ADT Inc. is gearing up for an initial public offering that will give investors the opportunity to buy shares in a company familiar to many Americans, thanks to the common sight of its blue octagonal logo on residential burglar alarms across the nation.
The Boca Raton, Fla.–based ADT is planning to offer 111.1 million shares priced at $17 to $19, to raise about $2 billion at the midpoint of the estimated range. The company is planning to list on the New York Stock Exchange under the ticker symbol “ADT.”
Morgan Stanley, Goldman Sachs, Barclays, Deutsche Bank, RBC, Citigroup, Bank of America Merrill Lynch and Credit Suisse are joint bookrunning managers on the deal, with eight other firms acting as co-managers. The deal is expected to price next week, according to data firm Ipreo.
Proceeds will be used to redeem debt, as well for the catchall “general corporate purposes,” which includes growth initiatives, according to ADT.
Apollo Global Management APO, +1.49% , which took the company private in February 2016 in a $6.9 billion leveraged buyout, will continue to own the majority of the shares, making ADT a “controlled company” under NYSE rules. That means Apollo continues to call the shots.
Apollo funded the deal partly by issuing preferred shares and warrants to an affiliate of the privately held Koch Industries Inc., for an aggregate $750 million, meaning the noted conservative political donors the Koch brothers also own a stake. The controlled-company status also exempts ADT from certain corporate-governance requirements.
Here are five things to know about ADT:
It has roots in the 19th century
ADT was created in 1874 as American District Telegraph, harnessing what was the leading communications technology of the time. From there, the company advanced to the call box, a system that allowed signals to be transmitted by a watchman to alert the police, say, or the fire department of the need for assistance. In the 1900s, the company came under the control of AT&T T, -0.05% , starting its switch to the signal business that was the first iteration of its security service. In 1940, it introduced the ultrasonic burglar alarm along with a fire-detection system. In 1969, the company went public for the first time on the NYSE.
It’s a big player in its market
ADT, which has grown through acquisitions, including most recently of Protection One and ASG, describes itself as the leading provider of security and monitoring services in the U.S. and Canada. The company estimates that it’s about five times bigger than the next largest residential alarm competitor, Vivint Home Security, measured by revenue, with a roughly 30% market share.
A 2017 survey found the ADT name had about 95% brand awareness, according to the company’s prospectus. It serves about 7.2 million residential and business customers and has the biggest sales, installation and service field force of any security company, supported by its roughly 18,000 employees.
2017 numbers are not yet available — and won’t be ahead of the IPO
ADT has not yet completed its financial results for 2017 and can only offer potential investors a set of expectations. The numbers will not be available before the IPO is completed, and that also means it cannot provide an update on what the tax bill that was signed into law in December means for its NOL (net operating loss) carryforwards, deferred tax assets that would normally help reduce its tax bill.
“Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense for the taxable year beginning Jan. 1, 2018,” says the prospectus.
That could mean a hit to earnings, but the extent won’t be clear until audited financials are available.
The company is expecting 2017 revenue of up to $4.3 billion, according to its preliminary estimates. Net income is expected to come to $550.8 million, and EBTIDA is expected at $2.37 billion. The company says it benefits from a stable revenue profile, with more than 90% of its revenue coming from recurring, contractually committed monthly payments under contracts that typically have initial terms of three to five years.
The company may have exposure to a surprising liability
One of the risk factors mentioned in the prospectus is the company’s liability for obligations of the Brink’s Co., thanks to its acquisition of a business formerly owned by Brink’s called Broadview Security. That business is subject to the Coal Industry Retiree Health Benefit Act of 1992, meaning it must cover the costs of health-care coverage for retired workers suffering from coal-related ailments.
Brink’s has created a Voluntary Employee’s Beneficiary Association trust to cover those liabilities, and Brink’s has agreed to indemnify the business for any and all liabilities stemming from its former coal operations. However, if Brink’s and the trust “are unable to satisfy all such obligations, we could be held liable, which could have a material adverse effect on our financial condition, results of operations and cash flows,” says the prospectus.
ADT has a lot of debt and a unique non-GAAP metric to go with it
ADT’s 2016 LBO has left it saddled with more than $10 billion in debt, and its estimated debt service cost for 2017 was $650 million. The company also has a $772 million obligation in the Koch preferred securities, as well as a dividend obligation of an estimated $84 million for 2017.
That means it is important for the company to meet its EBITDA and cash-flow targets to ensure it is able to service debt and remain in compliance with covenants. That in turn could limit its ability to incur further indebtedness or to make acquisitions or pay dividends.
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ADT offers Covenant Adjusted EBTIDA as one of the many non-GAAP numbers included in its prospectus (ones not prepared in compliance with Generally Accepted Accounting Principles, the regulatory standard).
“We believe that the presentation of Covenant Adjusted EBITDA is appropriate to provide additional information to investors about our ability to operate our business in compliance with the restrictions set forth in our debt agreements and is a component of compensation measures for our executives by supplementing GAAP measures of performance in the evaluation of the effectiveness of our business strategies,” states the prospectus.