Buy Arecont: Top Bid $10 Million Cash

By: John Honovich, Published on May 22, 2018

Last year, Arecont had a deal for a purchase price of $170 million (see Failed Arecont China Acquisition).

This year, Arecont has a deal for a purchase price of $10 million cash. But there is just over a month to beat that. Good deal or not?

Inside we examine the purchase agreement for Arecont, the Chapter 11 process and the potential to make a lot of money.

**** ****, ******* *** a **** *** * purchase ***** ** $*** million (********* ******* ***** ***********).

**** ****, ******* *** a **** *** * purchase ***** ** $** million ****. *** ***** is **** **** * month ** **** ****. Good **** ** ***?

****** ** ******* *** purchase ********* *** *******,*** ******* ** ********** *** ********* ** make * *** ** money.

[***************]

Purchase ********* *** ********

******* *** ****** * purchase ********* **** ********* [link ** ****** *********].***** ******* ***** ******** ***** ** $10 ******* ****:

** ******** ** *** cash, ** ******** ~$* million ** ***** ********* consideration ** ***** ******* liabilities *** ******* ******* included, **** ******* **** the ********* ****** ********** for ********* *** ***** owed ** *********, *********, etc., ** ***** *****:

**** ** ********** **** Arecont's *********:

$73+ ******* **** **** / ******** **** *********** ****

*** ******** ********* ******** the ******** **** **** that *** ******* **** this ********* *** ****** the ******* **. ***** $73+ ******* ** ***** owed, **** **** *********, that **** / **** holder **** **** ********* get ******* ** *** dollar *** **. *** new ***** *** ******* will *** **** ***** away.

Total **** *** ******* ~$** *******

** ******** ***** ****, for ***, ** ~$** million, ********* ** *** cash ******, ***********, ******* capital *** **** ******* investments ** ********, *****, etc.

Auction ******** *** **** ***

**** ********* ** *** final *** ** ******* to ***** ****, **** Turnspire ****** *** ***** to *****. *** ******* itself ** ******** *** July *, ****.

*******, ** ********* ** *** ******** post, *******'* ****** *** already ********* *** ********* bidders *** **** ** the **** ***** *** of **** *******.

Bear ****

*** **** **** ** that ******* ** ******** and **** ********* ** such * *********** ******** historically ****** *******, ****** dying ** ********** ** get *****. ******, **** members ************** **** * negative ******* ** ******* as *** **** **** just ***** ******* ** was ********* *****:

Bull ****

*** **** **** **:

  • *** **** **** *** strangling ******* ** *** gone.
  • *** *** ********** (*.*., Kaplinsky, *******) *** ****.
  • ******* *** ***** *** products *** ** *** simply * ********.
  • *** ***** ** ****** low. ******* *** ~$** million ******* ** ****.

** ******* **** ******* can ********* **** ** even * ~$** ******* per **** ******** (***** small *** **** ***** surveillance ******** *********), ** would ****** ****** *** amount ******** ** **** a ****** ** ***** to ***** ***** (****** even ****** ***** ************ manufacturers ***** ** ** price ** *****).

****

Comments (37)

My question would be, is there anything about the camera architecture that would allow it to be more than a regular camera, ie. something that would make it a real differentiator and not just another camera? 

This doesn't really answer your question, but when I was an integrator, when you talk about multisensor hemispheric/panoramic cameras, for better or worse, Arecont comes to mind. We stopped selling them 7 years ago, but there is value in having a name association, as long as the product works, the bar is lower for success.

Just speculation, but likely not. Their FPGA-based architecture implies that all primary facets of the system are custom-developed (for the presumed purposes of being a camera). This differs from a camera using an Ambarella or HiSilicon SoC (or Axis' ARTPEC chips), where the SoC (System on Chip) is essentially a small computer, optimized for handling video, but also able to do other things. The Axis ACAP apps are an example of how you can run various other programs on the cameras processor.

For Arecont cameras, it is highly unlikely they have anything developed and deployed in the cameras to support much beyond the features that are already there and well known.

 

something that would make it a real differentiator and not just another camera?

Really Luis, for $10 million? I am not even sure you can get a house in SoCal for $10 million ;)

In all seriousness, I think it's a good question. As #2 mentions, the FPGA architecture is the most likely technology differentiator. The problem / question is how much this is worth in 2018?

On the one hand, I am not an expert in that space, so I can't offer an opinion on that. On the other, presumably, Arecont and its banker have marketed the FPGA technology to the 100+ companies they reached out to, so the current bid status, indicates either buyers do not value that much or Arecont / Imperial have done a poor job selling that aspect.

One thing I am curious to know is how much of Arecont's QA issues are a factor of the FPGA architecture vs bad QA / management practices (i.e., is it the tech or the process)?

Yes, my question was partially rhetorical. Because it seems unless they come up with a new and valuable differentiator, their biggest selling point will be "Made in America", and that's if they can bring their QC back up. Not that it isn't possible. And maybe they just need to cut back, start small and grow it carefully and strategically. 

Or, buy a VMS too and give free camera licenses as an enticement to buy the cameras. :)

Sorry.
Somehow it reminds me of a meme picture: "Unique doesn't always make you useful"

Is there any land/a factory involved in the acquisition?  That would seem to be fairly valuable, particularly in California.

I don't believe they own real estate - they are a tenant in a multi story building.

Do they actually have a camera manufacturing factory here in the USA?

Arecont response:

We manufacture our Mega-line of products in Glendale, California. We do not occupy a traditional industrial manufacturing space. We are located in a Class A commercial office building where we occupy two floors and the basement of the building. The first floor is manufacturing, shipping, receiving and other operations functions. The basement contains our warehousing.  The seventh floor serves as office space for sales, marketing, customer/tech support, engineering and administrative functions.

Note: Mega-line refers to their existing offering (single and multi-imagers, etc.). Not manufactured in the US is the new Contera line and one bullet Mega-line product.

Their existing customer base has to be worth 5x's that/year.

While this may be true, it ignores the huge weight of their current debt due to 2014 shenanigans.

What's the weight of the current debt? This whole process will rid the debt, converting it effectively into equity, i.e., whatever the winning bid is. The 2014 debt is not a risk going forward

However, as for the value of their existing customer base, I'd be more cautious about that. Cameras are relatively easy to replace. Almost all of Arecont's major customers use mainstream enterprise 'open' VMSes that easily work with Arecont's major camera competitors. It's possible that Arecont saves them but the lock-in is relatively low compared to VMSes and access control software.

"What's the weight of the current debt? This whole process will rid the debt, converting it effectively into equity, i.e., whatever the winning bid is. The 2014 debt is not a risk going forward"

#1:  where did the $73M infusion from 2014 go?

#2:  please explain how this $73M debt was 'converted to equity'.

#3:  why would the debt holder bank agree to this 'buyout' if they effectively get zero in return for their underwriting of the original 2014 debt vehicle?

#1 Arecont's co-founders and other shareholders personally. What they did with that money, imagine.

#2 It's effectively converted to equity. Think of Arecont like a house with a mortgage. They can't pay the mortgage, the bank takes the 'house' (i.e., Arecont the company was the collateral) and they sell it for as much as they can. Whoever buys it now owns the equity of the house / Arecont.

#3 The bank wants to get as much as they can. The problems are (a) Arecont cannot pay back the debt, (b) the most anyone is willing to offer right now for Arecont is $10 million cash. If a bidding war breaks out, the bank will happily take as much money as possible. Right now, it's just $10 million.

The only other option is that the bank who holds that $73 million debt could choose to take over and run Arecont itself but given that it has come to this, evidently, they would rather get as much (or as little) money today for Arecont instead of running it for the next few years in the hope of turning it around (or not).

#1 was really the only question I was interested in.

and your answer is exactly as I surmised it would be.

It certainly appears to any outsider looking in, that the founders of Arecont took $73M from beguiled investors in 2014 based on what appears to most likely be false representations of the companies future outlook.

And if you think that I am being cavalier in my observations, answer this question:  why else would someone invest that much in an existing, 11+ yr old entity if not based on future projections?

you can claim those that ponied up $73M to the Arecont founders in 2014 were uneducated in our industry.... and you may be right.  but this also means that whatever the founders told them, they believed - and invested their $73M.

Imagine that you were invited to speak at that 2014 Arecont/investor meeting... what would have been your prognosis on the future of Arecont then?

You may not want to call a spade a spade..... so I will.  I think the founders took that money knowing their own prognosis they presented to investors was hogwash.... to bail themselves out for their own years of effort which was starting to tank in their face based on bad decisions they themselves made.

 

Neither of us knows what Arecont presented for the 2014 debt funding.

Structurally, though, there are 2 separate issues: Did Arecont falsify any factual information or did Arecont simply share optimistic opinions? Only the former would be grounds for potential legal issues.

For example, if Arecont said, "We have many happy customers", that is a clearly a factually correct statement since surely in 2014 Arecont could produce 'many' happy customers as reference checks. Is it misleading? Sure but that's not on Arecont.

It's the bank's job, especially at this level. This is not BRS Labs and mom n' pop investors. When loans are this big, the people approving them are going to be well educated and experienced. If they failed in their due diligence (i.e., did not realize the ongoing quality issues, brand damage, the incursion of the Chinese, etc.), that is on the bank.

ok, I have to admit that I agree with that.  :)

To expand on the 2014 debt, it was technically a dividend recapitalization as explained in the bankruptcy filings:

This type of funding is controversial generally as this article explains:

The practice is usually viewed in a negative light, since companies don’t generally benefit from the added debt while their sponsors receive the windfall and retain their equity stakes. Moreover, the additional debt is thought to weigh down portfolio companies, making them more susceptible to unanticipated market conditions and, potentially, to bankruptcy.

 

While $73+ million is still owed, with this agreement, that bank / loan holder will only literally get pennies on the dollar for it.

How many pennies per dollar do you think they’ll get? 

Will they accept pixels instead?

;)

If QA\QC issues are solved (may have something to do with manufacturing in an office building to meet demand?) this is an incredible opportunity to revitalize Arecont. Made in the USA is quite rare in our industry and they have many Fortune 100 end-user connections. You would need a $100M+ investment to rebuild, poach some top talent in sales\BD, marketing and product management, and Arecont could easily be a $200M business within 5 years, especially if Trump (or similar) is reelected: Tariffs, Buy America Act, etc. SLED is probably the largest vertical that exists for professional products. The Dan Rittman's and Nathan Wheeler's of the world should be looking hard at this. I'll check my lotto ticket tomorrow and maybe I'll snatch it up. 

Note: #7 is not from Arecont :)

Bring the Exacq guys back together? Have Wheeler return to Arecont? That's funny, though I could see some logic to it.

Has the bank put the company in receivership? Who is running the day to day now?

Raul Calderon is running day to day and was promoted to CEO when the founders 'resigned' / were ousted.

So who does Raul answer to? Is there still a board? Does he answer to the bank, court, board?

The court, via an external Chief Restructuring Officer, from this filing:

LinkedIn: Scott Avila, CEO Armory Strategic Partners

So the founders still have a say in the day to day? "Subject to the supervision of" sounds like they still call the shots.

EDIT: Also, it sounds like Avila is a receiver, looking at his website.

I don't know what that clause means but I think it's more legalese than anything else, since the Bankruptcy court is now in charge of disposing of Arecont, the auction, etc.

This section sheds more light, the founders own the holding company, not the operating company (the 'real' Arecont), so the CRO reports to the holding company:

The founders keep the holding company (which I am not sure what other assets it owns) but the operating company (the 'real' Arecont) is what is in Chp 11 and is being auctioned off by the bank.

 

We have a 50 of the Omni G2's and G3's installed around the Smithsonian, and they work quite well.  For the sake of supportability, I hope they manage to stay around.  

If you are buying an on-going business, there needs to be inherent product quality or new product where the engineering is completed and they are geared to release new product that will compete effectively in the industry. The only thing I see they have going is that they are "Made in America". If they can innovate then they could reclaim some market share and the price might be a deal for the buyer. We have had maddeningly disparate results from them. All the box cameras are still working. The recent Surround cameras, even ones new out of the box have a 50% or greater failure rate. We switched to Axis and Vivotek and the failure rates aren't even noticeable now. There are some really dedicated people at Arecont, we hope the company survives and prospers with new engineering staff updates.

Jim O'Donnell

Statewide Security-Redmond, WA

I think it would be a great buy for a company that is a prominent in the security industry that does not have a panoramic line of cameras. Should I say it Bosch or even a companies whose own offerings in that space are sub-par compared to others, should I say it Pelco.  Either of these one-time giants in the field would have the overhead to support the Arecont line. Standing alone I fear that Arecont is doomed to become beholden to an unfriendly foreign investor which will only steal its proprietary technology and customer base.

Let’s not forget Arecont being one of the few USA manufactures in this space was placed in to a lot of government facilities, as noted above by Scott. This makes an interesting subject if a foreign investor were to purchase the company. The cyber security implications of a foreign investor upon the integrity of the company would call into question the installation of future firmware updates, if one can't trust updates which are required to defend off future threats then the only course of action would be to remove those cameras. However during this time of shrinking government budgets, it could be quite vulnerability for some time which makes all that more tempting to a bad actor.

a great buy for a company that is a prominent in the security industry that does not have a panoramic line of cameras. Should I say it Bosch or even a companies whose own offerings in that space are sub-par compared to others, should I say it Pelco.

That's a good point. Neither Bosch nor Sony has multi-imagers. Buy Arecont. Problem Solved? :)

At that price point, I could see the value.

I would still like to see a compelling reason for me, or any other integrator, to buy this product in the future.  Throughout my career I've given chance after chance to Arecont to fix the quality issues and they never have.  I've been close to losing clients over these cameras.

What can they possibly do to convince me to give them another shot?

I'm at a loss to think of anything.

Coincidence???

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