Brink’s Company: Activists push for a spin-off

Brink’s Company: Activists push for a spin-of Masters in Finance | Applied Corporate Finance

• April 20th 2015

Duarte Marques 989 Mafalda Oom Torres 948 Teresa Botelho Neves 1029 Francisco Vieira de Campos 960 Gonçalo Pereira de Almeida 1034 Nova School of Business and Economics

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Executive Summary The decision of performing a spin-off follows pressure on the company from three activist shareholders who felt that Brinks has been chronically undervalued and separately it would be worth more than combined Since Top Management and activist shareholders were not align in terms of what was best for the company, the case presents both sides. Moreover, an assessment of the arguments was performed Nevertheless we have to bear in mind that Brink’s Company is made of two different business that seem to share very few operational synergies, which may be explained by the conglomerate discount that the companies was under Also alternatives to the spin-off were take into account, however we did not exploit in so detail as the spin-off, since it was the main issue in the case

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Industry Overview- Brink’s Inc. Globally

United States

$14bn •

Global market for security logistics • Projections to grow

Global Market Share Brinks; 17% 4Securicor; 14%

Smaller Competitors; 50%

Securitas; 13% Prosegur; 6%

Brinks

4Securicor

Securitas

Prosegur

Smaller Competitors

35% Mark et Shar e Largest competitor with 30% market share

Primary factors in attracting and retaining customers in the industry: • Reputation • Service Quality • Price

Industry Overview – Brink’s Inc. industry Cost structure

Wages

Employ ee benefits

Service Standar ds

Overall level of security

Cost Structure High quality and reliable insurance coverage as an important factor in attracting and retaining customers and risk management

5%<

Revenue growth for the industry

>9%

Drivers for growth in the particular industry: • Overall level of economic activity, in particular to retail activity. • Amount of paper currency in circulation.

Industry Overview – Brink’s Home Security Market for Electronic Security System

I. Sale s

II. Leasi ng

III. Installati on

IV. Monitori ng

$30 billion globally where US accounted for nearly half of total annual revenues. • •

V. Servi ce

US

Rest of the World

The North American Market is highly fragmented with the top five companies accounting for only 40% of the market which enables attractive opportunities for the M&A industry; ADT, a subsidiary of Tyco International, is the largest company in the market (estimated market share of 30%). Following ADT, BHS states a market share of 3%, Protection One of 2%, Stanley Convergent Security Solutions of 2% and Monotronics International of 1%.

Company Pric Service and Product reputation e quality Ability to identify and solicit prospective Market costumers visibility

Industry Overview – Brink’s Home Security Market for Electronic Security System Factors driving industry growth

Heightened security awareness

Higher capital spending

Increase in dual income households

Demographic changes

Higher capital spending

Higher capital spending by business

Growth in home and commercial security system installation and monitoring expected to grow at 3% annually from 2009 until 2014 in the US

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Brink’s Company Brinks was founded in Chicago on May 5th , 1859, when Perry purchased a horse-drawn wagon and made his first delivery.  In the early days, Brink used his single wagon to transport travelers' luggage between Chicago rail stations and hotels. As a curiosity, In 1871, the Great Chicago fire destroyed some 18,000 buildings, including the headquarters of Brink's City Express. Miraculously, Brink's horses and wagons were saved and the company was back in operation within a week.

Perry Brink

1981= Payrolls deliveries; 1962= Pittston Company acquires Brinks, by then known as an armored car company; 2000= Activists investors were calling for Brink’s to sell its BAX unit which ended up happening in November 2006 for $1.1 billion to Deutsche Bahn Group, a transportation and logistic Inc. – worldwide company. Brink’s provider of secure BRINK’S transportation Brink’s Home Security – Residential Alarm company

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Conglomerate Discount Conglomerate: Company that comprises multiple different corporations that operate in a wide rang of business. Usually there is a parent company (Brink’s Company) with one or more subsidiaries (Brink’s Inc. conglomerates: and BHS) Problems with There are few synergies between unrelated business; The extra layers of management needed, compared to standalone businesses increases costs; A conglomerate is likely to disclose less information than standalone businesses; many numbers are disclosed consolidated, rather than separately for each business; The complexity of a conglomerates' accounts can make them harder to analyze - and makes it easier for management to hide things; Management are very unlikely to have real expertise in all areas of the business, leaving it more difficult to align interests. Conglomerates usually are traded at discount

Conglomerate Discount Why do conglomerated typically trade below their sum of the parts? V(A+B) < V(A) Conglomerate discount: is the difference between what the businesses are worth separately, and the actual value the + V(B) Sum-ofmarket places on the conglomerate. Its name derives parts valuation essentially for that tendency of the stock market to undervalue the stocks of a conglomerate business. Investors often point to the conglomerate discount as a market inefficiency and view the discount as a way to buy undervalued stocks. Stock Market Explanations

Value of Brink’s Inc.

Market cannot understand multi-division firm and attach a correct multiple to its earnings or cash flow Companies don’t allocate analysts from each market segment to study conglomerate firm Value of Brink’s home security

Value of Brink’s Company

Conglomera te Discount

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Activists Activist investor: An individual or group that purchases large numbers of a public company's shares and/or sought to obtain seats on the company's board with the goal of effecting a major change in the company. Activists deliberately accumulate substantial stakes in undervalued companies to force changes that will increase the share price so they can sell at a profit. Target: Activist investors look for companies that are being mismanaged, have room to cut costs, could be run more profitably as a private company or have other kind of problems that the activist investor believes is able to fix to make the company more valuable. Hedge Funds Private Equity Firms

Wealth Individu als Exampl es of activist s

Activists

MMI Investme nts

Activists

Pirate Capital

Steel Partners LCC

• Private Investment Fund run by Clay Lifflander • Known for gaining positions in companies shortly before buyout deals were made and had a reputation for its “buyout touch”. • U.S.-based hedge fund was founded in 2002 by Tom Hudson • Their strategy was to buy stocks and take on management to drive stock prices in the company’s favor. • One seat at Brink’s board of • Hedge fund founded by Warren G. directors Litchtenstein • Invest in small-cap value stocks where they felt they could create value through active relationships with managements

Activists

Activist shareholder

Active on firm’s manageme nt

Increase Stock Performanc es

How do activists expect to make money? • Activists shareholders try to be active on firm’s management, in order to drive the strategy of the company to their benefits. In this case, they want to change the actual strategy of the firm because they believe that the actual strategy does not increase shareholders wealth. • They believed that the company was undervalued. • They want to increase their wealth by increasing stock performances and make money out of that.

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Issues being target by activists • • • • • •

Brink’s was trading as much as 35 % below its intrinsic value. They were frustrated that the board and management remained committed to its growth strategy. Instead, they wanted Brink’s to pursue strategic options to improve the stock price. MMI became the second largest stakeholder in BCO and given its frustration it was nominating 4 directors for election to board at BCO’s 2008 annual meeting. Pirate Capital was seeking for return because 2006 was the worst performance of the fund (only returns of 9.5% compared to 15.8% from S&P500) Steel Partners was making pressure to Brink’s Company pursue strategic alternatives recommended by it.

Tax-free split- up

Brink’s Compa ny

Brink’s Inc. Brink’s Home Security

Issues being target by activists MMI Investments Recommendations

November MMI increased its ownership in BCO to 6.7%

200 5

November BCO sold BAX unit

200 6 April Submitted a letter recommending that it divest its BAX unit

BAX had a cumulative net loss of $50 mm over the last 5 years This was underpricing the company

200 7 December Four strategic alternatives: a strategic acquisition, a leverage buyout, splitting up BCO, and a leveraged recapitalization

November MMI announced that it was nominating four directors for election to board at BCO’s 2008 annual meeting

July Refined its analysis and recommended a tax-free spinoff

Issues being target by activists Pirate Capital Recommendations

200 6

November Recommended to initiate a Dutch tender saying that was an opportune time. They requested that Tom Hudson be appointed to the board immediately

August Letter to the board encouraging BCO’s to take immediately steps to unlock long-term shareholders value by retaining an investment advisor to explore the sale of the company BCO failed to do what Pirate Capital asked

200 7

February Announced that Hudson would take a seat on the board

January Letter asking for a detailed report about MMI Investment strategies They also recommend that they should have two members on the board

August Conduct a survey of the 100 largest shareholders to determine the interest of a Spin-off 49 % were in favor of the spin-off and another 18 % interest in spin-off but they wanted a deeper analysis by

Issues being target by activists

Steel Partners LLC Recommendations

200 8 January Send a letter to the board saying that the company is significantly undervalued and were disappointed that the strategies implemented by the company didn’t consider their and the other shareholders recommendations. If Brink’s will not pursue a spin-off or other strategic alternative, they demand that Brink’s pursue an immediately sale of the company that maximizes value for all shareholders. They also say that due to the undervaluation, the company should be aggressively buying back shares and should significantly increase its repurchase program.

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Brinks is undervalued by the markets Trading basis: 40% undervalued vs. public peers based on 2006 EBITDA multiples

Strategic Transaction Basis: 35% undervalued vs.recent multiples in comparable deals BCO chronically undervalue d

Why?

s in n tio ing a l lcu ollow a C ef s th slide

Brinks is undervalued by the markets Key Valuation drivers that may not have been considered Possible Synergies

BAX Global sale

Decreasing former operations expenditures

Growth prospects both domestically and Abroad

Secure business model Aggressive BHS growth

Legacy healthcare liabilities

Brinks is undervalued by the markets Synergies •

Ability to use the strong cash flow generation from Brink's Inc. to fuel growth spending at Brink’s Home as well as leverage the strong Brink’s brand name

BAX Global sale •

Reduced the required funding for legacy liabilities by $225mm

Decreasing former operations expenditures •

Declining required funding in legacy healthcare liabilities related to coal as the beneficiary group ages, since the company is no longer involved in this business

Growth prospects both domestically and abroad • •

New opportunities to expand to other markets (Asia) Industry’s revenues growth in the mid-to-high single digit range

Aggressive BHS growth • •

Growth drives future revenue but starves current free cash flow BHS continued to gain market share within this highly fragmented industry • Economies of scale could be achieved (by leveraging the infrastructure of monitoring stations over more subscribers) • Potential for higher operating margins as little additional overhead is required to support additional subscribers • Opportunities to increase its under-presence in the commercial marketbusiness model Secure • Strong cash flows and prudent level of self-insurance (low risk expense)

Brinks is undervalued by the markets Other explainable reasons for Brink’s undervalued Industry’s unfavorable characteristic s

Missed Expectations

Activist Shareholders demands

Deceptive association with the air freight industry

Uncertainty relating to the company’s strategies

Brinks is undervalued by the markets Other explainable reasons for Brink’s undervalued

Industry’s unfavorable characteristics may lead share price declines • • • •

Sensitive to overall level of economic activity and to retail activity in particular Highly competitive and fragmented market Pricing pressures from its competitors Currency fluctuations impact on revenues since 70% came from outside the US

•

Failure in meeting earnings expectations due to Brink’s growth efforts puts it vulnerable to sharp price declines because markets tend to have a high expectation for future earnings growth

Missed Expectations

Deceptive association with the air freight industry • •

Association with previous air freight industry’s high capital costs and cyclicality might be lowering valuation BAX Global unit underperformance was an over-hang on the stock

Activist Shareholders demands • •

Activist Shareholders unsatisfaction and pressure it is not well seen by the market, which might lead to a lower stock price Lack of short-term measures to increase shareholder’s value – company’s low leverage might be seen as a sign of lack of effort to invest in business operations and increase value for shareholders

Uncertainty relating to the company’s strategies •

It might scare away buyers who buy shares they are more comfortable with

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Alternatives to Spin-of We believe that there are strategic alternatives that the company should take into account that can benefit from the current strength of the mergers and acquisitions market as well as the equity and credit markets in order to achieve the true value of the company.

Share Buyback

Leverag e Recapita lization

LBO

Sale to a strategi c buyer

Alternatives to Spin-of | Shares Buyback A share buyback is a company buying back its shares from the marketplace. Typically, it can be done through a tender offer or through the open market. • • • ••

•

•

Increases shareholders value by increasing the percentage of ownership held by each investor and reducing the total number of shares outstanding. Boost Share Price, the buyback means there are fewer shares trading on public markets and this tends to strengthen the share price, at least in the short term. With fewer shares trading, the EPS tends to rise, this helps the company to beat market expectations and helps drive a higher stock price. Signs market that company it is undervalue and Signalsthe to investors thatthe there are notbelieves other profitable opportunities has confidence in itself,Every whichdollar can be translated in an upward to grow the business. used to buy up stock is a swing dollar in theisn’t stock price. that hiring more employees, ramping up marketing, acquiring a competitor, developing a new product, or otherwise investing that money to grow the business. Companies spend a lot of money buying up shares and then cut their dividend as a result, since the company has less cash to hand out in dividends. So if you’re an investor who relies on dividend checks for income, this could hit you in the pocketbook. The rise in stock price may help the stock hit a target price the managers need to exercise their options, which can dilute the value

Alternatives to Spin-of | Leverage Recapitalization In a leveraged recap, firms announce a debt issuance and one-time distribution of extraordinary dividends simultaneously and where the distribution is material and is executed over a short period.

• • •

• •

•

Unlocks value to shareholders. Provides liquidity for the fund’s investment without losing control or the ability to capture the benefit of the company’s future sales and earnings growth. Cash flow savings from the “tax shield” attributable to the tax deductibility of interest payments on the newly issued debt Dividends are not tax deductible, and moreover the investors will have to pay personal taxes over the dividends received May leave it without the ability to adequately fund day-to-day working capital needs and may impair future growth opportunities or the ability to respond to and weather unanticipated business downturns Future debt issuance will suffer a higher cost of financing because the amount od debt had increased

Alternatives to Spin-of | LBO A leveraged buyout or LBO is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or debt to finance its acquisition.. • • • • •

• • • • • •

Usually PE companies can offer the highest price to the company Massive restructuring of the company The large interest payments force the company's management team to increase operating efficiency. The LBO can create a valuable tax shelter for the target company, because interest expenses are tax deductible. No need to publish information

There is a dilution/loss of ownership stake for current investors Different perceptions of value to the target firm and PE firm Cost-cutting measures my hurt the business and reputation of the company High costs and time expenditure in due dilligence High risk of bankruptcy given the large amount of debt It can lead to hostile takeovers.

Alternatives to Spin-of | Sale to a strategic buyer Strategic buyers, companies already in similar lines of business, are focused on enhancing their existing business model and the resulting financial return to their shareholders from the purchase of the target company. • • • • • • • • • • •

May provide highest valuation for shareholders in the near term May enable the entrepreneur to completely walk away (i.e. obtain the greatest liquidity) Potential operating synergies can improve the business Typically, strategic buyers are very knowledgeable from an operational and business perspective, facilitating due diligence and closing; may be able to close much faster Qualified buyers may not be constrained by financing contingencies or be at the mercy of the credit markets Management may lose autonomy, lose their jobs, or have their roles diminished Possible negative impact on culture and morale May affect customer loyalty Upside value potential may be sacrificed (unless there is significant stock or earnout consideration) Key concern is being caught up in bureaucratic delay— “decision paralysis” A secondary concern is related to access to competitive information,

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Value Created by Spin-ofs Spin-offs Just like M&A, but the other way around... • M&A deals are carried under the belief that the combination of the two entities may generate a new entity whose value is greater than the sum-of-the-parts • Spin-offs are carried out when a firm believes that its overall value would increase separately (sum-of-the-parts > combined firm) • From as investor’s point of view, one advantage brought about by a spin-off is the ability to manage separately their exposure to different businesses • May not fit their investment policy thus lowering the initial price when selling • There is empirical evidence that both mother company and spun-of one, on average, increase in value after separation How do they create value to shareholders? • Straightforward method to redeem the value embedded  eliminate conglomerate discount • Increase of business/management focus  restructuring opportunities • Variable compensation more linked to the unit’s performance • Efficiency boost of the spun off unit  more close supervision by shareholder of top management • Asymmetry of information between the conglomerate’s management team and the market • Seems a good solution to manage agency issues

Value Created by Spin-ofs So, why conglomerates still exists? • Crate value by exploiting synergies between the units they are made up of What valuation could be expect at each company? • Since the company operates in 2 different businesses, we should do a sum-of-the-parts valuation • value them separately (value them differently or give them weights) • Based on publicly traded • Based on precedent transaction companies • It may involves minorities, in • These are multiples of other words, control comparable prices (on the premium stock) • The market timing may • reflect transactions affect the multiples used, without control (net of which may drive to every control effect) misleading results Brink’s Inc. and BHS may require different valuations as separate

companies, given the discrepancy in M&A deals and trading multiples for these businesses

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Valuation | Publicly Traded Companies

Valuation | Publicly Traded Companies

• • • •

This valuation is based on 2006 and 2007 figures The conglomerate multiples were weighted based on EBITDA Clear evidence of a conglomerate discount Sum-of-the-Parts have an implied multiple slightly > Conglomerate fair value

Assuming the weighted average of all security companies multiples based on EBITDA weights

It seems that, in fact, there is a discount over the conglomerate and therefore the Sum-of-the-Parts is higher than Conglomerate market value

Valuation – Publicly Traded Companies From a Bottom-Up analysis, the BCO is trading at lower multiples than the industry...

Note the multiples among the two businesses are different and security services seem to have higher multiples. Then, we believe this is based on the industry fundamental and what is relevant to see which business if dragging the valuation down is the comparison of the implied multiple for each unit with the median and/or average of the relevant peers

Vs .

... It seems that the main responsible, quantitatively, appears to be BHS given that is trading way below industry multiples in both years

Valuation – Precedent Transactions •

•

•

Only transactions after 2003 were considered, due to: • Potential impact of the Dot-Com Bubble on transaction multiples • Market Timing Industry Median Multiples were chosen to perform the sum-of-the-parts valuation given it’s lower sensitivity to outliers The monitoring industry transaction multiples seem to reflect some control premium • However, in the security services multiples may imply some sort of discount...

Once again it is shown that the company is being undervalued

Agenda

Executive Summary Industry Overview Brink’s Company Conglomerate Discount Activists Issues being target my activists Brinks is undervalued by the Markets Alternatives to Spin-ofs Value created by Spin-ofs Valuation Final Recommendation

Final Recommendation Given the trend of consolidation within Security Services, BCO’s businesses are diferent in many ways and it would be more efficiently run separately • Even with some drawbacks, such as access and cost of capital to sponsor expansion growth, perceived different without the Brink’s brand association (or Royalties fees)

• We believe that there is only few synergies that do not offset the discount • Different geographic footprints • Different skillset required

Gains could be taken from a tax-free spin-on • Through the valuations performed, the split-up in two companies may be worth $80 to $85 per share • An increase between 30 to 40% • Securitas’ stock increased 21% from on month prior to the split Concluding, and after looking to other potential “exit” strategies, we believe the spin-of route to be the most appropriate one

Thank you for your attention. April 20th 2015

Nova School of Business and Economics