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LBO of Alarm ServicesBalancing Risk and Reward
Nicolas LindstromSamuel NadeauFranco Perugini
Mandate
North Village Capital purchase of AlarmServce Inc.
Debt Structure Strategic Fit Return
Recommendation
Complete LBO of AlarmServe, utilizing 2.5x Debt/EBITDA at entry to realize a 25% IRR
Mandate
Industry is a good fit for an LBO
How NVC can add ValueExpand to new geographic
areas
Focus on higher-margin accounts
Reduce operating cost
Eliminate cost of being public
$2 Million Dollars by year 4
NVC can add value to the company through their involvement
Decision of debt Level
Decision of debt LevelNo leverage Medium
Leverage High Leverage
Return 1 4 5Default 5 4 1
Probability to Receive
Financing 5 4 2
Total 11 12 8
Default risk is the deal-breaker
Decision of debt LevelNo leverage Medium
Leverage High Leverage
Return 1 4 5Default 5 4 1
Probability to Receive
Financing 5 4 2
Total 11 12 8
Medium leverage is the best option
How NVC can add Value
Stable industry for LBO
AlermServe is a good strategic investment investment for NVC
NVC can add $2 Value
Medium leverage is the best leverage level
Valuation
Valuation Introduction
Assumptions
Income Statement
Margin expansion provided by synergies and operating leverage
Income Statement2007 2008 2009 2010 2011 2012 2013 2014 CAGR
Revenues 23,766 28,310 32,273 33,900 35,600 38,100 40,700 44,000 6%Growth 19% 14% 5% 5% 7% 7% 8%
COGS 4,851 6,237 7,594 7,500 7,800 8,400 8,900 9,700 5%Gross Profit 18,915 22,073 24,678 26,400 27,800 29,700 31,800 34,300 7%
Margin 80% 78% 76% 78% 78% 78% 78% 78%Management Fees 0 0 0 678 712 762 814 880Selling Expenses 10,353 9,988 10,364 10,571 10,783 10,998 11,218 11,443 2%G&A 4,073 5,081 5,809 6,102 6,408 6,858 7,326 7,920 6%EBITDA (Pre-Synergies) 4,489 7,004 8,506 9,049 9,898 11,082 12,442 14,058 11%Synergies 0 0 0 500 1,000 1,500 2,000 2,000EBITDA (Post Synergies) 4,489 7,004 8,506 9,549 10,898 12,582 14,442 16,058 14%
D&A 2,605 3,066 3,134 3,600 3,700 4,000 4,300 4,600 8%Interest (Income) 97 85 66 1,429 1,318 1,184 1,024 828 66%EBT 1,788 3,853 5,306 4,020 4,880 5,898 7,118 8,630 10%Income Tax 626 1,349 1,857 1,407 1,708 2,064 2,491 3,020 10%Net Income 1,162 2,504 3,449 2,613 3,172 3,834 4,627 5,609 10%
Working Capital
Working Capital will require cash from the business
Working Capital2007 2008 2009 2010 2011 2012 2013 2014
Accounts Receivable 2,300 2,416 2,537 2,715 2,901 3,136% Sales 7% 7% 7% 7% 7% 7%DSO 26 26 26 26 26 26
Inventory 3,300 3,466 3,640 3,896 4,162 4,499% Sales 10% 10% 10% 10% 10% 10%
Accounts Payable 1,300 1,322 1,367 1,436 1,501 1,590% Expenses 5% 5% 5% 5% 5% 5%
WC 4,300 4,560 4,810 5,175 5,561 6,045Change 260 250 365 386 484
Deal Structure
Moderate debt levels to minimize risk
Debt ScheduleDebt Schedule
2010 2011 2012 2013 2014Revolver
Revolver Balance Beg 0 1,856 3,265 4,151 4,304% of AR 3,839 4,032 4,315 4,609 4,983 % of Inventory
Repaid (Drawn) (1,856) (1,409) (886) (153) 603Revolver Ending (Cash) 1,856 3,265 4,151 4,304 3,701
Interest 0 93 163 208 215Prime Rate 2% 2% 2% 2% 2%
SeniorSenior Debt 17,011 13,609 10,207 6,804 3,402 Repayment 3,402 3,402 3,402 3,402 3,402 Senior Debt Ending 13,609 10,207 6,804 3,402 -
Interest 919 714 510 306 102
SubordinatedSub Debt 4,253 4,253 4,253 4,253 4,253 Repayment - - - - - Sub Debt Ending 4,253 4,253 4,253 4,253 4,253
Interest 510 510 510 510 510
Cash Flow
Debt repayment will be the major cash drain
Cash Flow Statement2007 2008 2009 2010 2011 2012 2013 2014
Net Income 2,613 3,172 3,834 4,627 5,609Plus: D&A 3,600 3,700 4,000 4,300 4,600Less: Change in WC 260 250 365 386 484Operating Cash Flow 5,953 6,622 7,469 8,540 9,725
Capital Expenditures (4,407) (4,628) (4,953) (5,291) (5,720)Investing Cash Flow (4,407) (4,628) (4,953) (5,291) (5,720)
Debt Repaid (3,402) (3,402) (3,402) (3,402) (3,402)Dividends Paid 0 0 0 0 0Financing Cash Flow (3,402) (3,402) (3,402) (3,402) (3,402)
Change in Cash Flow (1,856) (1,409) (886) (153) 603
Return Profile
25% IRR with a 3x multiple on money
Returns Analysis2007 2008 2009 2010 2011 2012 2013 2014
EBITDA 9,549 10,898 12,582 14,442 16,058Exit Multiple 6.0x 6.0x 6.0x 6.0x 6.0xExit Enterprise Value 57,294 65,385 75,491 86,652 96,345
Less: Net Debt 19,718 17,725 15,208 11,959 7,954Implied Equity Value 37,575 47,661 60,283 74,693 88,392
Payment (30,790) - - - - Management Fees - 678 712 762 814 880 Proceeds From Sale - - - - - 88,392Total Return (30,790) 678 712 762 814 89,272
IRR 25%Multiple on Money 3.0x
Weak 2010 Return Check
-5% Revenue growth in ‘10 leads to 19% IRR
Returns Analysis2007 2008 2009 2010 2011 2012 2013 2014
EBITDA 7,702 8,879 10,470 12,148 13,419Exit Multiple 6.0x 6.0x 6.0x 6.0x 6.0xExit Enterprise Value 46,212 53,275 62,819 72,886 80,514
Less: Net Debt 20,008 18,863 17,247 15,023 12,134Implied Equity Value 26,204 34,412 45,572 57,863 68,380
Payment (30,790) - - - - Management Fees - 613 644 689 737 789 Proceeds From Sale - - - - - 68,380Total Return (30,790) 613 644 689 737 69,169
IRR 19%Multiple on Money 2.3x
Return Sensitivity
Multiple contraction will still provide sufficient returns
Exit Multiple0 4.5x 5.0x 5.5x 6.0x 6.5x 7.0x 7.5x
14,492 15% 18% 20% 22% 25% 27% 28%15,255 16% 19% 22% 24% 26% 28% 30%16,058 18% 20% 23% 25% 27% 29% 31%16,860 19% 22% 24% 26% 29% 31% 32%17,703 20% 23% 25% 28% 30% 32% 34%
Exit EBITDA and Exit Multiple IRR Sensitivity
Implementation
Acquisition Timeline
2009Q4 Q1 Q2 Q3 Q4
LOIAccess data roomDue DiligenceLegal docsSign SPAClose deal
2010
Focus of due diligence will be on empolyee retention
Debt
2.5x Total Leverage
Sources and UsesSources UsesRevolver 0 Purchase Price 51,034Senior Debt 17,011 Transaction Fees 1,021Sub Debt 4,253Equity 30,790Total 52,054 Total 52,054
Unlevered Scenario Debt/EBITDA $ ValueSenior Debt 2.0x 17,011Subordinated 0.5x 4,253Revolver 0.0x 0Total debt 2.5x 21,264
Leverage and Covenants
All covenants are very comfortably respected
Leverage Analysis2007 2008 2009 2010 2011 2012 2013 2014
EBITDA Coverage 128.3x 6.7x 8.3x 10.6x 14.1x 19.4xEBITDA-Capex Coverage 3.6x 4.8x 6.4x 8.9x 12.5xDebt/EBITDA 2.5x 2.1x 1.6x 1.2x 0.8x 0.5x
CovenantsEBITDA Coverage 2.0x 2.0x 2.0x 2.0x 2.0xEBITDA-Capex Coverage 2.0x 2.0x 2.0x 2.0x 2.0xDebt/EBITDA 3.0x 3.0x 3.0x 3.0x 3.0x
Management Strategies
New strategies will increase CF to pay down debt
Management fees
Management fees will add to returns
Exit strategies decision matrix
Returns will be the deal maker
IPO Sale Dividend recap
Return Low (19%) High (25%) Medium (23%)
Time Medium Medium Low
Risk Medium High Low
Sale Timeline
Q3 Q4 Q1 Q2 Q3 Q4Invite banks to pitchReview pitchesSelect advisorsPrepare CIMSign NDALOIAccess data roomDue DiligenceLegal docsSign SPAClose deal
2013 2014
A strong CIM will be crucial to strong exit valuation