITDA number. When you see all these valuations, then you can compare apples to apples with other acquisitions."

Until those numbers are known, said Kessler, it is difficult to compare the sale of Monitronics against the business of companies like ADT, Brinks, Protection One, and Central Security Group because all of those companies operate internal sales in addition to their dealer programs. Before the Monitronics acquisition, Central Security Group was the most recent of the major monitoring companies to receive an investment; in November, the monitoring company announced that it had received a major investment from Boston equity firm Summit Partners.

From inside Monitronics, President Mike Haislip painted a positive outlook for the residential security industry, which he said is his company's "sweet spot." Haislip said that only 17.5 percent of homes in the U.S. have a monitored security system and that the industry and Monitronics itself had still seen positive growth during recessionary periods.

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