An Alarmingly Good Investment The Leveraged Buyout of AlarmServe Inc. M.H. Capital Partners December 2009 Javier Hernandez-Cotton Franco Perugini

An Alarmingly Good Investment

The Leveraged Buyout of AlarmServe Inc.

M.H. Capital Partners

December 2009

Javier Hernandez-Cotton

Franco Perugini

Introduction

1. Introduction

2. Analysis

3. Valuation

4. Implementation

Introduction

Introduction Analysis Valuation Implementation

Should North Village Capital (“NVC”) buyout AlarmServe Inc.?

Introduction


Should North Village Capital (“NVC”) buyout AlarmServe Inc.?

Acquire AlarmServe at a purchase price of $51.0mm at 6.0x

EBITDA using 2.5x total leverage (“Moderate Leverage”) to

realize I.R.R. of 35% and a return on cash of 4.2x by 2015

Situation Overview


Proposition $51mm bid for AlarmServe at 6x EBITDA

Key Considerations:

1Uncertain Market

Conditions

2Deal Financing &

Debt Structure

3 Value Creation

4 Exit Strategy

Establish entry strategy that accounts for systemic risk and current debt capital markets conditions

What portion of the deal will be financed through debt & what covenants could be placed on the debt?

How will NVC achieve a target IRR of 30% (min. 20%)?

How will NVC exit its position in 5-7 years?

Analysis

1. Introduction

2. Analysis

3. Valuation

4. Implementation

23.828.3

32.3 33.9 35.638.1

40.744.0

2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F

Revenue EBITDA (Post-Syn.)

AlarmServe as a target


Products & Services

Installation & servicing of two way voice communication system

Competitive Advantage: Unique service offering superior to competitors

Value Strong contract base (secured revenues): represent 88% of revenues Company branding is strong, enabling them in a merger to expand services and

offering under the known “AlarmServe” banner

Opportunity: No singular “Industry Leader” at the moment

Financial Snapshot

10.7%

Historic 3-Year Revenue CAGR

18%2007

26%2009

Operating Margins

Assessing the Market


Shift over the past years from fragmented to consolidated

Outside large low-cost players, there is ~3600 security alarm providers

Alarm Security Industry

Provides opportunity for companies to consolidate through acquisitions of smaller providers

Leverage requirements for financial institutions has increased since the financial collapse

Debt Capital Markets

While higher leverage is favourable for returns, interest rates ramp up aggressively with increased leverage (senior: 6% to 8%, subordinated 12% to 15%)

Key Takeaway

AlarmServe can acquire add-on companies enabling them to grow customer base, diversify product offerings, and scale business

Take on conservative amount of debt for the deal and provide scenarios for potential covenants offered by the bank

Implications to NVC

Investment Thesis & Strategic Rationale


1

2

3

Deal would represent 10% of NVC’s total portfolio During financial collapse, one of the fund’s companies has gone under

Service is a growing necessity amongst consumers & even in recessionary periods is a staple service

Favourability of Industry

NVC

Inorganic: Add-on acquisition Organic: Geographic expansion, product expansion to

higher margin segments

Inorganic & Organic Growth Opportunities

Investment opportunity provides low risk opportunity with expansive growth opportunities through conservative strategic movements

Favourable Return Opportunies

Unlevered: 23% Moderate Leverage: 35% High Leverage: 62%

Valuation

1. Introduction

2. Analysis

3. Valuation

4. Implementation

Valuation Overview


Sensitivity

Leverage Levels Multiples

Returns AnalysisIRR Cash on Cash

ProjectionsOperating Sources and Uses

Valuation Inputs


• 2010-2014 revenue CAGR of ~7%

• 2010-2014 EBITDA CAGR of 13% pre-synergies

• Capex equal to 13% of revenues

• Additional management fees of 2% of revenues

Operating Projections• 5 year amortizing senior

debt

• 8 year bullet payment subordinated debt

• Revolving operating line of credit

• Assumes excess cash is swept to pay down revolver

Debt Structure• Exit multiple equal to entry

multiple (6.0x base case)

Returns

Income Statement


Income StatementFY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

Revenue 23.8 28.3 32.3 33.9 35.6 38.1 40.7 44.0COGS (4.9) (6.2) (7.6) (7.5) (7.8) (8.4) (9.0) (9.7)

Gross Profit 18.9 22.1 24.7 26.4 27.8 29.7 31.7 34.3

SG&AFixed (10.4) (10.0) (10.4) (10.4) (10.4) (10.4) (10.4) (10.4)Variable (4.1) (5.1) (5.8) (6.1) (6.4) (6.9) (7.3) (7.9)

EBITDA (Pre-Syn.) 4.4 7.0 8.5 9.9 11.0 12.4 14.0 16.0

Synergies 0.0 0.0 0.0 0.0 0.5 1.5 2.0 2.0EBITDA 4.4 7.0 8.5 9.9 11.5 13.9 16.0 18.0

Depreciation (2.6) (3.1) (3.1) (3.6) (3.7) (4.0) (4.3) (4.6)EBIT 1.8 3.9 5.4 6.3 7.8 9.9 11.7 13.4

7% CAGR

13% CAGR

Synergies scaling to $2mm/annum

Deal Structure – Base Case


General Assumptions Sources and UsesCompany Name Alarmserve Inc Sources Uses

Senior Debt 17.0 Purchase of Alarmserve 51.0 2009 EBITDA ($mm) 8.5 Subordinated Debt 4.3 Transaction Costs 2% 1.0 Purchase Multiple 6.0x Bank Line Drawn 3.4 Purchase Price ($mm) 51 Equity from Sponsor 27.4

Total 52.0 Total 52.0

Inputs Leverage InterestScenario Senior Subord. Senior Subord.Unlevered 0.0x 0.0x 0% 0%Moderate Leverage 2.0x 0.5x 6% 12%High Leverage 3.0x 1.5x 8% 15%

Our base case scenario assumes moderate leverage

We factor in additional transaction costs of 2% for due diligence and funding costs

Debt Schedule


Debt ScheduleFY2010 FY2011 FY2012 FY2013 FY2014

Senior DebtDebt Beginning 17.0 13.6 10.2 6.8 3.4

Principal Repaid 3.4 3.4 3.4 3.4 3.4Debt Ending 13.6 10.2 6.8 3.4 0.0

Interest Expense 0.9 0.7 0.5 0.3 0.1

SubordinatedDebt Beginning 4.3 4.3 4.3 4.3 4.3

Principal Repaid 0.0 0.0 0.0 0.0 0.0Debt Ending 4.3 4.3 4.3 4.3 4.3


Operating LineBeginning Balance (Cash) 3.4 2.1 0.3 (2.7) (6.5)

Drawn (Repaid) (1.3) (1.9) (2.9) (3.9) (4.7)Ending Balance (Cash) 2.1 0.3 (2.7) (6.5) (11.2)

Interest Expense (Income) 0.2 0.1 (0.0) (0.1) (0.1)

Total DebtBeginning Balance 24.7 20.0 14.7 8.4 1.1

Net Repayment 3.4 3.4 3.4 3.4 3.4Ending Balance 21.3 16.6 11.3 5.0 (2.3)


Operating line used as a cash sweep; cash balances pay 1%

interest

Senior debt amortizes over 5 years at 6% interest

Sub debt priced at 12%

Alarmserve is able to reach net cash by 2014

Cash Flow Statement


Capital expenditures at 13% of revenues

Excess cash used to pay down revolver

Cash Flow StatementFY2010 FY2011 FY2012 FY2013 FY2014

EBITDA 9.9 11.5 13.9 16.0 18.0Less: Mgmt Fees 0.7 0.7 0.8 0.8 0.9Less: D&A (3.6) (3.7) (4.0) (4.3) (4.6)EBIT 7.0 8.5 10.7 12.5 14.3Less: Interest 1.6 1.3 1.0 0.8 0.5EBT 8.6 9.8 11.7 13.2 14.8Less: Taxes 3.0 3.4 4.1 4.6 5.2

Net Income 5.6 6.4 7.6 8.6 9.6Less: Chg. In WC (0.1) (0.2) (0.3) (0.3) (0.4)Add: D&A 3.6 3.7 4.0 4.3 4.6Cash from Operations 9.1 9.9 11.3 12.6 13.8

Capital Expenditures 4.4 4.6 5.0 5.3 5.7Cash from Investing (4.4) (4.6) (5.0) (5.3) (5.7)

Dividends 0.0 0.0 0.0 0.0 0.0Principal Repayment (3.4) (3.4) (3.4) (3.4) (3.4)Cash from Financing (3.4) (3.4) (3.4) (3.4) (3.4)

Cash Flow 1.3 1.9 2.9 3.9 4.7Operating Line Drawn/(Repaid) (1.3) (1.9) (2.9) (3.9) (4.7)

Management fees are an additional expense for

Alarmserve

Returns Analysis


Returns AnalysisFY2009 FY2010 FY2011 FY2012 FY2013 FY2014

Initial Investment (27)

EBITDA 10 11 14 16 18Exit Multiple 6.0x 6.0x 6.0x 6.0x 6.0xEnterprise Value 59 69 84 96 108Less: Debt (20) (15) (11) (8) (4)Plus: Cash 0 0 3 7 11Equity Value 39 54 75 95 115

Plus: Mgmt Fees @ 2.0% 1 1 1 1 1Plus: Dividends 0 0 0 0 0Cash Flow to Equity 40 55 76 96 116

IRR 46% 42% 42% 38% 35%Cash on Cash 1.5x 2.0x 2.7x 3.5x 4.2x

Ability to realize 35% IRR by 2014

Returns well above 20% hurdle rate;Additional upside exists through paying excess cash out to NVC as a dividend

No dividends assumed

Exit multiple = entry multiple

Leverage Analysis


Under the base case, Alarmserve will have no trouble meeting debt covenants

Leverage AnalysisFY2009 FY2010 FY2011 FY2012 FY2013 FY2014

EBITDA 9.9 11.5 13.9 16.0 18.0Capex 4.4 4.6 5.0 5.3 5.7Interest Expense 1.6 1.3 1.0 0.8 0.5Net Debt 20.0 14.7 8.4 1.1 (6.9)

RatiosNet Debt / EBITDA 2.0x 1.3x 0.6x 0.1x -0.4xEBITDA Coverage 6.2x 8.6x 14.0x 21.3x 35.9xInterest Coverage 3.9x 5.9x 10.0x 15.5x 26.7xEBITDA-Capex Coverage 3.4x 5.2x 9.0x 14.2x 24.5x

Maintenance CovenantsInitial Leverage (incl. Revolver) 2.9x 2.9x 3.2x 3.0x 2.8x 2.6xLeverage Buffer 0.5x 0.5x 0.0x 0.0x 0.0x 0.0xAnnual Step-Down -0.2x -0.2x -0.2x -0.2x -0.2xMax Allowable Leverage 3.4x 3.2x 3.0x 2.8x 2.6x 2.4x

Min. EBITDA Coverage 2.5x 2.5x 2.5x 2.5x 2.5x

FCF Coverage 1.5x 1.5x 1.5x 1.5x 1.5x

Covenant Stress Test – 85% Attainment


At 85% attainment, we see a leverage and FCF coverage breach

Leverage AnalysisFY2010 FY2011 FY2012 FY2013 FY2014

EBITDA 5.7 7.1 9.3 11.0 12.6Capex 3.7 3.9 4.2 4.5 4.9Interest Expense 1.6 1.4 1.2 1.0 0.6Net Debt 21.7 18.6 14.5 9.6 4.2

RatiosNet Debt / EBITDA 3.8x 2.6x 1.6x 0.9x 0.3xEBITDA Coverage 3.6x 5.0x 7.5x 11.1x 20.6xInterest Coverage 1.3x 2.4x 4.3x 6.7x 13.0xEBITDA-Capex Coverage (FCF Coverage) 1.2x 2.2x 4.1x 6.5x 12.6x

Maintenance CovenantsInitial Leverage (incl. Revolver) 2.9x 2.9x 3.2x 3.0x 2.8x 2.6xLeverage Buffer 0.5x 0.5x 0.0x 0.0x 0.0x 0.0xAnnual Step-Down -0.2x -0.2x -0.2x -0.2x -0.2xMax Allowable Leverage 3.4x 3.2x 3.0x 2.8x 2.6x 2.4x

Min. EBITDA Coverage 2.5x 2.5x 2.5x 2.5x 2.5x

FCF Coverage 1.5x 1.5x 1.5x 1.5x 1.5x

Sensitivities


Deal structure provides flexibility with assumptions and leverage to realize adequate returns

IRR Sensitivity to Leverage and ExitExit Multiple

4.0x 5.0x 6.0x 7.0x 8.0x

Unlevered 16% 20% 23% 26% 29%

Moderate 25% 30% 35% 39% 42%

High Leverage 49% 56% 62% 67% 71%Lev

erag

eIRR Sensitivity to Leverage and EBITDA Attainment

EBITDA Attainment - 201410.8 14.4 18.0 19.8 21.6

Unlevered 9% 17% 23% 26% 28%

Moderate 17% 27% 35% 38% 41%

High Leverage 37% 52% 62% 66% 70%Lev

erag

e

An unlevered scenario still surpasses 20% hurdle

Exit EBITDA of $10.8mm (6% CAGR) still provides 17% IRR

Implementation

1. Introduction

2. Analysis

3. Valuation

4. Implementation

Recommended Course of Action


Acquire AlarmServe at a purchase price of $51mm at 6x

EBITDA using 2.5x total leverage (“Moderate Leverage”) to

realize I.R.R. of 35% and a return on cash of 4.2x by 2015

1 Deal Schedule

2Company

Management

3 Exit Strategy

Implementation Plan:

Acquiring AlarmServe


1 Deal Schedule

Recommended Course of Action


1 Deal Schedule

Negotiation Buffer

Contact Banks for Financing

Evaluate Internal Processes

Negotiation range of $51mm – $55mm: $55mm price represents 6.5x EBITDA & provides an I.R.R. of 31% at 6x exit multiple

Contact Major Canadian BanksTarget rates: senior at 6% and subordinate at 12%

Potential to introduce management or optimize operations

Inorganic Growth Opportunity


2Company

Management

Potential Consolidation Attempt

Acquisition Target Criteria

Look for target with ~$5mm in EBITDA (half ours) and look to pay ~6.0x

Strong client base outside of AlarmServe’s current network

Ability to scale response workforce: Office integration opportunities

Exiting in ~2014


3 Exit Strategy

Initial Public Offering

High return

Difficult to exit full position in a timely manner

Expensive underwriting fee’s

Sale to Strategic Buyer

Optimal as portion synergies can be included into valuation

Likely, considering the industries move to consolidation

Sale to Financial Buyer

Ability to completely exit position

Could pay premium if LBO market is booming

Dividend Recapitalization

Allows NVC to crystalize value, while maintaining control

Could lead to over leveraging

Could exceed investment horizon

Risk and Mitigation


Negotiation Issues

Difficulty Securing Financing

Covenant Breach

~$4.0mm in negotiation room

Take on less debt

Establish strict spending policies

Hostile Takeover

Accept higher rate

Renegotiate at higher interest rate

Mitigation ContingencyRisk

Conclusion

1. Introduction

2. Analysis

3. Valuation

4. Implementation

Acquire AlarmServe at a purchase price of $51.0 mm at 6.0x EBITDA using 2.5x total leverage

(“Moderate Leverage”) to realize I.R.R. of 35% and a return on cash of 4.2x by 2015

Backup - Earnout

Earnout structure provides upside to management, in the event that they own a majority interest

Earn-outMinimum MaximumEBITDA EBITDA Excess Max Implied

Year Level Level EBITDA Multiple Addition EV MultipleFY2010 5.7 6.1 0.401 6.0x 2.4 53.4 8.7xFY2011 6.1 6.6 0.429 6.0x 2.6 56.0 8.5xFY2012 6.6 7.0 0.459 6.0x 2.8 58.7 8.4xFY2013 7.0 7.5 0.491 6.0x 2.9 61.7 8.2xFY2014 7.5 8.0 0.526 6.0x 3.2 64.8 8.1x

Total EV w/Earn-out (Current EBITDA) 64.8 7.6x

Documents

An Alarmingly Good Investment The Leveraged Buyout of AlarmServe Inc. M.H. Capital Partners December 2009 Javier Hernandez-Cotton Franco Perugini