NEW YORK, November 21 /PRNewswire/ --
Lakewood Capital Management, LP yesterday sent the following letter to Ulf Mattsson, Chairman of the Board of Securitas Direct:
November 20, 2007
Ulf Mattsson
Chairman of the Board
Securitas Direct AB
Kalendegatan 26, Box 4519
SE-203 20 Malmo
Sweden
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
inflation.
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.
(CONTINUA)
