Arecont Monster Raise - $80 MillionBy John Honovich, Published Dec 01, 2014, 12:00am EST
In the biggest private surveillance industry fundraising event, Arecont Vision has raised $80 million.
However, they have taken an extremely unconventional approach that will likely do more to hurt their future growth than empower it.
In this note, we examine the financial details and explain the pros and cons of the raise.
As the SEC filing shows, this is an $80 million debt raise, not equity, i.e., Arecont has to pay this off.
Payout to Founders / Shareholders
The debt is being used to pay shareholders. According to the filing, $37.2 million of it is being paid out to executives / directors, most notably CEO Michael Kaplinsky [link no longer available] and President Vladimir Berezin [link no longer available].
We suspect the balance of the majority is being paid to other investors as well as employees / former employees who hold shares.
Pay Day Without Selling
The big upside to Arecont is that they get paid without having to sell the company. Many sources tell us that Arecont Vision had been actively for sale for a number of years but that the price offered was never high enough to complete a deal.
Now, the key individuals can significantly cash out plus get the upside of selling the company in the future if a more lucrative deal comes around.
Downsides - Restrictions and Debt Service
The downside is that the debtholders will certainly have loan covenants and, most likely, annual debt payoff requirements.
This could be $10 to $15 million in annual debt payments assuming a 5 - 10-year term for the loan. That would require quite a significant amount of cash dedicated to paying back debt rather than growing the company.
In corporate finance, the term such deals go under is 'leveraged recapitalization' and one of the big risks is that it can "lead a company to focus on short-term projects that generate cash (to pay off the debt and interest payments), which in turn leads the company to lose its strategic focus."
Arecont's greatest strength is their multi-imager offerings (e.g, the Omni), which likely now accounts for the majority of their revenue. It also remains an offering with few direct competitors. More manufacturers appear to be gearing up multi-imager competitors (ACTi and DW are showcasing such units) but it appears for now that Arecont retains a significant competitive advantage here.
Arecont's 2 biggest problems is their reputation for poor quality (e.g., 1, 2, 3) and the maturing market for low cost high MP offerings. Between 2007 and 2010, the company averaged 71% annual growth, shooting up from under $10 million to over $50 million in revenue. However, since then, the company's growth rate has been under 25% (2011 growth was 25% [link no longer available] and 2012 / 2013 growth leaves them at less than $100 million annual revenue, shown in the SEC filing).
Quality concerns have certainly hurt them. The bigger problem, now, though, is that many low-cost manufacturers offer HD, 3MP and 5MP cameras for significantly less than Arecont (e.g., ACTi, Vivotek, Dahua and Hikvision).
The debt deal is a big win for Arecont's founders and shareholders as they get to significantly cash out.
However, the likely debt servicing will constrain growth. And Arecont's management has never had a customer focused approached, so getting paid may further disincentive their efforts there.
Ultimately, though, with or without this deal, Arecont's biggest challenge will be how to stop the flood of low-cost entrances who are undermining their historical competitive positioning.
Note: IPVM emailed Arecont's management team for comment on this last week but has not received a response. We will update if they provide one.
Back to Top