Brink's Home Security

A Breakup

Companies are always in flux: acquiring, divesting, buying back stock, retiring debt, borrowing money, managing investments, dealing with macro concerns (housing, joblessness, markets), and appeasing customers. Divestitures, often times, are part of the "creative destruction" of capitalism, and serve as chances to break up crappy businesses that a company's overpaid for, or to truly separate units that don't share common "synergies."

This can help boost returns. Spinoffs fall into this category. Unloved, unwanted, or companies in the better-off-on-their-own category soon break free and relish their independence as new entities. They're now let loose of the parent company's TPS reports and fading memories of clashes over uses of capital. Parents are relieved and can now truly focus on how to appeal to shareholders' complaints. Ain't the life of a public company grand?

Independence can ironically be the most synergistic. Brink's Home Security (BHS) sells monitored security services in a highly fragmented market to over one million North American customers. Activist investors Steel Partners and MMI Investments have encouraged a divorce of BHS from Brink's, a provider of armored transport and cash services. The company is set to break free from its parent by the end of October via a tax-free spinoff. Shareholders will receive one share of BHS for every share of Brink's (the parent). BHS will emerge with a spotless debt-free balance sheet and will be allowed to use Brink's name for three years. Then, a rebranding campaign will ensue. That sounds like a perfect opportunity to be acquired.

Revenues are largely recurring and costs fairly consistent. Operating margins have stood at an enviable 25-26% over the last couple years. Returns on capital, a sign of business strength, run close to 18%. Business is good. Revenues are up 8% year-over-year. Amidst the bursting of the real estate and credit bubbles, homeowners seem to still worry about strangers breaking in.

The Competition

ADT is probably the biggest name in the game. It is 15x BHS' size in sales but has nearly twice the attrition rate (12.7% vs. 7%) and less than half the operating margin. ADT, a division of Tyco, would love to gobble up a smaller but better run competitor.


The Breakup Fee

From the most recent form 10Q:

"Year-to-date expenses related to our strategic review, proxy matters and the spin totaled about $9 million. We’ll probably spend another $8 million to $11 million on this effort, so total expenses for these matters should be in the range of $17 million to $20 million for the year."


And....

To spend close to 50% of last year's operating income on strategic review, proxy stuff and other legal and accounting bills is a gutsy move. As future details surface, namely executive comp and insider ownership, BHS appears to be a strong, easy to understand, and predictable business. At 15x EBIT I'd consider a deeper look into this soon-to-be-public subsidiary.


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Disclosure: none