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8 October 2019

Telus buys ADT’s Canadian unit to step up smart home challenge

ADT has sold its ADT Canada wing to local operator Telus for $528.4m (CAD$700m). Telus bought out AlarmForce’s western customers for $50.2m (CAD$66.5m), shortly after AlarmForce was acquired by Telus rival Bell. The new deal leaves Telus with an expanded smart home customer base, but ADT’s decision to exit the Canadian market signals a potential end for standalone service providers.

ADT said that the Canadian market was too costly to run in, and AlarmForce’s demise could also be attributed to that issue. As the CSPs are already ingrained in customer lives, via their TV and broadband offerings, it should be more cost-effective for them to offer a smart home and security service to these customers than the standalone security firms.

Adding to the price pressure on these firms has been the rise of the DIY and off-the-shelf retail competitors, with the likes of Nest (Google) and Ring (Amazon) promising much lower prices than the incumbents. A new breed of start-ups has also been challenging the old guard, such as SimpliSafe and Canary, and with the Google and Amazon ecosystems encouraging consolidation among these start-ups and vendors, the established security providers are being squeezed on all fronts.

“Opportunities continue to develop for ADT in the areas of smart home integration, the expansion of the home security business into new demographics and ADT’s growth in commercial security,” said Jim DeVries, CEO of ADT. “The sale of our more capital-intensive Canadian operations enables us to sharpen our focus on the exciting growth and higher margin opportunities in the US, where we can more efficiently invest our time and resources. Importantly, these emerging opportunities are ideal for leveraging the trusted ADT brand as we continue generating strong free cashflow to drive shareholder value over the long term.”

So, ADT is retreating south, focusing on the core American market, where it has around a 25% market share. To quieten investors, it announced a special dividend of $550m, or $0.70 pre share, on condition of the deal closing – expected in Q4 2019. In terms of valuations, ADT Canada was worth around 2.3 times revenue, which is not good news for a plethora of smart home start-ups, as these valuations have taken a beating over the past couple of years.

Telus says that it has 100,000 security service customers before the deal, 39,000 of which came from that AlarmForce acquisition. At the $50.2m purchase price, this means that each of those subscribers is worth around $1,287, for context.

Now, ADT didn’t mention how many customers it had in the announcement, but if you divide the valuation by the AlarmForce one, it should be around 410,500. However, Bloomberg says that the deal is going to add 500,000 customers ($1,056 each) and 1,000 staff to Telus’ operations, meaning that the ADT Canada acquisition is better value on a per-home basis than AlarmForce was – perhaps evidence of this downward price pressure.

So, Telus gets to sell its other services to these 500,000 new customers, as well as use the established ADT brand to sell into its existing broadband, TV, and mobile customers. In terms of growth, it will be interesting to see if Telus can dramatically change the 12,000 quarterly additions to its security offerings. With that ADT brand power, it should see an uptick, but it is competing directly against Rogers and Bell, as well as the startups and of course Amazon and Google.

For CSPs, buying a local security provider like ADT seems to make a lot of sense, if they have any smart home ambitions. It should be a quick way to create enough of a customer base to enjoy some economies of scale, and the ability to increase ARPUs via cross-selling seems like a no-brainer. However, there is still definitely the risk that these create islanded ecosystems at the expense of a joined-up global smart home ecosystem.

ADT’s Q2 results were published in August, listing a 13% ($152mn) year-on-year growth in revenue to $1.28bn, but a net loss of $104m – up from Q2 2018’s net loss of $64m. ADT said that its adjusted EBITDA was $630m in the quarter, but it still ended up losing that $104m. For the 2019 financial outlook, ADT expects total revenues of around $5bn, with adjusted EBITDA of $2.5bn – but no word on net income.

In its 2018 annual report, total revenue was listed as $4.58bn, with net loss being $609.1m. It said it served around 7.2m recurring customers, which works out to around $636 per customer if you divide the annual revenue by customers. Compared to what it got for selling the Canadian customers off, you can see why ADT took the deal – around a 40% premium on a straight comparison.

Shortly after the Q2 results were out, ADT announced it was ‘transforming’ its brand, looking to move beyond just home security and into “protection for physical valuables, business assets, enterprise-level data, digital identities, new teen drivers, elderly loved ones, pets, apartments, houses and everything in between.” That’s a lot of IoT-related devices and opportunities to pursue.

Just three weeks after this announcement, ADT reshuffled its ADT Commercial leadership, to better align itself following its merger with Protection 1 in 2016 and then the acquisition of Red Hawk Fire and Security in December 2018. It only took another three weeks for ADT to announce the Telus deal.

So, ADT’s pivot is up for interpretation. On the one hand, it’s an admission of defeat, a withdrawal from a market in which it didn’t really have an excuse not to be a profitable market leader. On the other hand, it’s a move to become a more expansive offering, part of its journey to go beyond just the house and into the wider IoT-enabled world.

But in an age where Google and Amazon are getting closer to being able to offer a pretty comprehensive managed security service, one has to wonder how long companies like ADT have. Sure, Google and Amazon are probably not going to kill of the high-end and installer driven smart home niches, but they sure are going to try and squeeze everyone out of the low and middle tiers.