On the morning of January 18th 2018, it was made public that home-security company ADT Services would go public with an IPO of $14 per share. Because ADT is owned by private equity firm Apollo Global Management LLC, the implications of this initial public offering are more complex than may first seem.
ADT started in 1874 as the American District Telegraph company, but has evolved into an alert box corporation, adding features such as home video surveillance and remote locking and unlocking of doors. However, the company was bought by Apollo in 2016 for roughly $7 billion dollars through a leveraged buyout, and was eventually merged with Protection 1, a smaller U.S security company that ADT had acquired previously. However, in order to raise additional funds to pay down some of the company’s debt, Apollo decided to take its investment back to public markets. More specifically, ADT intends to use the proceeds to redeem securities held by Koch Industries Inc. In addition, although Apollo hinted at declaring a dividend following the ADT offering, such prospects were not guaranteed in the actual deal.
Apollo was able to fund its original LBO by issuing both preferred shares and warrants to an affiliate of Koch Industries for approximately $750 million, indicating that the Koch brothers have a stake in now-public ADT. Today, several banks were included as book-running managers for the IPO: Morgan Stanley, Goldman Sachs, Barclays, and Deutsche Bank, just to name a few. In terms of the actual structure of the IPO, the original target range was priced between $17 and $19 per share, but ended up being priced at only $14 per share. This cut the maximum amount of funding the company could generate to $1.69 billion, approximately 25% less than that which would have been reached at a price of $19. More specifically, the company had originally planned to sell 111.11 million shares to pay down its debt, but ended up selling only 105 million shares, with underwriting banks having the opportunity to purchase 15.75 million shares. Even after considering the weakened price, Apollo made a “paper profit of around $2.4 billion,” according to media sources covering the intricacies of the deal. In addition, Apollo retains about 85% of ADT following the IPO.
There are several circumstances surrounding ADT’s decision to go public, the most important of which being its presence in the market. A survey conducted in 2017 found that ADT holds approximately 95% brand awareness, with its 18,000 employees serving 7.2 million customers globally. At the same time, the company has recently gained exposure to a liability for obligations to Brin’s Co, of which ADT recently acquired a formerly owned business. Due to a relatively new Health Benefit Act, ADT’s obligations have become stricter, and shifts in operations and cash flows may hint at whether or not ADT is following protocol. Finally, ADT has over $10 billion in debt as a product of its 2016 LBO, $770 million in obligation to Koch securities, and approximately $85 million in dividend obligations for 2017 alone. In other words, in order to keep servicing debt, the company needs to meet its EBITDA and cash-flow targets, which is a difficult task when also becoming public and raising the question of acquisitions, indebtedness, and dividends.*
While it is early to predict whether or not the decision to IPO will be successful for ADT, the very nature of the deal still indicates it was a conceivable win. That is, Apollo did not sell any shares, so this is not entirely an exit of the PE firm. Under Apollo’s ownership, customer churn has decreased for ADT, which means that the need to promote and advertise to new customers has decreased. In addition, Bloomberg surveys have found that while private equity investors are more likely to take their time exiting if a stock has performed poorly, an IPO is ultimately the “first step to stepping down.” Clearly, while ADT’s opening day was woeful, the company’s maturation and growth into a global security provider are signs of a potential maturation, and as a result, exit from Apollo.