Group 4 Securicor – ISS out - new target?

We highlight some of the reasons why the Group 4 Securicor–ISS deal collapsed and looking a few months ahead what G4S’ next step could be.

Why the ISS idea was wrong
At face value it looks like G4S followed a set strategy in this takeover attempt. But considering the ISS deal failed and when comparing to G4S’ past takeover success what are the key ingredients of its strategy after all?

G4S has a strategy to use highly specialised expertise in key sectors and leverage on the strong position it holds in its markets. Further to this, acquisitions should take advantage of the fast growing New Markets.

Firstly, ISS has some exposure to New Markets (see table 1) and G4S could more or less double this exposure. But the price for this would be huge exposure to Europe and the US, with European exposure in particular entailing many low growth countries and large exposure in particular to the troubled southern nations of Greece, Italy and Spain. Due to the current economic situation in Europe the timing alone brings this deal into question. 
 
Secondly, maybe G4S would like to reap some cross-selling opportunities but approximately 61 percent of ISS’ revenue comes from cleaning/catering and this matches poorly G4S’ current business areas. This would dilute its focused strategy which investors have been accustomed to.
Finally – why offer to pay DKK130 per share? The range set for the failed ISS Initial Public Offering last year was close to 100, and this price was back then seen as more appropriate. The company however struggles to make money! ISS  impairs intangible assets and brands and this pattern has consistently been an aspect of its business for some years. So why a high-end price?

What other opportunities does G4S have?
Firstly, if G4S is to continue in its key sectors where it has strong competencies then takeover targets would probably remain in its peer group as listed in tables 1 and 2-  put aside ISS. These companies’ have to a large extent the same sector exposure as G4S but there are differences in their regional exposure.

If New Markets is the focal point for G4S then Prosegur would be the preferred takeover choice as this would increase G4S’ revenue in New Markets by GBP 1bn. The other half of Prosegur’s revenue comes from Europe and for the most part Spain and Portugal. These countries are under substantial pressure and businesses there could suffer going forward and therefore this is a negative aspect.
On the positive side Prosegur has a good Net Profit margin, free cash flow and a low Net Debt / EBITDA ratio of 0.7x. These parameters are all interesting and synergies in Europe alone could be enough to accept the extra European exposure. In size it is less than half that of ISS and it has good fundamentals. Given the possible troubles ahead for half of Prosegur’s business this could result in a reasonable takeover price.

 
Another possible takeover could be Securitas. The company is a lot cheaper on valuation than Prosegur and trades at a 25 percent lower P/E ratio. This is based on the fact that Securitas’s Net Income margin is only 2.9 percent and its revenue growth has suffered lately and this is expected to remain the case for a while, according to analysts. But the fact that Securitas is suffering at the moment gives room for a buyer to improve the company and results in potential synergies, so a good deal for G4S possibly lies herein. Securitas’ debt level is manageable and it has a reasonable free cash flow to support this.

A deal with Securitas would provide “synergies” rather than pursuing the strategy of accessing high growth markets.

Conclusion
The favourite in the above peer group seems to be Prosegur, based on its Latin American exposure and the promising growth there (which would almost double G4S’ New Markets exposure). One negative is its valuation. Securitas would be a cheaper alternative and entail synergies and market strength but provide less in terms of increasing exposure in New Markets.