Safe as houses: the deal an Aussie minnow couldn’t pass up

In Australia, home security penetration has remained around 5 per cent, while the American penetration has jumped to 22 per cent.

When American giant enterprises decide to quit a small part of their operation in a country like Australia, they often don’t worry too much about price. Usually they look for a clean exit.

The $65bn ($US96bn) market capitalised US giant Johnson Controls decided that it wanted to sell its home and commercial security business in Australia — in Johnson terms, a very tiny operation. But the most obvious buyer, its rival Chubb, apparently did not want to expand in Australia at this time and other alternative buyers didn’t offer Johnson a clean exit.

And so it was that an Australian minnow with a market capitalisation of just $15m bought out the Americans’ business, which has a turnover of $95m and an EBITA of $21m, for just $45m.

Nevertheless, the cash purchase was three times the capitalisation of the minnow, Intelligence Monitoring Group.

Included in the purchase were Australian rights to the brand ADT, which is a leading home and commercial security brand in both the US and Asia. IMG’s financing was made possible by the annuity or recurring revenue currently generated by the ADT brand in Australia.

About 10 years ago, in both the US and Australia, only about 5 per cent of dwellings and businesses had security devices. But in the US, Google and others developed home security systems that linked to mobile phones and other computer devices, enabling owners to see exactly what was happening in their buildings. But despite the existence of Johnson and Chubb, the Australian home security business continued to market its existing products and our penetration remained around 5 per cent while the American penetration has jumped to 22 per cent.

In Australian TV news bulletins, like those in the US, almost every day there are stories of enterprise invasions and home security breaches. So IMG believes the Australian market is ripe to explode along US lines.

Back in 2021 Hong Kong based hedge fund Black Crane Advisors, in which Australian Peter Kennan is a major shareholder, partnered with Dennison Hambling to invest in a small Australian security company which became IMG. Kennan, who became IMG chairman, was formerly with UBS in Australia.

But when Kennan and Hambling bought into the Australian company, they discovered that it was in deep trouble. So, the last two years have been spent generating a positive IMG cash flow, but to be really successful IMG had to be a leader in the industry.

So when the Johnson Controls ADT Australian assets became available, here was the opportunity for the minnow to gain market leadership, albeit a huge bite that would require innovative financing that carried risk.

The company this week announced the acquisition and a share issue that will raise $15m, or double its previous market capitalisation, underwritten by Black Crane. But it also needed $30m dollars of debt to complete the purchase, plus refinancing of its own debt and the working capital required to bring the two businesses together.

There is an increasing global market for high-risk/high reward debt in such situations and the Hong Kong based TOR Investment Management is loaning IMG $80m over three years but with the flexibility of much earlier repayment. Early repayment will be important because the base interest rate is 10 per cent. There are one-off payments totalling 8 per cent, plus an entitlement to 7.5 per cent equity. I can’t recall any previous deal being put together in this way.

But Kennan and IMG chief executive Hambling are optimistic that the annuity basis of the combined income created as ADT customers pay a fee each year, plus the opportunities to use the ADT brand and the new technologies that are sweeping the US, will rapidly increase IMG’s EBIT and profitability to enable the repayment of the debt and deliver rewards to shareholders.

In the first full year, 2023-24, they forecast a combined $31m EBITA.

And of course such optimism would never have been possible but for the fact that Johnson was prepared to sell the ADT business at a price that is much lower than similar businesses are sold around the world.

In Australia, Johnson did most of its security industry marketing in the consumer area using the old technologies and did not thrust hard into the commercial area, forcing companies like Woolworths to actually install their own security systems rather than rely on a security provider.

Kennan and Hambling believe that Australia represents a huge security market area waiting to be serviced, and that the new technologies accompanying the rise of crime in both business and home area markets will boost demand.

And in ADT they will not only have a global brand (albeit confined to Australia) but will have a clear leadership in market share. But of course, like all very highly leveraged plays, they must have the management to bring the two businesses together to make it work.