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ADT Commercial to lock in buys under new owner

GTCR plans to put the commercial security, fire and life safety business that it newly acquired from ADT back on an M&A path after five years of mostly organic growth, said David Donnini, GTCR managing director and head of Business & Consumer Services.

This month, ADT [NYSE:ADT], a Boca Raton, Florida-based provider of electronic security, fire protection, and related alarm monitoring services, agreed to sell the business to GTCR for USD 1.6bn.

The commercial business comprised only about 10% of ADT’s revenue. As such, “it was not always a priority for M&A or growth capital,” the executive said. In fact, in the last five years, the business had predominantly grown organically. Under GTCR, Donnini said “we’ll put a lot of additional resources into M&A.”

Earlier this year, ADT hired Citi and RBC to field offers for the commercial unit. “They talked to a handful of potential buyers. It made more sense for us than most buyers because of our history with the company and the executives,” he said.

Over the next five years, ADT Commercial is aiming for a larger global geographic presence to support national account activity, he said, though the company has not yet pinpointed where it will make acquisitions. Most revenue is from the US at present, he added. In addition, it could acquire vertical expertise in segments such as healthcare, hospitals, government, education and retail, he said.

Donnini maintained that the company is “size agnostic. A transformational deal could happen.” A large deal might have to wait until after it integrates the carveout, but smaller, more strategic tuck-ins can happen “from day one”. There is no lower limit for deal size, he added. It is interested in commercial security, fire, life and safety firms.

Small tuck-in acquisitions are trading in the mid-single digits of EBITDA, he said. ADT said the EV/commercial adjusted EBITDA multiple for its commercial unit was about 11.2X including the estimated allocation of corporate costs.

“11x was a fair multiple. It took us quite a while for both sides to agree,” he added.

Donnini, who said he has been with GTCR since 1991, pointed out that the PE firm has owned various incarnations of the ADT business over the past decades. GTCR sold Protection 1 to Apollo Global Management in 2015. In February of 2016, Apollo took ADT private and combined it with Protection 1.

“We created the commercial security business from scratch and sold it to Apollo and then it was merged with ADT,” he said. ADT subsequently acquired Red Hawk Fire & Security, a transformational deal, in December 2018. “That made it a much more substantial commercial company.”

The ADT business was the PE firm’s fourth investment in the security industry with Tim Whall. GTCR partnered for a third time with the industry executive to acquire Protection 1 in 2010. Whall previously partnered with GTCR on investments in Cambridge Protection Industries and HSM Electronic Protection Services, a carveout from Honeywell. Whall is now on ADT Commercial’s board.

This is also the PE firm’s third security investment with Dan Bresingham, CEO of ADT Commercial. “We’re working with two executives we’ve got a long history with,” he said.

ADT Commercial now has close to USD 1bn in revenue and about USD 140m of EBITDA, he said.

Commercial security businesses generate significant recurring monthly revenue (RMR), he said. The figure for ADT was not disclosed but he said it is usually around two-thirds of EBITDA. RMR is derived from the inspection of security systems; remote monitoring and service contracts, he said.

Under the new ownership, the company will change its name “in relatively short order,” he said, adding that the management team already has one picked out.

Donnini said the business has been growing well under ADT and so has the commercial security industry. “It’s probably because technology continues to evolve and become part of the commercial business,” as it has for residential security. This “drives growth in the space,” he said.

Indeed, he noted that when GTCR first got into the commercial security space in 1999, video cameras were new and used almost exclusively by banks. “We called it closed-circuit TV.”

Today, video is cheaper and ubiquitous. Often, artificial intelligence screens are added to reduce the amount of time humans need to observe video footage and decide whether to intervene, he noted.

But commercial security is very different from residential security, with systems that are much more complex and robust, he said. It is also highly regulated, particularly on the fire side of the business, with many various municipal codes that are strictly enforced.

The largest industry player is Johnson Controls [NYSE:JCI], which merged with Tyco Security in 2016, Donnini said. In 2012, Tyco itself was spun out of ADT. The industry’s second-largest player, Securitas [STO:SECU-B], acquired its commercial security business from Stanley Black & Decker in 2022. The business included HSM, the Honeywell carveout acquired by GTCR in 2004, Donnini noted.

Another large player is Convergint, owned by Ares, Leonard Green and Harvest Partners, he said.

In September of 2022, ADT received a USD 1.5bn investment from Bloomington, Illinois-based State Farm as well as a Google-related partnership targeting the expansion of the company’s base.

Proceeds from the transaction with GTCR will be used to reduce ADT’s debt by USD 1.5bn, with cash interest savings expected to offset the impact of divesting its commercial business. Citi, RBC Capital Markets, and Cravath, Swaine & Moore acted as advisors to ADT.