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Safety first

16 February 2016 By Jeffrey Goldfarb

Leon Black is giving new meaning to secured loans. Apollo Global, the private equity firm he helps run, has agreed to buy U.S. home safety and fire protection company ADT for about $7 billion. It’s an alarmingly sized buyout given the fear coursing through credit markets, but the deal comes with plenty of safeguards.

Big leveraged deals have been hard to come by since the financial crisis. It has become even tougher in recent weeks as bond buyers run scared from the outlook on U.S. interest rates. Using a variety of creative maneuvers, Apollo may have cracked the code.

First, it’s kicking in a big slug of equity, with the assistance of co-investors. Together, they’re writing a $4.5 billion check. That’s nearly half the purchase price including debt, a higher proportion than historically gets used in leveraged buyouts. It’ll help keep ADT’s debt at less than five times EBITDA, comfortably below a guideline multiple of six times issued to big banks by the Federal Reserve.

Apollo is also taking a page out of the modern buyout playbook. Just as the Brazilian billionaires at 3G turned to Warren Buffett for Heinz and the German Reimann family tapped other wealthy dynasties to acquire D.E. Master Blenders, Black’s firm is issuing $750 million of preferred securities to an investment arm of Koch Industries, the private conglomerate led by David and Charles Koch.

The last line of defense is a plan to merge ADT with a rival security firm that Apollo owns. Protection 1, whose chief executive is lined up to run the combined company, will add its 2 million customers to ADT’s 6.5 million. That should generate some healthy cost savings, and maybe even new revenue if Protection 1 can help ADT increase sales to businesses as hoped.

The 56 percent premium Apollo is paying ADT shareholders amounts to about $2.5 billion. To fully cover that sum on a present-value basis would require $370 million in synergies, taxed at ADT’s 32 percent rate and put on an earnings multiple of 10. That might be a tall order, at nearly 9 percent of the combined revenue of Protection 1 and ADT. Even so, Apollo appears to have built in enough extra security to both get the deal done and lock up a decent return.


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