ASCENT CAPITAL GROUP INC ASCMA
February 01, 2016 - 3:14pm EST by
cameron57
2016 2017
Price: 11.28 EPS 0 0
Shares Out. (in M): 13 P/E 0 0
Market Cap (in M): 144 P/FCF 0 0
Net Debt (in M): 1,635 EBIT 0 0
TEV: 1,779 TEV/EBIT 0 0

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  • Small Cap
  • Home security
  • Event-driven
  • Undervalued Bond
 

Description

Monitronics Senior Notes – Jan 2016

Monitronics is Ascent Capital Group’s (ASCMA) OpCo

 

Buy Monitronics 9.125% notes due May 2020 at 78.  Off ~20 points over the LTM period, these notes offer a 12% current and 17% yield to worst, with short effective maturity.  I think bonds are covered through par, but for the sake of establishing a one year price target, say 92 at year-end 2016, for a ~28% total return with downside protection.

 

 Bond Returns         
 Recommendation - Buy 9.125% OpCo Bonds at 78       
 See material upside through normalized operating performance       
 Believe market sell-off is more reflective of technicals; bond finding new owners     
 With TEV coverage; Ascent should trade at ~200bps per turn or closer to ~10% YTW   
 Reference historical Vivint / ASCMA relationships for guidance       
 Trade Exit Date  Dec-16      
   Bear   Base   Bull   TODAY 
 Yield per Turn  300 bps 275 bps 200 bps 430 bps
 Current Net Leverage  4.3x 4.3x 4.3x 4.3x
 Targeted Yield  12.8% 11.7% 8.5% 16.6%
 Targeted Price                   88.4                  91.6                102.1  
 Coupon                     8.4                    8.4                    8.4
 Total Dollar Return                   18.8                  22.0                  32.4  
 Total Percentage Return  24% 28% 42%  
 IRR  25% 30% 45%  

 

Monitronics is the nation’s #2 Home Security operator with 1.1mm subscribers and 600+ exclusive dealers.  The Company generates $360mm of EBITDA, $45mm of recurring monthly revenue and burns ~$70mm of cash.  The burn is not good, but with $315mm in liquidity and several operational headwinds abating; bonds should feel good about the 31x RMR attachment point versus private markets well north of 40x.  Ascent is likely worth more dead than alive, and I see potential events given a lower share price and activist investor, but think bonds trade higher regardless given the yield and value characteristics.  As to why:

1)      Discrete Operating Drivers Improving

2)      Good Credit Documentation

3)      Attractive Valuation

4)      Potential Event-Driven Situation

5)      Improved Technicals

 

Stanley339 wrote up Ascent in 2012 and there have been several discussions on ADT.  This idea is security-specific, so please follow up for company (my estimates are nothing special; comes down to normalized attrition) or industry thoughts (I worry about MSOs and RBOCs, but also see don’t see them destroying industry economics).  As John Malone has exited and the stock under-performed, sell-side coverage has waned, but Imperial and BaML cover the sector actively.

 

For starters, the capital structure:

  • $315mm revolver due Dec 2017 ($185mm drawn)
  • $691mm term loan B due Mar 2018
  • $550mm term loan B-1 due April 2022
  • $585mm unsecured OpCo notes due April 2020
  • $104mm HoldCo convertible bonds due July 2020
  • 12.3mm A shares and 0.4mm B shares for $145mm market cap
  • $128mm cash (most at HoldCo, some at OpCo)
  • Collectively, that’s $1.8bn of enterprise value (below)

 

 Capital Structure   $ Avail   $ Out   LIBOR / Flr   Sprd / Rate   Maturity   Price     Curr Yield   YTW   Net Lvg   Mkt Lvg   Net RMR 
 Revolver              185             130 0.30% 3.75% Dec-17            100.0   4.1% NM      
 Term Loan B                401 1.00% 4.25% Mar-18              94.3   5.6% 8.2%      
 Term Loan B-1                545 1.00% 4.50% Apr-22              98.2   5.6% 5.9%      
 Monitronics OpCo Secured Debt           1,075               2.6x 2.5x 20.1x
 Unsecured Notes                585 0.00% 9.125% Apr-20              78.0   11.7% 16.6%    
 Monitronics OpCo Debt             1,660               4.3x 3.9x 30.9x
 Convertible Bonds                104 0.00% 4.00% Jul-20              62.0   6.5% 16.3%    
 Ascent Capital HoldCo Debt           1,763               4.5x 4.4x 35.1x
 Cash & Equivalents               (128)                    
 Market Cap                144                    
 Enterprise Value             1,779               4.9x   39.2x

 

For that EV you get 1.1mm subs generating $42 in recurring monthly revenue (“RMR”) or $45.5mm of consolidated corporate RMR.  In a more traditional sense, Ascent generates $360mm of LTM EBITDA.  What are these assets worth?

  • Comps trade primarily on RMR and Steady-State Free Cash Flow (“SSFCF”):
    • Why not EBITDA? – Some companies expense subscriber acquisition costs (“SAC”) while others capitalize, so GAAP numbers require adjustment to compare.  Add back SAC to EBITDA and treat as an investing cash flow.
      • ADT and Vivint trade for 5x and 7x pre-SAC EBITDA
    • RMR – Given comparable attrition rates and unit operating costs, a proxy for recurring monthly cash flow.
      • ADT and Vivint trade for 38x and 35x (through bonds, closer to 50x through equity)
      • Precedent transactions have gone for 45-60x RMR
    • SSFCF – Adjusts for aforementioned accounting differences.  Start with EBITDA, then adjust for required capital outflows to maintain a flat subscriber base (RMR * churn * creation multiple) and then deduct cash taxes
      • ADT and Vivint trade for 10x and 15x SSFCF

 

Key Points:

1)      Discrete Operating Drivers Improving – Bonds traded down in 2015 for a number of company-specific issues.  Taken individually, these issues are explainable, but together strain credulity for an already complicated situation.  Let’s take them one-by-one:

·         Churn – Industry net unit attrition averages 12-12.5%, driven by moves or the expiry of initial contracts.  Most contracts have 3-4 year initial terms, so upon expiry, churn spikes for customers that want to leave, leveling off through years 7,8 and 9.  Pinnacle Security, a bulk purchase of 120k subs completed in 2012, is experiencing these same issues, driving ~100bps increase in churn (see Exhibit C)

·   Mitigant – The average FICO score is >715, subscribers are diversified by state and region, and checks confirm good customer hygiene.  Put another way, the spike is timing-related and temporary.  Expect more and better disclosure regarding to at least partially address market concern.

·   Mitigant – I also look to ADT and Vivint, both of whom average 12-12.5%, and experienced similar one-time issues in 2013 and 2014.  Securities traded up as churn improved.

·         Dealer Network – Monitronics has no physical sales force, but relies on ~600 exclusive nationwide dealers to originate, install and then sell contracts.  The base is concentrated, with the top 10 driving >50% of gross installations.  One of the larger dealers went bankrupt in 2015, driving weaker-than-expected gross installations.

·   Mitigant – Stepped up dealer support and monitoring should help, but these are small businesses operating in competitive environments. 

·         Bulk Pricing – Contractual dealer originations are supplemented with periodic ‘bulk’ purchases (e.g. Pinnacle), however, higher pricing coupled with EV degradation has made bulk purchases uneconomical and slowed growth.

·   Mitigant – Tightening credit conditions increase industry cost of capital, and should impact creation multiples, especially in the lower middle market where PE has been active.

·         Other Operational Changes – Pinnacle switched billing system providers in 2015, driving churn ~20bps higher.  The industry is also dealing with higher operating expenses as nationwide 2G networks phase out, and in-home cellular radios upgraded.

·   Mitigant – Billing system conversion in the rearview mirror; 20bps churn headwind that will not repeat.

·   Mitigant – 2G Network upgrade seems to be going fine, albeit with $20mm of incremental operating expenses in 2016.

·         New CEO – Long-time CEO Mike Haslip retired in early 2015, and Jeff Gardner hired as CEO in Sept 2015.  Telecom investors may remember Gardner from Windstream.  I’m concerned about Gardner’s capital allocation history; he overspent at Windstream and did a poor job of integration.

·   Mitigant – With Ascent shut out of the capital markets and shares down 75% LTM, the Company is focused on de-leveraging versus external growth.

2)      Good Credit Documentation – Monitronics is highly leveraged at 4.9x EBITDA or 37x RMR, but has very little capacity to add incremental debt.  The Credit Facility caps total leverage at 5x, whereas Unsecured Bonds are tighter, capping total leverage at 4.75x.

3)      Attractive Valuation – Bonds create the Company for 31x RMR versus the last eight years’ precedent transactions’ median 53x EV / RMR.  Apollo purchased Protection One in May 2015 for $2bn or 51x RMR.  Accordingly, I believe these notes have meaningful downside protection in a number of scenarios.

4)      Potential Event-Driven Situation – The subscriber base, dealer relationships and monitoring platform are valuable assets.  One could make the argument that these assets are worth more dead than alive, and maybe we might be nearing that point.  Notable small-cap activist Okumus has taken an 11% stake and filed a D in December 2015.  HoldCo CEO Bill Fitzgerald is well aware of the strategic optionality.

5)      Improved Technicals – This is a decent-sized bond within a sleepy structure once dominated by ETFs and insurance companies.  20% of the issue traded in 2015, primarily into hedge fund buyers.  As these sellers clear out, bonds are re-establishing a floor in the mid-high 70s.

 

Valuation

·         I triangulate around par bond coverage using a couple of different metrics:

o   Implied Subscriber Value – 12.5% normalized attrition * $44.50 RMR less $8.50 operating costs and with a 35x creation multiple = $1,900 value per sub.  $1,900 * 1.1mm subs = $2bn of EV

o   Steady-State Free Cash Flow – $45.5mm RMR * 12.5% normalized attrition * 35x creation multiple = $200mm of steady-state FCF.  12.5x SSFCF = $1.9bn of EV

o   EV / RMR – 42.5x RMR = $1.9bn of EV.  42.5x is admittedly just a number but numerous precedent transaction comps suggest private market values of 40-50x

·         Overall – The situation is weird, and industry in transition, but bonds drive significant yields with meaningful downside protection.  At 11% current and 16% yield to worst, you’re well-compensated for these risks

·         Bond-Specific – The bond market, simplistically views leverage and yield on a yield per turn (of leverage) basis.  The nearest comp, Vivint trades at 250bps, versus Monitronics at 320bps.  This relationship actually inverted in 2H 2015 due to aforementioned technical factors; Monitronics has historically traded ~500bps tight to Vivint.  250bps * 4.3x net leverage = 11% targeted yield, or a 91 bond price.

 

Exhibits

 

Exhibit A – Capital Structure

 Capital Structure   $ Avail   $ Out   LIBOR / Flr   Sprd / Rate   Maturity   Price     Curr Yield   YTW   Net Lvg   Mkt Lvg   Net RMR 
 Revolver              185             130 0.30% 3.75% Dec-17            100.0   4.1% NM      
 Term Loan B                401 1.00% 4.25% Mar-18              94.3   5.6% 8.2%      
 Term Loan B-1                545 1.00% 4.50% Apr-22              98.2   5.6% 5.9%      
 Monitronics OpCo Secured Debt           1,075               2.6x 2.5x 20.1x
 Unsecured Notes                585 0.00% 9.125% Apr-20              78.0   11.7% 16.6%    
 Monitronics OpCo Debt             1,660               4.3x 3.9x 30.9x
 Convertible Bonds                104 0.00% 4.00% Jul-20              62.0   6.5% 16.3%    
 Ascent Capital HoldCo Debt           1,763               4.5x 4.4x 35.1x
 Cash & Equivalents               (128)                    
 Market Cap                144                    
 Enterprise Value             1,779               4.9x   39.2x

 

Exhibit B – Monitronics (white) versus Vivint (green)

 [Not coming through, will paste in Q&A - but Moni has historically traded ~500bps tight to Vivint, expect some normalization]

 

Exhibit C – Pinnacle-Related Churn (expect more and better disclosure on the matter)

 [Also not coming through, will paste in Q&A.  Source doc on IR website - breaking out consolidated churn, and then backing out Pinnacle]

Exhibit D – M&A Comps

 Acquiror   Target   Date   TEV   RMR   EBITDA  EV / RMR EV / EBITDA
 Stanley Works   HSM Electronic Protection  Feb-07         690           10           45 69.0x 15.3x
 Protection One / IASG Merger    Jun-05         545             7           22 77.9x 24.8x
 Tyco (ADT)   Broadview  Jan-10         195           44         153 4.4x 1.3x
 GTCR   Protection One  Jan-10      1,845           26           90 71.0x 20.5x
 Rockbridge / Falcon   Protect America  Jan-10             -             -             - NM NM
 Summit Partners   Central Security Group  Nov-10         248             4           32 62.0x 7.8x
 Oak Hill Capital   Security Networks  Nov-10         136             0           23 NM 5.9x
 Ascent Media   Monitronics  Dec-10      1,255           24         199 52.3x 6.3x
 Bain, Hellman & Friedman    Jun-11      3,255           68         231 47.9x 14.1x
 ADT Spin-Off    Sep-12     11,000         250      1,604 44.0x 6.9x
 Blackstone   Vivint  Nov-12      2,000           30         200 66.7x 10.0x
 ADT   Devcon  Jun-13         148             4             - 37.0x NM
 Monitronics   Security Networks  Aug-13         507             9             - 56.3x NM
 ADT   Reliance Protectron  Jul-14         555           11             - 50.5x NM
 Apollo   Protection One  May-15      2,000           39             - 51.3x NM
           AVERAGE  53.1x 11.3x
           MEDIAN  52.3x 8.9x

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Improved disclosure around Pinnacle churn

Lapping of one-time issues

Short maturity

Potential sale / event-driven situation

    sort by   Expand   New

    Description

    Monitronics Senior Notes – Jan 2016

    Monitronics is Ascent Capital Group’s (ASCMA) OpCo

     

    Buy Monitronics 9.125% notes due May 2020 at 78.  Off ~20 points over the LTM period, these notes offer a 12% current and 17% yield to worst, with short effective maturity.  I think bonds are covered through par, but for the sake of establishing a one year price target, say 92 at year-end 2016, for a ~28% total return with downside protection.

     

     Bond Returns         
     Recommendation - Buy 9.125% OpCo Bonds at 78       
     See material upside through normalized operating performance       
     Believe market sell-off is more reflective of technicals; bond finding new owners     
     With TEV coverage; Ascent should trade at ~200bps per turn or closer to ~10% YTW   
     Reference historical Vivint / ASCMA relationships for guidance       
     Trade Exit Date  Dec-16      
       Bear   Base   Bull   TODAY 
     Yield per Turn  300 bps 275 bps 200 bps 430 bps
     Current Net Leverage  4.3x 4.3x 4.3x 4.3x
     Targeted Yield  12.8% 11.7% 8.5% 16.6%
     Targeted Price                   88.4                  91.6                102.1  
     Coupon                     8.4                    8.4                    8.4
     Total Dollar Return                   18.8                  22.0                  32.4  
     Total Percentage Return  24% 28% 42%  
     IRR  25% 30% 45%  

     

    Monitronics is the nation’s #2 Home Security operator with 1.1mm subscribers and 600+ exclusive dealers.  The Company generates $360mm of EBITDA, $45mm of recurring monthly revenue and burns ~$70mm of cash.  The burn is not good, but with $315mm in liquidity and several operational headwinds abating; bonds should feel good about the 31x RMR attachment point versus private markets well north of 40x.  Ascent is likely worth more dead than alive, and I see potential events given a lower share price and activist investor, but think bonds trade higher regardless given the yield and value characteristics.  As to why:

    1)      Discrete Operating Drivers Improving

    2)      Good Credit Documentation

    3)      Attractive Valuation

    4)      Potential Event-Driven Situation

    5)      Improved Technicals

     

    Stanley339 wrote up Ascent in 2012 and there have been several discussions on ADT.  This idea is security-specific, so please follow up for company (my estimates are nothing special; comes down to normalized attrition) or industry thoughts (I worry about MSOs and RBOCs, but also see don’t see them destroying industry economics).  As John Malone has exited and the stock under-performed, sell-side coverage has waned, but Imperial and BaML cover the sector actively.

     

    For starters, the capital structure:

     

     Capital Structure   $ Avail   $ Out   LIBOR / Flr   Sprd / Rate   Maturity   Price     Curr Yield   YTW   Net Lvg   Mkt Lvg   Net RMR 
     Revolver              185             130 0.30% 3.75% Dec-17            100.0   4.1% NM      
     Term Loan B                401 1.00% 4.25% Mar-18              94.3   5.6% 8.2%      
     Term Loan B-1                545 1.00% 4.50% Apr-22              98.2   5.6% 5.9%      
     Monitronics OpCo Secured Debt           1,075               2.6x 2.5x 20.1x
     Unsecured Notes                585 0.00% 9.125% Apr-20              78.0   11.7% 16.6%    
     Monitronics OpCo Debt             1,660               4.3x 3.9x 30.9x
     Convertible Bonds                104 0.00% 4.00% Jul-20              62.0   6.5% 16.3%    
     Ascent Capital HoldCo Debt           1,763               4.5x 4.4x 35.1x
     Cash & Equivalents               (128)                    
     Market Cap                144                    
     Enterprise Value             1,779               4.9x   39.2x

     

    For that EV you get 1.1mm subs generating $42 in recurring monthly revenue (“RMR”) or $45.5mm of consolidated corporate RMR.  In a more traditional sense, Ascent generates $360mm of LTM EBITDA.  What are these assets worth?

     

    Key Points:

    1)      Discrete Operating Drivers Improving – Bonds traded down in 2015 for a number of company-specific issues.  Taken individually, these issues are explainable, but together strain credulity for an already complicated situation.  Let’s take them one-by-one:

    ·         Churn – Industry net unit attrition averages 12-12.5%, driven by moves or the expiry of initial contracts.  Most contracts have 3-4 year initial terms, so upon expiry, churn spikes for customers that want to leave, leveling off through years 7,8 and 9.  Pinnacle Security, a bulk purchase of 120k subs completed in 2012, is experiencing these same issues, driving ~100bps increase in churn (see Exhibit C)

    ·   Mitigant – The average FICO score is >715, subscribers are diversified by state and region, and checks confirm good customer hygiene.  Put another way, the spike is timing-related and temporary.  Expect more and better disclosure regarding to at least partially address market concern.

    ·   Mitigant – I also look to ADT and Vivint, both of whom average 12-12.5%, and experienced similar one-time issues in 2013 and 2014.  Securities traded up as churn improved.

    ·         Dealer Network – Monitronics has no physical sales force, but relies on ~600 exclusive nationwide dealers to originate, install and then sell contracts.  The base is concentrated, with the top 10 driving >50% of gross installations.  One of the larger dealers went bankrupt in 2015, driving weaker-than-expected gross installations.

    ·   Mitigant – Stepped up dealer support and monitoring should help, but these are small businesses operating in competitive environments. 

    ·         Bulk Pricing – Contractual dealer originations are supplemented with periodic ‘bulk’ purchases (e.g. Pinnacle), however, higher pricing coupled with EV degradation has made bulk purchases uneconomical and slowed growth.

    ·   Mitigant – Tightening credit conditions increase industry cost of capital, and should impact creation multiples, especially in the lower middle market where PE has been active.

    ·         Other Operational Changes – Pinnacle switched billing system providers in 2015, driving churn ~20bps higher.  The industry is also dealing with higher operating expenses as nationwide 2G networks phase out, and in-home cellular radios upgraded.

    ·   Mitigant – Billing system conversion in the rearview mirror; 20bps churn headwind that will not repeat.

    ·   Mitigant – 2G Network upgrade seems to be going fine, albeit with $20mm of incremental operating expenses in 2016.

    ·         New CEO – Long-time CEO Mike Haslip retired in early 2015, and Jeff Gardner hired as CEO in Sept 2015.  Telecom investors may remember Gardner from Windstream.  I’m concerned about Gardner’s capital allocation history; he overspent at Windstream and did a poor job of integration.

    ·   Mitigant – With Ascent shut out of the capital markets and shares down 75% LTM, the Company is focused on de-leveraging versus external growth.

    2)      Good Credit Documentation – Monitronics is highly leveraged at 4.9x EBITDA or 37x RMR, but has very little capacity to add incremental debt.  The Credit Facility caps total leverage at 5x, whereas Unsecured Bonds are tighter, capping total leverage at 4.75x.

    3)      Attractive Valuation – Bonds create the Company for 31x RMR versus the last eight years’ precedent transactions’ median 53x EV / RMR.  Apollo purchased Protection One in May 2015 for $2bn or 51x RMR.  Accordingly, I believe these notes have meaningful downside protection in a number of scenarios.

    4)      Potential Event-Driven Situation – The subscriber base, dealer relationships and monitoring platform are valuable assets.  One could make the argument that these assets are worth more dead than alive, and maybe we might be nearing that point.  Notable small-cap activist Okumus has taken an 11% stake and filed a D in December 2015.  HoldCo CEO Bill Fitzgerald is well aware of the strategic optionality.

    5)      Improved Technicals – This is a decent-sized bond within a sleepy structure once dominated by ETFs and insurance companies.  20% of the issue traded in 2015, primarily into hedge fund buyers.  As these sellers clear out, bonds are re-establishing a floor in the mid-high 70s.

     

    Valuation

    ·         I triangulate around par bond coverage using a couple of different metrics:

    o   Implied Subscriber Value – 12.5% normalized attrition * $44.50 RMR less $8.50 operating costs and with a 35x creation multiple = $1,900 value per sub.  $1,900 * 1.1mm subs = $2bn of EV

    o   Steady-State Free Cash Flow – $45.5mm RMR * 12.5% normalized attrition * 35x creation multiple = $200mm of steady-state FCF.  12.5x SSFCF = $1.9bn of EV

    o   EV / RMR – 42.5x RMR = $1.9bn of EV.  42.5x is admittedly just a number but numerous precedent transaction comps suggest private market values of 40-50x

    ·         Overall – The situation is weird, and industry in transition, but bonds drive significant yields with meaningful downside protection.  At 11% current and 16% yield to worst, you’re well-compensated for these risks

    ·         Bond-Specific – The bond market, simplistically views leverage and yield on a yield per turn (of leverage) basis.  The nearest comp, Vivint trades at 250bps, versus Monitronics at 320bps.  This relationship actually inverted in 2H 2015 due to aforementioned technical factors; Monitronics has historically traded ~500bps tight to Vivint.  250bps * 4.3x net leverage = 11% targeted yield, or a 91 bond price.

     

    Exhibits

     

    Exhibit A – Capital Structure

     Capital Structure   $ Avail   $ Out   LIBOR / Flr   Sprd / Rate   Maturity   Price     Curr Yield   YTW   Net Lvg   Mkt Lvg   Net RMR 
     Revolver              185             130 0.30% 3.75% Dec-17            100.0   4.1% NM      
     Term Loan B                401 1.00% 4.25% Mar-18              94.3   5.6% 8.2%      
     Term Loan B-1                545 1.00% 4.50% Apr-22              98.2   5.6% 5.9%      
     Monitronics OpCo Secured Debt           1,075               2.6x 2.5x 20.1x
     Unsecured Notes                585 0.00% 9.125% Apr-20              78.0   11.7% 16.6%    
     Monitronics OpCo Debt             1,660               4.3x 3.9x 30.9x
     Convertible Bonds                104 0.00% 4.00% Jul-20              62.0   6.5% 16.3%    
     Ascent Capital HoldCo Debt           1,763               4.5x 4.4x 35.1x
     Cash & Equivalents               (128)                    
     Market Cap                144                    
     Enterprise Value             1,779               4.9x   39.2x

     

    Exhibit B – Monitronics (white) versus Vivint (green)

     [Not coming through, will paste in Q&A - but Moni has historically traded ~500bps tight to Vivint, expect some normalization]

     

    Exhibit C – Pinnacle-Related Churn (expect more and better disclosure on the matter)

     [Also not coming through, will paste in Q&A.  Source doc on IR website - breaking out consolidated churn, and then backing out Pinnacle]

    Exhibit D – M&A Comps

     Acquiror   Target   Date   TEV   RMR   EBITDA  EV / RMR EV / EBITDA
     Stanley Works   HSM Electronic Protection  Feb-07         690           10           45 69.0x 15.3x
     Protection One / IASG Merger    Jun-05         545             7           22 77.9x 24.8x
     Tyco (ADT)   Broadview  Jan-10         195           44         153 4.4x 1.3x
     GTCR   Protection One  Jan-10      1,845           26           90 71.0x 20.5x
     Rockbridge / Falcon   Protect America  Jan-10             -             -             - NM NM
     Summit Partners   Central Security Group  Nov-10         248             4           32 62.0x 7.8x
     Oak Hill Capital   Security Networks  Nov-10         136             0           23 NM 5.9x
     Ascent Media   Monitronics  Dec-10      1,255           24         199 52.3x 6.3x
     Bain, Hellman & Friedman    Jun-11      3,255           68         231 47.9x 14.1x
     ADT Spin-Off    Sep-12     11,000         250      1,604 44.0x 6.9x
     Blackstone   Vivint  Nov-12      2,000           30         200 66.7x 10.0x
     ADT   Devcon  Jun-13         148             4             - 37.0x NM
     Monitronics   Security Networks  Aug-13         507             9             - 56.3x NM
     ADT   Reliance Protectron  Jul-14         555           11             - 50.5x NM
     Apollo   Protection One  May-15      2,000           39             - 51.3x NM
               AVERAGE  53.1x 11.3x
               MEDIAN  52.3x 8.9x

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Improved disclosure around Pinnacle churn

    Lapping of one-time issues

    Short maturity

    Potential sale / event-driven situation

    Messages


    SubjectThank you / Few Qs / Thoughts
    Entry02/02/2016 01:52 AM
    MemberAres

    Hi Cameron,

    Thank you for your write up.  Wanted to ask some questions and share a few thoughts / observations and hear your thoughts.  

    1. MBO.  

    If one believes managment that alevated attrition rate is a temporary issue and it will go back to normal and there are not fundamental changes why a customer useful life woudl god down, then both bonds and equity are very appealing.  Management should know it better than anyone else (of course, they can be wrong).  I woudl think that if this is the case, they should be busy figurig out a going private transaction as i am writing this.  

    Equity is a tiny slice of the cap structure.  Banks would probably agree.  Is there a CoC provision in the bonds?  If there is one, then you can get 100 or 101 within next 12 months and not just 92-95 => would be a great outcome.  

    If that does not happen and attrition view is accurate (see below), other players or PE firms should be viewing them as an attractive target.  

    2. Attrition rate.

    Would you be willing to share how you get comfortable that the attrition rate would go down to 12%-12.5% over time?  I have read all explanations that management provided and spoke with CFO a few times.  It all makes sense but candidly it can also be not accurate and/or wishful thinking.  Any color would be much appreciated. 

    3. Activist. 

    What do you think their playbook is going to be?  

    4. Capital Allocation. 

    Do you expect management to do anything in terms of share buybacks and bond buybacks?  They played a bit with buying shares back as far as i recall.  I tend to think that during 4Q release / call we would find out that they bought some bonds back.  

    If they did not, I would be quite concerned as i would view it as admission that they are concerned about liquidity. 

    5. John Malone's reduction in ownerhip.

    That's concerning.  Any thoughts on this? 

    Thank you in advance! 

    Ares

     

     

     

     


    SubjectRe: Re: Thank you / Few Qs / Thoughts
    Entry02/02/2016 02:07 PM
    MemberAres

    Thank you, Cameron.

    1. MBO. Just checked the language this morning.  Going private trasaction would trigger CoC.  Thanks for pointing out. 

    2. Attrition. I have looked at ADT but not at Vivint.  Thank you for the color.  And I do not have access to B&B so the color there is very helpful.  

    3. Activist.   No comments.  Thank you.

    4. Capital Allocation. Sounds like the management has done a remarkably poor job.  

    And I agree re: Gardner.  When I saw that announcment, I thought "that's bad".  I actually told CFO that this choice did not add any credibility to the team and likely subtracted from it. 

    5. JM.  Management was giving me an explanaiton that for JM it was a small holding and he is simplying his holdings.  That makes sense but I also think that it was a problem child with dim prospects and JM wanted out.  Well, he was right. 

    Another thing that concerns me is potential entrance of Apple, GOOG, AMZN, MSFT, etc. into the space with the new "cool" products.  Will it take Monitronics from the eco-system?  The bullish view is that it will be other devices but they will still be serviced (i.e., monitored) by Monitronics. 

    Thank you again!

    Ares


    SubjectRe: ADT Buyout
    Entry02/16/2016 05:57 PM
    MemberRSJ

    Thanks for your thoughts cameron57. I am trying to reconcile the premium as well. How do you think about the difference in the quality of subscribers between ASCMA and ADT? I guess ADT boasts higher ARPU and lower churn but they both generate unlevered cash-on-cash return of ~15%. The one aspect of this story that concerns me is the cash burn....I understand they have sufficient liquidity (for now) but given the competitive intensity of this industry I'm not sure what levers mgmt can pull that would enable them to grow into the capital structure in the next 1-2 years (beyond that who knows). I do agree with your initial premise that ASCMA may be more valuable dead vs alive with the bonds trading below ADT's SAC on per sub basis.


    SubjectRe: FQ4 Print
    Entry03/01/2016 09:50 AM
    MemberRSJ

    Thanks for the update. With churn showing no sign of declining, what levers can they pull to reduce cash burn on a sustainable basis? Separately, move in the bonds since the ADT print has been impressive, wouldn't be surprised to see some give back....tough to get excited at these levels given mediocre fundamentals, uninspiring mgmt and cash burn/further secured priming.


    SubjectRe: Re: Re: FQ4 Print
    Entry03/01/2016 10:25 AM
    MemberRSJ

    Where are you seeing the parent 4% '20s today?


    SubjectSubsidiary guarantee
    Entry03/17/2016 12:09 PM
    MemberRSJ

    Cameron 57 - going through the 10k, it seems that the bank debt (term loans and revolver) are secured by the stock of monitronics and its existing subsidiaries, and both the bank debt and the 9.125% bonds have a guarantee from all the domestic subsidiaries……so do the bonds and bank debt have a pari passu guarantee claim from the domestic subs or is there an intercreditor agreement that subordinates the guarantee for the bonds?


    SubjectSeeing 79-81 context
    Entry03/23/2016 05:50 PM
    MemberRSJ

    Cameron57 - any fundamental reason for the recent weakness? Technically, HY continues to tighten. ASCMA equity is obviously volatile but still up +60% since Apollo/ADT anouncement. Opco bonds getting back to unch. Looks like great buying opp but wondering what I am missing.


    SubjectBonds vs. Equity Price Action
    Entry05/25/2016 03:10 PM
    MemberAres

    I was wondering whether I am the only one puzzled by price action of equity as comared to bonds. 

    I understand that that ASCMA is hihgly levered and equity here trades as a call option on EV but still a bit puzzled.  

    Any thoughts of others who are following the situation will be very welcome. 


    SubjectRe: Bonds vs. Equity Price Action
    Entry05/25/2016 04:08 PM
    MemberRSJ

    Yup, definitely perplexed, especially as Gardner is now more focused on FCF and less on new account growth.....more beneficial for the bonds. As most of the cash resides at Ascent parent and the consolidated entity is still in compliance of debt/RP covenants, mgmt could be buying back stock. 


    SubjectRe: Re: Bonds vs. Equity Price Action
    Entry05/25/2016 04:26 PM
    Membercan869

    Different investor base, a 20% move in the stock is de minimis on the TEV.  

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