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August 5, 2020

Breakingviews: Google gets physical-security amuse-bouche

by Breakingviews.

It’s not every day a trillion-dollar company rings the doorbell. Home- and business-security group ADT reaped the benefit on Monday. The news that the company had agreed to sell a 6.6% stake to Alphabet unit Google for $450 million pushed up its market capitalization by nearly $4 billion, or just shy of 60%. That’s a big response to an initial deal to fold Google Nest thermostats and other devices into its security lineup.ADT boss Jim DeVries does not pretend his company can do the kind of things the technology giant can do when it comes to hardware or the artificial intelligence and machine learning that go with home automation and the internet of things in general. A partnership with Google adds those overlays to ADT’s established security-service credentials and 6 million-plus customers.Google, of course, gets that ready-made market. And both companies score with a more complete offering for the smart-home sector, one growing at a 20% annual clip according to ADT.Simplistically, the bump in market value implies extra EBITDA of around $500 million a year, based on ADT’s roughly 7.5 times enterprise value-to-EBITDA ratio as of Friday. At the 40% margin reported for the first quarter, that would mean $1.3 billion in incremental annual revenue – a hefty uplift of nearly a quarter from the present run rate. In reality investors are probably thinking the opportunity is even bigger, but perhaps further in the future.

Some may also foresee new options for ADT’s corporate destiny. The company’s shares traded above their 2018 initial public offering price of $14 during the day on Monday for the first time since then. Private equity funds run by Apollo Global Management, which bought ADT in 2016, still own more than 80% of the stock.
If the partnership goes well after Alphabet’s sample investment, it could buy the whole caboodle. Assuming it has already done the bulk of its due diligence, that would be an undemanding step for a company worth 100 times as much as ADT. Smart-home tech is exciting, but for Apollo and other investors a hint of a profitable exit down the road may be even more enticing.

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