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IB Interview Guide, Module 3: Deal Discussion Example - ADT (Leveraged Buyout)

Apollo Global Management acquired security services company ADT for $7 billion in a leveraged buyout. ADT controls over 25% of the North American security market. Apollo sees an opportunity for consolidation in the fragmented security industry. The deal price of 6.9x EBITDA was reasonable and in line with precedent deals. The acquisition of ADT along with two other security companies positions Apollo to grow the business through synergies and additional acquisitions.

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793 views3 pages

IB Interview Guide, Module 3: Deal Discussion Example - ADT (Leveraged Buyout)

Apollo Global Management acquired security services company ADT for $7 billion in a leveraged buyout. ADT controls over 25% of the North American security market. Apollo sees an opportunity for consolidation in the fragmented security industry. The deal price of 6.9x EBITDA was reasonable and in line with precedent deals. The acquisition of ADT along with two other security companies positions Apollo to grow the business through synergies and additional acquisitions.

Uploaded by

Sofia Moura
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IB Interview Guide, Module 3: Deal Discussion Example – ADT


(Leveraged Buyout)
You can use this outline and executed example for leveraged buyout (LBO) discussions.
Sources of Information:
Background of Merger:
https://www.sec.gov/Archives/edgar/data/1546640/000119312516495387/d141890dprem14a
.htm#toc141890_11
Goldman Sachs Fairness Opinion:
https://www.sec.gov/Archives/edgar/data/1546640/000119312516495387/d141890dprem14a
.htm#toc141890_13
Reuters Coverage:
http://www.reuters.com/article/us-adt-m-a-apollo-global-idUSKCN0VP1F1
NY Times Coverage:
https://www.nytimes.com/2016/02/17/business/apollo-global-management-to-buy-adt-for-6-
9-billion.html?_r=0
https://www.nytimes.com/2016/02/18/business/dealbook/apollo-builds-in-safeguards-for-its-
adt-deal.html?_r=0
Outline:
1) Background Information: Security services company that makes burglary alarm and
video surveillance systems, with ~27% share of the security market in North America
(the biggest player, by far). Revenue of $3.6 billion with EBITDA of $1.8 billion. Apollo is
combining ADT and Protection 1 and ASG Security (portco’s).

2) Deal Rationale: Roll-up/consolidation play by Apollo; attracted to high recurring


revenue and 5-6% market growth; ADT was approached by several parties and felt
Apollo’s offer was a good price.

3) Financial Stats: LTM EV / EBITDA of 6.9x; 1-day premium of 56%, but ~30% over the
prior 3-6 months. Multiples are in-line with precedent transactions. Rolling over some
existing Debt; 50% Equity, with the rest from Term Loans, Second Lien Loans, and
Preferred Stock.

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4) Your Opinion: OK deal for ADT, but great outcome for Apollo – multiples are
reasonable, and deal is based on EBITDA growth and roll-ups.
Executed Deal Discussion:
“Sure. One deal I followed recently was Apollo’s $7 billion leveraged buyout of ADT, where
Goldman Sachs advised ADT.
ADT is a security services company that makes burglary alarm and video surveillance systems.
It’s the biggest security company in North America, and it controls over 25% of the market, with
revenue of $3.6 billion and EBITDA of $1.8 billion. Apollo is combining the company with two of
its security portfolio companies: Protection 1 and ASG.
This deal is a consolidation play by Apollo – they see a fragmented market with a clear #1
player, and they want to build an acquisition platform around ADT. They like the high recurring
revenue of security companies and a market that’s growing faster than the overall economy, at
5-6% per year. ADT wasn’t looking for a sale, but it was approached by several firms and felt
that Apollo’s price was good.
The deal was done for an EV / EBITDA multiple of 6.9x and a 1-day premium of 56%. However,
the premium was only around 30% relative to the company’s share price over the past 3-6
months. The revenue and EBITDA multiples are in line with those of recent precedent
transactions.
Apollo is rolling over some of the existing Debt and repaying the rest. About 50% of the deal will
be funded with Equity, with the rest from Term Loans, Second Lien Loans, and Preferred Stock.
The deal was an OK one for ADT – its share price had fallen significantly, so it didn’t receive an
outsized price. But it seems like a great one for Apollo because they paid a reasonable multiple,
acquired the top company in the market, and plan to make the deal work via EBITDA growth
and add-on acquisitions.”
Possible Follow-Up Questions:
You are less likely to receive follow-up questions because this deal didn’t involve a “popular” or
widely known company.
We present these follow-up questions not because you “need” immediate answers to them,
but to set your expectations:
Question #1: What type of IRR could Apollo realize in this deal?

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Deflect this question by pointing out that it’s hard to say because Apollo will combine ADT with
other companies and make more acquisitions in the future. But if ADT’s EBITDA doubles over
five years, the exit multiple stays the same, and the company repays the $1.6 billion of term
loans, the IRR might be in the 25-30% range.
There’s a $4.5 billion equity contribution in the beginning and an exit for 6.9x * $3.6 billion =
$25 billion EV. Subtract ~$5 billion for the remaining Debt and add-on acquisition funding to get
Exit Equity Proceeds of ~$20 billion. $20B / $5B = a 4x multiple over 5 years, which is just above
a 30% IRR. The IRR might be closer to 20-25% with lower EBITDA growth.
Question #2: What synergies could Apollo realize by combining ADT with Protection 1?
They might realize cost savings at the corporate level and even boost revenue since Protection
1 adds 2 million customers to ADT’s 6.5 million. Protection 1 would also gain access to the
Canadian market. Synergies would have to be in the hundreds of millions per year (~10% of
combined revenue) to cover the 56% premium.
Question #3: What do you think about ADT’s financial profile?
The high recurring revenue and extremely high EBITDA margins (~50%) are attractive, but the
company’s FCF and FCF conversion (~10-15% of EBITDA) are weak due to high recurring
purchases of intangibles. Management’s projections also assume that growth will accelerate to
5-6%, well above the company’s ~3% historical growth, which may be aggressive.
Question #4: Were there any unusual deal terms in the LBO?
Apollo provided a 40-day “go shop” period, which allows ADT to seek a better offer. It’s also a
bit unusual to use Preferred Stock in a deal like this. Finally, the combination with the portfolio
companies may require asset divestitures.
Question #5: What are the risks in this deal?
The main one is that EBITDA fails to grow by as much as expected. If it grows in-line with the
management’s standalone plan and increases by only 20% over 5 years, the IRR would almost
certainly be below 20%. Another risk is that the add-on acquisitions may not work out, or that
the smaller companies are not willing to sell at reasonable prices.
Question #6: If you were Apollo, would you have done this deal?
Yes. It was done at a reasonable multiple, the downside risk is limited, and there’s a lot of
upside if the additional deals go well. It’s a good market, and the company’s financial profile is
well-suited for an LBO.

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