In an industry-shaking move, ADT announced Tuesday it would shed its commercial security, fire and life safety unit to a private equity firm for $1.6 billion, as the company plans to focus on residential, small business and multi-family consumer markets.
ADT Commercial was acquired by private equity firm GTCR, which has been at the center of many other high-profile industry acquisitions in previous years – including selling the combined Protection 1 and ASG to Apollo, the private equity firm backing ADT. In a conference call Tuesday, ADT President & CEO Jim DeVries said that $1.5 billion in proceeds from the all-cash sale are planned for “significant” debt reduction.
In a conference call Monday, DeVries said it had been getting interest in its commercial unit for a couple of years but recently had the opportunity to sell it at a more acceptable price than previous inquiries. The sale represents an 11.2x multiple on its EV/Commercial Adjusted EBITDA.
ADT Goes Back to All-Residential Roots
In 1997 Tyco International acquired ADT for $5.6 billion, and in 2010, Tyco acquired Broadview Security (formerly Brinks Home Security) for $2 billion and merged it with ADT, creating a behemoth home security provider that was the biggest in the U.S.
In 2011, Tyco split into three groups: ADT Home Security, Tyco Security Products and Pentair – effectively splitting up the home, commercial and security products businesses as separate entities. Private Equity firm Apollo Global Management acquired ADT for $7 billion in 2016 combining it with Protection 1 and ASG, which Apollo had recently acquired from GTCR.
Before getting back into the commercial side of the industry in 2014 with the ADT Business offering, the company was left to concentrate on the home security portion of the equation – which is where the company is heading now.
Thanks to its recent partnerships with Google and State Farm, ADT says its journey now is to be a “premier provider of smart home and residential solar solutions” and the company will be better positioned to prioritize its investments and grow through its “strategic differentiators and innovative offerings.”
“ADT’s move to divest the Commercial division sounds like the triumph of pragmatism over grandiosity,” says analyst Brad Russell, VP of market research firm Interpret. “Going after commercial security, while a massive revenue segment, requires ADT to conduct a capital-intensive effort to develop new technologies and acquisitions or license technology and tools from partners – thus reducing their margins.
"The focus on their core residential and SMB business signals the confidence they have been building with recent profitability and capital injections by Google and State Farm. It is a ‘building-on-your-strengths’ strategy, especially when recessionary forces are suggesting conservative moves that minimize risk.”
Powered by Google, ADT has continued a push into both the professional and DIY residential security and smart home segments. “The divestment enables more focus for ADT, to facilitate the pursuit of significant residential and small business growth opportunities in the smart home and solar markets,” DeVries said.
“Google products have enabled us to increase the number of devices in the home – expanding our share of wallet and representing a key variable correlated to higher customer engagement and retention. These larger more connected home systems translate to higher device take rates and help to increase our installation revenue per home, which is up 17% over the prior year period.”
“ADT is a powerhouse player in the residential security space, and this move to divest its commercial business shows the focus they are highly focused on the residential market,” adds industry analyst Elizabeth Parks of research firm Parks Associates. “With the large investments of Google and State Farm, we anticipate ADT to continue to introduce new offerings into the market that extend beyond just traditional security solutions. The interactive services and connected devices attached to systems give new value and meaning to consumers, and new revenue opportunities for ADT.”
More changes came last year, when State Farm announced it acquired a 15% equity position worth $1.5 billion in total investment. The State Farm investment in ADT underscored a growing trend of adjacent industry expansion in the residential market. Another prime example is the industry’s move into solar offerings; in fact, DeVries said during the conference call that ADT has dedicated dealers and programs to speed adoption of solar in the residential space.
“ADT solar customers who want to switch to renewable solar energy can now access loan financing from our banking providers and are expected soon to have a lease option as well,” he said, adding that the principal headwind for solar adoption has been higher interest rates. “We are now turning our focus to sales, and we’ve partnered with two of our key smart home dealers to sell solar.”
Commercial Business an Attractive Target
Undoubtedly, a PE firm like GTCR sees ADT Commercial as a stable and attractive option; in fact, according to security industry business broker Rory Russell of Acquisition & Funding Services, the majority of PE-backed buyers are targeting commercial rather than residential businesses. “The buyers I’m dealing with prefer [commercial], especially the fire part of it because it is mandated by state, federal and local jurisdictions,” he says, adding that "with only a 22-25% penetration rate, there’s still plenty of opportunities in the smart home.”
DeVries said the sale price represents “an attractive enterprise value,” adding
As part of the transaction, which must still be approved by regulatory authorities, ADT will provide transitional services for a period of up to 24 months, and the ADT Commercial brand name can be licensed for 12 months. Dan Bresingham, current EVP of ADT Commercial, will reportedly become CEO of the standalone business.
At ISC West in 2019, ADT unveiled the ADT Commercial brand, splitting the segment created by the remnants of Tyco Integrated Security, Protection 1, Aronson Security Group, and the new (at the time) acquisition of commercial security giant Red Hawk Fire & Security, which was completed in December 2018.
During the show, ADT Commercial SVP Chris BenVau said the company always wanted to have employees who focus purely on commercial, “but we didn’t have enough scale, and it just didn’t make financial sense to do it. We might have a tech that does a house in the morning and a business in the afternoon. Red Hawk put us at the tipping point, and now we are at the scale where we don’t need that. We will have technicians that only do real commercial work.”
ADT Commercial subsequently added several integration firms to its ranks, including Acme Security Systems, Access Systems Integration, Advanced Cabling Systems, Protec Inc., MSE Corporate Security and Gaston Security. It continued to add integrators post-announcement, including Systems Group, Fusion Fire Protection, SAFE Electronics, Edwards Electronic Systems, and most recently Key-Rite Security in 2022.
“ADT Commercial has established itself as an innovative leader in providing the critical safety services that businesses need to protect their day-to-day functionality,” said David Donnini, Managing Director and Head of Business & Consumer Services at GTCR, who previously served on the Board of Directors for Protection 1, as well as HSM Security Monitoring and Cambridge Protection.
“We are very proud to once again partner with the leadership team of ADT Commercial to continue to invest in the platform and deliver the solutions its customers have come to expect. ADT has done a tremendous job in further developing this segment in recent years and we are excited to help drive the business forward in its next chapter of growth.”
Paul Rothman is Editor-in-Chief of Security Business magazine, a partner publication to SecurityInfoWatch.com. John Dobberstein is Managing Editor of SecurityInfoWatch.com.