New York, November 21 (ots/PRNewswire)
Lakewood Capital Management, LP yesterday sent the following
letter to Ulf Mattsson, Chairman of the Board of Securitas Direct:
November 20, 2007
Chairman of the Board
Securitas Direct AB
Kalendegatan 26, Box 4519
SE-203 20 Malmo
Dear Mr. Mattsson,
As you may know, funds affiliated with Lakewood Capital
Management, LP ("Lakewood") own 4,000,000 series B shares of
Securitas Direct AB ("Securitas Direct" or the "Company"), which
represent approximately 1.1% of the total outstanding shares.
I am writing to inform you that we will not be tendering our
shares in the recently announced offer from ESML Intressenter AB
("ESML" or the "Offeror"), and I would like to share with you why we
believe the current offer is not in the best interest of Securitas
Direct's shareholders. We have acquired our position in the Company
earlier this year, and we have a long-term, patient view towards our
investment in the Company. Securitas Direct has been our fund's
largest holding for some time, and we have spent considerable effort
analyzing and valuing the business.
We believe Securitas Direct is an extraordinary business with
strong management, leading market shares, high returns on capital,
predictable and recurring cash flows, and significant growth
opportunities. We firmly believe the company is worth substantially
more than the SEK 26 per share offer from ESML. In our view, the
value of the Company today is conservatively between SEK 35 and SEK
50 per share based on assumptions which are below management's
publicly-stated targets, as I will discuss further below.
Our view of value is substantiated by the level of financing the
Offeror was able to attain and significant recent insider share
purchases, including those by the CEO which he publicly stated were
financed by the sale of his home. We believe the offer at these
levels is an opportunistic attempt by the Company's two largest
shareholders and their financial backers to capture the vast upside
we see in the Company for themselves.
We urge you not to recommend the current offer to shareholders and
instead explore the following options for maximizing shareholder
value: (1) negotiate an offer price from ESML that more fairly
represents the value of the Company, (2) solicit superior offers from
other strategic and financial buyers, and (3) if a deal cannot be
completed, pursue a leveraged recapitalization of the Company to
allow public shareholders to participate in the same upside that the
Offeror sees in an appropriately capitalized Securitas Direct.
THOUGHTS ON VALUE
Since the spin-off of Securitas Direct in September 2006, we
believe the public market has had some difficulty in properly valuing
the Company's shares. Lakewood believes the market has been overly
focused on reported earnings despite the fact that earnings are
heavily distorted by the conservative expensing of customer
acquisition costs. In fact, as you know, the quicker the Company
grows and arguably the more value the Company creates for its
shareholders, the lower the reported earnings will become due to the
burden of the customer acquisition costs -- thereby rendering
meaningless traditional valuation metrics such as P/E and Enterprise
Value / EBIT multiples. As a starting point, we believe EBIT must be
adjusted for growth acquisition costs (i.e., expensed acquisition
costs necessary to grow the customer portfolio net of the churn
rate). This "steady-state" EBIT ("Adjusted EBIT") is likely to be
approximately SEK 1.1 billion in 2008 by our estimates. The current
offer of SEK 26 per share only values the Company at 8.7x this
Adjusted EBIT, a bargain for what we consider a company with
tremendous growth potential at extremely attractive unlevered,
after-tax returns on capital of almost 20%.
After only one year as a public company, we believe investors and
analysts are only beginning to understand the true value of the
shares. We are patient shareholders and we believe that in a
reasonable time, the shares will reflect the underlying economic
value of the Company.
Lakewood has valued the Company under two different methodologies:
(1) a discounted cash flow analysis and (2) a leveraged buyout
analysis. Please note that we have not used a comparable company
analysis as we believe there are no standalone public companies that
are comparable to Securitas Direct and the understatement of reported
earnings makes such analysis useless. While I have summarized our
assumptions and conclusions below, we have separately shared the full
detail of our analysis with you and your advisor SEB Enskilda last
week via email, as you know. As I recently learned that you have
hired JP Morgan as an additional advisor, I would ask that you share
the detailed analysis with them as well.
Please note the following analysis is based on public information,
discussions with management and our own industry research.
Discounted Cash Flow Analysis
In conducting our discounted cash flow analysis, we have used the
following key assumptions, which we believe are conservative and
below management's publicly stated targets:
i) Customer Growth: 14% average growth over the next three years
(2008-2010), 13% average growth over the next five years (2008-2012)
and 10% average growth over the next ten years (2008-2017) -- which
are levels below both the current growth rate and management's
publicly stated target of at least 20%. Long-term rates of customer
growth at levels we have assumed (or higher) are supported by the
Company's significant market share of new customer additions in a
rapidly growing market due to increased penetration of security
alarms in Europe from a relatively low level.
ii) Payback Period on New Customers: 4.1 years, which is consistent with
current levels and longer than management's stated target of less
than 4.0 years.
iii) Customer Churn: Approximately 7% over the next several years (which
is higher than management's stated target of less than 6%) and
gradually drifting towards a long-term rate of 10% based on a
ten-year customer life (shorter than the ten- to eleven-year average
life disclosed by management).
iv) Pricing/Cost Inflation: 2% annual increase in revenue and operating
costs per customer, consistent with a normal long-term level of
v) Discount Rate: 9% weighted average cost of capital, which we believe
is particularly conservative in light of the stability and
predictability of the Company's cash flows and is supported by the
significant level of debt the Offeror has been able to secure.
Based on these assumptions, our discounted cash flow analysis
yields a current value for the shares of SEK 50.
To give you an appreciation for the sensitivities to the analysis,
if we assume that customer growth averages only 10% over the next
five years (and the rate of growth declines steadily from there), our
fair value estimate is still SEK 44 per share. Separately, if
customer churn increases to 8% over the next several years, our fair
value estimate is SEK 46 per share. If pricing pressure forces the
Company to only price to 1% long-term growth instead of the 2% we
have assumed, the fair value estimate declines to SEK 39 per share.
Finally, increasing our discount rate to 10% lowers the fair value
estimate to SEK 40 per share.
While we believe our estimate of SEK 50 per share is conservative,
you can see through the sensitivities that it is difficult to argue
that the fair value of the shares is much less than SEK 40 per share
based on this analysis.
Leveraged Buyout Analysis
We have also valued the Company by determining what a financial
buyer could pay for the Company under the following assumptions:
i) Operating Case: Same as in the discounted cash flow analysis above.
ii) Leverage: SEK 5.5 billion, equivalent to the financing package the
Offeror has secured (we have used a 7.5% blended rate of interest
which we believe is reasonable).
iii) Fees: 3% financing fees (calculated on debt levels) and 1% advisory
fees (calculated on total deal value).
iv) Holding Period and Exit Multiple: We have assumed a five-year
holding period and an 11x Adjusted EBIT exit multiple, which
we think is a conservative exit valuation either through the public
markets or a strategic sale (please note our discounted cash flow
analysis indicates the fair value of the business is 13x Adjusted
EBIT in five years, so we believe this is a quite conservative exit
Based on these assumptions, we believe the Offeror will earn a
greater than 30% annually-compounded rate of return at the current
offer price of SEK 26 per share. We believe a fair leveraged return
for a financial buyer should be around 15-18% over a five-year
holding period, which would indicate a fair price per share of SEK 35
to SEK 38. To give you an idea of the sensitivities, if the exit
multiple falls to 10x Adjusted EBIT, a buyer can still earn a 15%
five-year return at a price per share of SEK 35. Furthermore, if the
exit multiple is 12x Adjusted EBIT (which we believe is a more
reasonable estimate of value at that time), a buyer can earn 15%
returns by paying SEK 40 per share today. Finally, even if our
Adjusted EBIT estimate in five years is too high by 10%, we still
believe a buyer can earn 15% returns at a price of SEK 35 per share.
In summary, our leveraged buyout analysis indicates a buyer can
pay SEK 35 to SEK 40 per share and still generate an attractive
return under what we believe are quite conservative assumptions.
If a deal cannot be consummated at an attractive price to
shareholders, we believe Securitas Direct's future as a public
company is bright. Many shareholders have expressed the view that the
Company is overcapitalized and can support significant debt levels.
We had assumed that the only reason the Company was not more
appropriately leveraged was due to what we figured was an aversion to
debt by the Company's two largest shareholders. However, this offer
makes it plainly clear that these shareholders are quite comfortable
with meaningful leverage on the business. We now can definitively say
that they are in agreement with us and many other shareholders with
regard to the appropriate capital structure, and if Securitas Direct
continues as a public company, we urge you and the Board to
immediately pursue a significant leveraging of the balance sheet
which can finance sizeable share repurchases and/or a special
We believe the amount of debt secured by the Offeror is a
comfortable level of leverage for the business with Adjusted EBIT /
interest expense levels of 2.6x in 2008 and 2.9x in 2009 by our
estimate (with the ratios steadily improving thereafter). This
transaction would maximize public company value by lowering the
Company's cost of capital and providing public shareholders with the
opportunity to either reap the types of returns that I described in
the leveraged buyout analysis above and/or receive cash from their
While we are not opposed to the concept of a sale transaction, we
believe the current offer dramatically understates the value of the
Company. We are supportive, long-term shareholders and we believe the
potential upside in the shares is considerable. If a fair transaction
cannot be consummated, we are particularly excited about the future
for Securitas Direct as a more appropriately capitalized public
I would be happy to discuss this with you further by phone at
+1-212-584-2211 or in person.
Anthony T. Bozza
Lakewood Capital Management, LP
ABOUT LAKEWOOD CAPITAL MANAGEMENT
Lakewood Capital Management, LP is a private investment firm based
in New York. The firm employs a long-term fundamental approach to
investing with a strict emphasis on capital preservation.
ots Originaltext: Lakewood Capital Management, LP
Im Internet recherchierbar: http://www.presseportal.ch
Michael Antonacci, Chief Financial Officer, Lakewood Capital
Management, LP, +1-212-584-2213, email@example.com