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Case Studies

Peter A. Sokoloff & Co. regularly analyzes transactions which occur within the industries covered. An archive of these case studies is kept online as a courtesy to our colleagues. To receive by e-mail new case studies as they are prepared, please e-mail [email protected] with your contact information.

Archives > Transaction Case Study 19

Protection One acquiring Integrated Alarm Services Group

Dear Colleague,

On December 20, 2006, Protection One (OTC:PONN), provider of  security alarm monitoring services to residential, commercial and national account customers, announced that it would be acquiring by merger Albany, N.Y. based, Integrated Alarm Services Group Inc. (NASDAG:IASG), for $84.8 million.  Protection One, Inc. is headquartered in Lawrence, Kansas.

IASG provides alarm contract financing, monitoring and servicing to independent security alarm dealers located throughout the United States to assist them in serving the residential and commercial security alarm market.  IASG reported 730 employees and revenues of $95.9 million, EBITDA of $20.3 million (excluding interest income) and $16.2 million in cash for the twelve months ending September 30, 2006.  IASG currently has $133.9 million of long term liabilities.  Thus the Enterprise Value assumed in the transaction is $202.5 million.  The transaction, based on the reported information, is equal to 9.98x EBITDA and 2.11x revenue.

Additionally, IASG most recently reported RMR (Recurring Monthly Revenue) of approximately $6.9 million.  Thus the purchase price (Enterprise Value) paid by PONN is equal to 29.34x IASG's RMR.

Under the terms of the merger agreement, which has been approved unanimously by the Boards of both companies, each share of IASG will be exchanged for 0.29 shares of Protection One common stock. Subsequent to the transaction, there will be approximately 25.3 million shares of Protection One common stock outstanding, of which IASG and Protection One shareholders will own approximately 28% and 72%, respectively.  IASG’s price per share was $2.90 prior to the announcement and closed at $3.20.  Currently, it is trading at $3.50 per share.

Protection One, with 2,450 employees, reported revenues of $268.0 million and adjusted EBITDA of $84.1 million for the twelve months ended September 30, 2006.  Counting debt and minus cash, PONN's Enterprise Value is $664.049 million.  Protection One’s share price went up from $12 to $12.25, a 2.1% increase on the day of the announcement and closed on January 17, 2007 at $12.60.  This is a 5% gain in less than a month.

The merged company will have 73 branches across the country, six state-of-the-art monitoring response centers, and a dedicated disaster recovery center.   Based on the 12-month period ended September 30, 2006, the combined revenues and adjusted EBITDA are $363.8 million and $104.4 million, respectively, and the RMR is $26.8 million.  With a combined Enterprise Value of $866.549 million, the multiples are 2.38x revenue, 8.3x EBITDA and 32.33x RMR.

The EBITDA is being measured prior to the realization of any operating synergies.   The management teams of both companies believe the combination will result in cost savings based upon scale efficiencies, the elimination of redundancies and greater purchasing power. Management believes that the combination will generate net savings of $11 million to $13 million annualized within 12 months of the closing of the transaction.

Richard Ginsburg, President and CEO of Protection One, commented, "This transaction is a transforming event for Protection One. Building on our previous successes, we believe combining with IASG positions the new company for improved operating margins and accelerated cash flow growth. We are pleased to expand our shareholder base and believe that this merger will create value for both IASG and Protection One shareholders. We will continue to have strong product and service offerings for the residential, commercial, national account and multifamily markets and an unmatched network of central stations to serve the monitoring needs of customers and independent alarm companies."

Ginsburg continued, "Wholesale operations will continue to operate separately from the other divisions of the company. We believe merging our wholesale entities will allow independent alarm companies to benefit from the scale of that combined business as well as other benefits we intend to offer through our buying power and increased size. Our ultimate goal is to provide our independent alarm company clients with truly new concepts in the areas of lead generation, equipment purchasing, and financing."

Charles May, President and CEO of IASG, said, "This proposed transaction satisfies virtually all of the objectives identified as part of IASG's evaluation of strategic options. We are creating a market leader with the size and national footprint necessary to be a highly successful security monitoring services business in the twenty-first century. We are assembling the resources and creating the business model to build a sizeable growth business. This combination offers the opportunity to resume creating shareholder value and, as a larger company, we expect the merger will provide greater liquidity for both companies' shareholders. I am excited about what the Protection One and IASG businesses and people will be able to do together with one of the best recognized and respected brands in the industry."

The merger will require the approval of IASG's shareholders and regulatory approval. The transaction is expected to be completed in the second quarter of 2007.  It is anticipated that the merged company will be traded on the NASDAQ Stock Market, ending Protection One's departure from a full listing since it was delisted from the NYSE in 2003.

We hope that you find this feature from Sokoloff & Co. interesting, informative and useful.  We welcome your comments and suggestions.

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