Brinks Co. (when issued) BCO*
October 25, 2008 - 11:57am EST by
beech625
2008 2009
Price: 19.75 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 900 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

We believe there is an extraordinary dislocation in the value of Brink’s Inc (BCO).  The company is spinning off its Brink’s Home Security subsidiary on October 31, 2008. Both the parent and the spin are trading on a “when-issued basis”:  Brink’s Inc. under the BCO* ticker at a closing price of $19.75; and the home security business under the CFL* ticker at a closing price of $19.60.  The combined, pre-spin company trades “regular way” under the BCO ticker at a current price of $39.60.      

 

BCO will distribute one share of CFL common to the holder of each share of BCO’s common outstanding as of October 21, 2008. Each company will have about 46.6 million fully diluted shares outstanding following the spin.

 

We believe the opportunity in this transaction is in the stub BCO* (when-issued) shares and offers the potential for a double within a year.  For purposes of this write-up, I’ll provide a brief description of the business, valuation, and the catalyst.   


Brink's, Inc.
 
BCO* is a leading provider of security services around the world.  Specific services include:
  • Cash-in-transit ("CIT") armored car transportation
  • Automated teller machine ("ATM") replenishment and servicing
  • Global Services - arranging secure long-distance transportation of valuables
  • Cash Logistics - supply chain management of cash
  • Guarding services, including airport security
  • Secure Data Solutions - transporting, storing and destroying sensitive information

Customers include banks and financial institutions, retailers, government agencies, mints, jewelers and other commercial operators. The company operates in more than 50 countries and supported by about 800 facilities and 9,100 vehicles.  For convenience, I have hijacked the charts below from the company’s 10-K to show results over the past five years.
 



BCO* competes with large multinational, regional and smaller companies throughout the world including Group 4 Securicor plc (UK), Securitas AB (Sweden), Prosegur, Compania de Seguridad, S.A. (Spain) and Garda World Security Corporation (Canada).

Valuation

 

Since the stub is already trading on a when-issued basis, so we have an ascertainable “post-spin” value which is $19.75 per share. The table below illustrates the current valuation:

 

Current Price:                $19.60

FD Shares:                   46.6M

Market Capitalization:    $913.4M

LESS Cash:                  $196.0M

PLUS Debt:                  $179.4M

 

Enterprise Value:           $896.8

 

Using the most recent consensus 2009 EBITDA estimate of $390 million, the company has a forward EV/EBITDA multiple of 2.3x.  Of course Wall Street can be wildly optimistic with its estimates, particularly during difficult economic periods.  So to factor this in, I’ll provide a range of discounts to EBITDA and the resulting multiples below.

 

Discount           EBITDA            EV/EBITDA

10%                  $351M              2.55x

20%                  $312M              2.87x

30%                  $273M              3.28x

40%                  $234M              3.83x

50%                  $195M              4.60x

 

Over time, we believe a very reasonable multiple on this type of business is 7x, even in a difficult economic environment.  In any case, that is a number that would attract private equity (should the debt markets ever return).  Here’s how the potential upside works out using the EBITDA discounts and 7x:

 

Discount           Equity Value     Share Price       Upside

10%                  $2,473M            $53.08              171%

20%                  $2,200M            $47.22              141%

30%                  $1,927M            $41.36              111%

40%                  $1,638M            $35.51               81%

50%                  $1,382M            $29.65                51%

 

Risks

 

The Company has funded a VEBA trust to cover obligations related to its former coal business.  The Company may have to make additional contributions to fund the obligations.  In addition, the company is not completely immune to a deep global recession. However, the BCO business held up very well during the 2000-2002 period.

 

 

 

 

Catalyst

Completion of the spinoff on October 31st and hopefully more attention to the underlying value of the stand alone BCO.
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    Description

    We believe there is an extraordinary dislocation in the value of Brink’s Inc (BCO).  The company is spinning off its Brink’s Home Security subsidiary on October 31, 2008. Both the parent and the spin are trading on a “when-issued basis”:  Brink’s Inc. under the BCO* ticker at a closing price of $19.75; and the home security business under the CFL* ticker at a closing price of $19.60.  The combined, pre-spin company trades “regular way” under the BCO ticker at a current price of $39.60.      

     

    BCO will distribute one share of CFL common to the holder of each share of BCO’s common outstanding as of October 21, 2008. Each company will have about 46.6 million fully diluted shares outstanding following the spin.

     

    We believe the opportunity in this transaction is in the stub BCO* (when-issued) shares and offers the potential for a double within a year.  For purposes of this write-up, I’ll provide a brief description of the business, valuation, and the catalyst.   


    Brink's, Inc.
     
    BCO* is a leading provider of security services around the world.  Specific services include:
    • Cash-in-transit ("CIT") armored car transportation
    • Automated teller machine ("ATM") replenishment and servicing
    • Global Services - arranging secure long-distance transportation of valuables
    • Cash Logistics - supply chain management of cash
    • Guarding services, including airport security
    • Secure Data Solutions - transporting, storing and destroying sensitive information

    Customers include banks and financial institutions, retailers, government agencies, mints, jewelers and other commercial operators. The company operates in more than 50 countries and supported by about 800 facilities and 9,100 vehicles.  For convenience, I have hijacked the charts below from the company’s 10-K to show results over the past five years.
     



    BCO* competes with large multinational, regional and smaller companies throughout the world including Group 4 Securicor plc (UK), Securitas AB (Sweden), Prosegur, Compania de Seguridad, S.A. (Spain) and Garda World Security Corporation (Canada).

    Valuation

     

    Since the stub is already trading on a when-issued basis, so we have an ascertainable “post-spin” value which is $19.75 per share. The table below illustrates the current valuation:

     

    Current Price:                $19.60

    FD Shares:                   46.6M

    Market Capitalization:    $913.4M

    LESS Cash:                  $196.0M

    PLUS Debt:                  $179.4M

     

    Enterprise Value:           $896.8

     

    Using the most recent consensus 2009 EBITDA estimate of $390 million, the company has a forward EV/EBITDA multiple of 2.3x.  Of course Wall Street can be wildly optimistic with its estimates, particularly during difficult economic periods.  So to factor this in, I’ll provide a range of discounts to EBITDA and the resulting multiples below.

     

    Discount           EBITDA            EV/EBITDA

    10%                  $351M              2.55x

    20%                  $312M              2.87x

    30%                  $273M              3.28x

    40%                  $234M              3.83x

    50%                  $195M              4.60x

     

    Over time, we believe a very reasonable multiple on this type of business is 7x, even in a difficult economic environment.  In any case, that is a number that would attract private equity (should the debt markets ever return).  Here’s how the potential upside works out using the EBITDA discounts and 7x:

     

    Discount           Equity Value     Share Price       Upside

    10%                  $2,473M            $53.08              171%

    20%                  $2,200M            $47.22              141%

    30%                  $1,927M            $41.36              111%

    40%                  $1,638M            $35.51               81%

    50%                  $1,382M            $29.65                51%

     

    Risks

     

    The Company has funded a VEBA trust to cover obligations related to its former coal business.  The Company may have to make additional contributions to fund the obligations.  In addition, the company is not completely immune to a deep global recession. However, the BCO business held up very well during the 2000-2002 period.

     

     

     

     

    Catalyst

    Completion of the spinoff on October 31st and hopefully more attention to the underlying value of the stand alone BCO.

    Messages


    Subjectquestions
    Entry10/25/2008 09:03 PM
    Membermav44


    In the 10-k, it is disclosed that the company has a $142M legacy liability net of the $460m VEBA asset that has been pre-funded. However, the VEBA is invested 70% in equities, so i think you have to assume this is down with the market which would create another $130m of liability or $270m total or EV of $1,160 using your calcs. Management also estimates $175m of capex this year, so EBITDA-capex would be $215m using your calcs or a EV/EBITDA-capex of 5.4x, still pretty cheap, but perhaps marginally less so than you indicate - is there any reason you wouldn't think about it this way?

    Can you also explain why EBITDA has grown so much in this business the last few years and what you think a reasonable downcase would be for this sort of a business in a recession. It seems there may have been some one time bumps related to new int'l currencies being distributed. Thanks.

    SubjectQ&A
    Entry10/28/2008 11:38 AM
    Memberbeech625
    I apologize for the delayed response as I'm on the road. I'll give the short answers below and follow up when I get more time.

    As a point of reference, below are the Brinks Inc. numbers through the 2001-2003 period.

    Rev. Op. Inc. Change
    2000 $1,463 $108.5 + 4.8%
    2001 $1,536 $92.0 -15.2%
    2002 $1,580 $96.1 + 4.5%
    2003 $1,689 $112.5 +17.2%

    Clearly 2001 was a sizeable hit in OI despite revenue growth. But 2002 was arguable a worse environment than 2001 yet the company managed to grown both revenues and operating income. I can't say this current environment won't be much worse but I think that the provided range of discounts will cover the actual outcomes over the next few years.

    I do believe the 09 consensus estimates are too high. For our own base case projections, we are using a 30% discount (double the 2001 fall-off year). We heard the roadshow presentation for the spin about a month ago. Management indicated little concern about the current financial turmoil as security services in such environments are often more in demand. The caveat from management was the potential for widespread failure of small financial institutions which tend to more fully utilize outsourced security services. Based on this possibility, we thought 30% should be plenty to cover.

    With Brinks Inc., the large majority of CAPEX is for growth. According the the IR folks, maintenance CAPEX generally runs in the 15-20% range.

    A will try to get to the VEBA questions shortly.

    SubjectCurrency Issues
    Entry10/30/2008 05:31 PM
    Membercanuck272
    The dramatic rise of the dollar in the past 3 months is going to impact a lot of companies. With over 75% of operating profit coming from International operations, if you assume the current rates hold, the company's operating profit is going to be 10-15% lower going forward. Have you looked at this? Also, have you looked at how much of their historical growth was driven by currency, as the $ was falling over the past several years until July?
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