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ADT and Protection 1 merger – Latest multi-billion-dollar security industry deal

2016 is shaping up to be the year of the billion-dollar merger in the security market. After last month's mammoth Tyco/Johnson Control merger, a second big merger has rocked the market, this one involving one of the most familiar names in the consumer market – ADT. The home and small business security company, which traces its history back to 1874, has agreed to be acquired by private equity firm Apollo Global Management, and will merge with competitor Protection 1, a subsidiary of Apollo-owned Prime Security Services Borrower LLC.

Smart technology integration

It’s the second time in a month that a company “formerly known as Tyco” has been involved in a multi-billion-dollar merger. On January 25th, Tyco announced an agreement to merge with Johnson Controls (and to abandon the Tyco name). ADT was part of Tyco before being spun off as a separate company in 2011. The new combined company will retain the familiar ADT brand and remain headquartered in Boca Raton, Florida.

Read more: Tyco and Johnson Controls merger driven by convergence

The announcement comes amid rapid changes in the residential security and home automation market, much of it driven by emerging Internet of Things (IoT) technology. Holding the largest share of the U.S. residential security market, and a respectable small business presence, ADT has been aggressively promoting its leadership role in home automation with its ADT Pulse product. At the Consumer Electronics Show in 2016, ADT announced integration of several “smart” technologies, including the Nest Learning Thermostats, with Pulse. ADT is creating a home automation ecosystem through strategic partnerships with various technology companies using its application programming interfaces (APIs) to achieve best-in-class smart home automation. Adding Protection 1 customers to the mix will expand those opportunities.

Protection 1 began in 1991 when it was spun off from PacifiCorp., a power utility. It grew rapidly, largely through acquisition, into a full-service business and home security company, although growth came with financial challenges along with way. Protection 1 and ASG Security were acquired by Prime Security Services Borrower last year. Currently, Protection 1 operates five security monitoring centres and serves more than 2 million customers.

Entering commercial security sector

Recently, Protection 1 has made strides in the retail and enterprise markets, including promoting electronic security technologies that can help companies comply with ever-increasing regulations and guidelines that govern their industries. The enterprise business is a nice complement to ADT, which has focused on smaller businesses (and residential) since ceding its enterprise business to Tyco in the 2011 spin-off agreement (the non-compete expired in 2014). “Protection 1’s robust commercial presence will speed ADT’s expansion into the commercial sector,” says Timothy J. Whall, Protection 1’s President and CEO.

"Despite the 56% premium Apollo is paying for ADT, the valuation is not high, and we believe it could allow room for a possible strategic bid, even in the current challenging market", says Jeff Kessler of Imperial Capital

The acquisition is by no means a “done deal,” however. The agreement includes a 40-day "go-shop" period in which ADT could look for a better offer.

Jeff Kessler of Imperial Capital contends that ADT's shares are undervalued on the market, and should be higher than $26.87. "Despite the 56% premium Apollo is paying for ADT (based on the closing price on Feb. 12, 2016), the valuation is not high, and we believe it could allow room for a possible strategic bid, even in the current challenging market," he says.

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