- ADT and Google just announced a major partnership that will enhance ADT's residential security and monitoring business.
- ADT is also growing organically and through M&A in the commercial security market. ADT, recently, partnered with Dollar Tree to provide services.
- The stock price soared in response to the Google and ADT announcement.
- ADT is still very leveraged and it is not yet profitable.
ADT Inc. (NYSE:ADT) is a stock that I have written articles about several times over the past couple of years. As my readers know, I have been bullish in my articles. But to be frank, it has been a volatile stock to hold, and that is why I viewed it as a special situation stock. Today, Alphabet (GOOG) (GOOGL) announced a $450 million investment to acquire a 6.6% stake in ADT. The deal is expected to close in Q3 2020. The stock price soared over 80% pre-market in response. This deal will arguably strengthen ADT's market leadership position in home security. But besides the Google partnership, ADT has made several other strategic moves that are adding value. Granted, the company is very leveraged and is not profitable at the moment. That said, I still like ADT. The company has been able to move forward, expand into the commercial security market, and grow the top line despite high leverage. I view the stock as a long-term buy.
Overview of ADT
ADT's focus is on providing residential and commercial security and other monitoring services in the U.S. Note that the Canadian operations were divested. The company traces its roots to 1874. ADT's services include monitoring for security, fire and smoke, medical alert, access control, flooding, video, cybersecurity, and home automation. ADT is widely known and has high name recognition. Today, in the residential security monitoring market, ADT is reportedly five times the size of the next largest competitor and has an estimated 30% market share.
ADT was spun out of Johnson Controls International plc (JCI) in 2012. But this was only the residential business. JCI retained the commercial business. ADT was acquired by Apollo Global Management, LLC (APO) in 2016 and merged with Protection One and Alarm Security Group LLC that were already owned by Apollo. ADT conducted an IPO in January 2018. Apollo, in effect, controls ADT through majority ownership of the common stock. ADT expanded in the commercial market by acquiring Red Hawk in 2018.
The Google Deal
First, let's take a look at the Google deal. Google is investing $450 million to acquire 6.6% of ADT. The shares are a newly created Class B common that reportedly has all the rights and preferences of the common stock except for the right to vote on directors. The partnership will allow ADT to create the next generation of smart home security monitoring technology by leveraging Google's Nest technology. From this perspective, it is a partnership that will create value. ADT's strengths are professional monitoring, installation, and service. On the other hand, Google is much stronger on the smart software and hardware side. Here is the specific statement from the announcement:
The partnership will integrate Google's hardware and services and ADT's DIY and professionally installed smart home security solutions to innovate the residential and small business security industry. The future ADT + Google helpful home security solution is expected to advance smart home offerings and attract new consumers seeking premium technology, end-to-end smart home service and trusted security.
Both companies will add $150 million each for product development, training, and marketing of the new products. ADT is expecting to offer certain Google products this year and expand further in 2021.
For Google, this deal will not move the needle much simply due to the company's size. But it does provide a clearer path to get Nest technology into the home. On the other hand, the deal is unquestionably a good one for ADT. It brings the financial strength and technology of Google into the partnership. The $450 million will be used to pay down debt and for future growth. That said, ADT is still a very leveraged company with a net leverage ratio of 4.2X at end of Q1 2020. The company has successfully pushed the debt maturity profile out and no debt is maturing until 2021. But it does provide some cash for paying the debt maturing in 2021.
On the growth front, ADT was not clear on how the money would be used. But, clearly, ADT is trying to grow the commercial business through M&A as well as organically. The main commercial acquisition was Red Hawk, but ADT has done several other smaller acquisitions. I view it as likely that there will be further bolt-on acquisitions as ADT tries to gain scale in the commercial market.
The Dollar Tree Partnership
The Google deal is getting all the attention and driving the soaring stock price as of this writing. But ADT announced a major partnership with Dollar Tree Inc. (DLTR) in early-June. The agreement included equipment, service, and monitoring services to Dollar Tree's and Family Dollar's (Dollar Tree acquired Family Dollar in 2015) retail locations. The specific statement from ADT is below:
Our goal is to provide custom, innovative, integrated solutions to meet Dollar Tree's unique needs. With this partnership, we're helping to shape the future of retail security and look forward to working with Dollar Tree to make that future a reality
The exact dollar value of the partnership to ADT was not disclosed. Let's estimate the dollar value of this deal. Dollar Tree has 15,370 stores as of early May. ADT states that typical revenue per site for large or multi-site locations is $50 - $120+. If we assume the low end, then we are talking $768,500 in additional revenue per month or $9+ million per year. In reality, the number is probably somewhat higher to account for site installations and equipment. The dollar value is not a huge amount but it is enough to add to the top and bottom lines over time. Further, it more firmly establishes ADT as a player in the large multi-site retail commercial security market.
Final Thoughts on ADT
ADT will probably continue to grow organically and through acquisitions in the commercial market. The residential market just got a huge boost from the partnership with Google. It will take some time for this to impact the bottom line. However, clearly, Google will be marketing its Nest products and services partnership with ADT. This is a big plus for ADT. I like how ADT is executing and the company is now the clear leader in the residential market. The Google deal may permit ADT to gain market share and strengthen its leadership position. The Dollar Tree partnership is another plus that is adding value. I view the stock as a long-term buy.
If you would like notifications as to when my new articles are published, please click the orange button at the top of the page to "Follow" me.
This article was written by
Analyst’s Disclosure: I am/we are long ADT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.