Industry Experts Comment on Devcon Sale, APX Acquisition

By Martha Entwistle Security System News Article10.08.2009  

YARMOUTH, Maine—It’s been a busy week in the alarm industry: On Oct. 1 Devcon International was sold to Pinnacle Security owner Golden Gate Capital, and on Tuesday Apx Alarm acquired a central station from CMS, a subsidiary of Protection One. What do these events say about summer-model companies, the economy, and how do these events affect the landscape of the North American security market? We asked three industry experts to weigh in: Michael Barnes, a partner in investment banking firm Barnes Associates, which specializes in the security alarm industry, and co-sponsor of the Barnes Buchanan Conference; George DeMarco, chairman of the ESX expo, and former owner and CEO of The Greater Alarm Company; and Henry Edmonds, CEO of The Edmonds Group a specialized investment bank focused on recurring revenue industries with a particular emphasis on the security alarm industry.

Michael Barnes:

“Devcon was a particularly good deal for Golden Gate. We assisted Devcon with the sale, along with the folks at Morgan Joseph. As we ramped up the process we were very surprised at how capable management was, and how much better the company was performing relative to our initial expectations. Robert Farenhem and his team had the core of the business in great shape and poised to move forward aggressively.  Unfortunately, much of this was masked by legacy operating issues, some dysfunction in the balance sheet, and the effects of an abrupt shift in the economy.

Golden Gate took the time to learn about the underlying capabilities, and had the insight to see the possibilities. With this transaction, Golden Gate now has two excellent companies, each with its distinct skill sets. While it is our understanding that there will not be a move to combine Pinnacle and Devcon anytime soon, I am sure there will be some cross-pollinating between the management teams. Devcon could really benefit from a higher volume internal sales capability, and Pinnacle can no doubt learn much from Devcon about building the systems and infrastructure necessary to provide high quality, localized service to their owned accounts.”

George DeMarco:

With regards to Golden Gate Capital’s recent transaction, it’s always great to have an injection of supportive capital to properly energize an organization. It then becomes all about execution of their business plan. The goal of any transaction is to effectively blend human resources and financial capital, delivering exceptional customer service while meeting the financial requirements of the stakeholders.”

Henry Edmonds:

Devcon’s transaction is a positive both for the Devcon and for the alarm industry. Devcon is a solid business that’s been stuck in neutral as a result of a broken capital structure. Attracting a high-profile private equity firm (Golden Gate) under those circumstances speaks well to private equity’s view of the alarm industry. And having a new investor who will allow the company to move forward and begin to build value again.”

Henry Edmonds:

“I believe that Apx’s success in doubling its credit facility to $440M in this difficult capital market environment is a validation of the summer-sales model. Also, Apx has pushed through what appeared to be a barrier of around $200 million of debt availability for any single company in the industry. This is great news for other larger alarm companies who need more debt capacity to grow. Bringing monitoring in-house is a smart strategic move. It gives them complete control over all aspects of the customer relationship and makes them an attractive platform for a strategic entrant to the alarm industry if/when they decide to sell the business.”

George DeMarco:

“In my opinion, APX already made an impact within the security industry with their impressive sales and marketing efforts, and operating expertise. The recent central station transaction sends a clear message to the industry that they are committed to being a full-service security company. This step is a natural progression for APX to continue developing its technology footprint, maximizing the customer experience and increasing their industry visibility as they execute their growth strategy.

Michael Barnes:

“It is not surprising that APX is continuing its movement toward vertically integrating. Since they raised the capital needed to retain ownership of their originated accounts, it is to be expected. Having said this, my guess is that this transaction was more opportunistic in nature, something that made sense for both Protection One [CMS] and Apx, at this time.

The quality of wholesale monitoring services has risen so high, and the pricing so competitive, it is unlikely that gaining this capability was a critical path item for Apx. Their more important task is likely to be continuing the assemblage of all the requisite operating capabilities to deliver high-quality service on an ongoing basis, and capturing all of the long-term value potential associated with their owned accounts.

On the surface, neither of these deals would seem to change the picture much. Apx managing their own monitoring instead of outsourcing is not a particularly big deal, and Golden Gate making another investment in the industry could be nothing more than an expression of their liking the space. Underneath, however, this is likely to be yet another indicator of the permanence of the door-knocking and/or summer sales players, along with the stage being set for these companies to increasingly combine their incredibly strong sales capabilities with the high quality ‘touch’ of the more traditional alarm company. That is, not only originating new customers on a large scale, but also providing great service, realizing low attrition, and capturing the full value associated with re-signs, transfers, add-ons, upgrades, and referrals.”

Martha Entwistle

Comments are closed.