Hikvision First Western Acquisition - Alarm Manufacturer Pyronix

Author: John Honovich, Published on May 19, 2016

Hikvision has $1.5 billion, at least, to spend internationally.

Now, they have done their first Western acquisition, acquiring UK alarm manufacturer Pyronix.

In this note, we review Pyronix's financials, their market position and the potential impact of this deal.

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Comments (33)

Very Interesting!!! TBH I think we should be worried...

Looks like they're offering two way wireless alarm sensors. This is defiantly a strength for them. I don't like all-in-one control panel/keypad systems but the two way is more than 99% of alarm companies offer.

John - it's been a while since I was heavily involved in anything alarm related, but I recall monitored wireless sensors being around a decade ago. I thought most of the more modern systems had monitored sensors?

Doing a quick search, it looks like ADT sensors throw a zone trouble/fault on low-battery, indicating that the sensor is monitored.

Supervised wireless is different from two way. Two way allows the sensor to send and receive signals from the panel and the panel to make changes to the sensor remotely. This motion detectors, with two way wireless. The system can turn the motion off while the system is disarmed so the battery life is longer especially in commercial envorments with traditional 1 way communication like ADT uses that motion keeps sending signals all day long even when the system is disarmed

DMP is the only manufacture that makes two way in the US right now (to my knowledge). Honeywell is about to release one but it's over wifi.

Theres more to it but that's the the basics.

Elk Products has been doing two-way wireless for years in the M1 platform, fyi. I agree with your assessment of 1-way wireless but would also add the ease of hacking in one-way wireless systems which is a "dirty little secret" in the intrusion space. Look up the ABC News report on hacking of wireless alarm systems and see just how easy it is.

The Hik is coming, the Hik is coming :-)

The Barbarians are at our doorstep, where is the white knight?

Is that 30 million per month recurring, or annual?

It's annual. They sell products or 'kit' as I believe the Brits like to call it. Recurring revenue is what their customers get when incorporating those products for end user systems.

Hikvision has plans for significant investment in the UK and particularly in its UK-based manufacturing, with plans to dramatically expand operations.

It could be the main reason of acquisition. They have got a "springboard" in Europe and the next target hast to be in North America. I do believe it will be someone with the local manufacturing.

In my own view I agree. Hik already has a product. But it's that China manufacturer. Now they have a European name with history. They can ship partial product to the UK and finish it off if they want to then claim made in UK.

My hunch is that this is their plan. They have bought a known name for cheap verses the costs of convincing a market to trust them.

Financials Pyronix

Pyronix has grown well over the past 5 years, roughly doubling their size from 2010 to 2014 to ~$30 million USD, according to UK records. The company also reports solid net income of ~5%.

Acquisition Price

Deal terms were not announced but given their revenue, growth and profits, a reasonable range would be $50 - $100 million USD price.

Assuming 2015 earnings grew 50% to 2.25MM, the $50 - 100 MM acquisition price would be P/E of 22 to 44x:

  • Are these typical earnings multiples for security acquisitions (Dropcam excluded) or is Hikvision paying a big premium because they have the cash? S&P 500 ~15x and Wilshire 5000 ~20x, so the 20-40+ seemed high for a low-medium growth industry.
  • Are you aware of any summary of transaction multiples (P/S and P/E) for the last couple years? The referenced link (http://www.ifsecglobal.com/hikvision-to-acquire-pyronix/) is helpful but does not show sales or earnings.

Thanks. Another very informative article.

Transaction multiples for security companies are generally in the 1 - 4x P/S range. I don't have a table of it but I've covered 20 of these deals in the past 5 years and that's the range.

P/E is hard to track because most of them are not public companies and there's not as much clarity about profits (especially since how profits are framed can vary far more than revenue).

is Hikvision paying a big premium

To be clear, I do not know what Hikvision paid. I simply know what the going rate for security companies is historically (described above). 1x revenue is generally for weaker manufacturers (either low growth or weak prospects). I picked 2-3x because Pyronix's financials look solid and that's generally the range for solid companies.

Finally, I would not be shocked if they paid 4x revenue mainly because Chinese companies tend to be viewed, in general, as less attractive places to sell to than Western companies (some is bias, but some is clearly the risk of, well, selling to the Chinese government). Again, that said, I do not know what was paid nor have I ever spoken with Pyronix to have a sense of how open they would be to such deals.

S&P 500 ~15x and Wilshire 5000 ~20x, so the 20-40+ seemed high for a low-medium growth industry.

One other important point.

These are generally strategic rather than financial purchases. A company like Hikvision is not going to leave Pyronix as is, and just let them generate and return cash to Hikvision corporate.

Hikvision could easily justify paying $100 or even $200 million (if they wanted / needed) simply because they have the benefit of inserting Pyronix into the Hikvision sales machine. If an independent Pyronix mostly in Europe does ~$30 million revenue, how much revenue can Hikvision generate selling Pyronix globally through its channels? $100 million annual? $200 million?

To that end, current profits are not a real constraint on acquisition price.

Hikvision will have a hard time explaining high valuation to its board and the Chinese Security regulators, if it overpays its acquisitions.

And the general consensus that the Chinese companies can bid a target with any price is absurd. A recent bid on Starwood by AnBang Insurance was actually killed by the Chinese regulators, which led to a withdraw from the bidder, AnBang Insurance.

So, practically speaking, there is a ceiling of how much Hik could spend on acquisitions.

the general consensus that the Chinese companies can bid a target with any price is absurd.

Who says that? Cite specific please.

My two points are that (1) any large corporation in the same industry, Hikvision or not, can be a premium to what a purely financial player do and (2) Chinese companies typically need to pay a premium and all cash to Western companies to overcome concerns of Chinese ownership (e.g.Ingram Micro Acquisition).

Come on John. Your points are of course right. And for sure, Chinese companies must pay cash. In fact, in Q1 2016, Chinese companies publiclly annouced 186 deals with 102 BN USD in considerations. Guess what, all of them were in cash.

Two reasons for all cash and lack of stock consideration:

1) Why would a US company need to hold Chinese stocks in exchange for their own stocks? Chinese stock market has shown too much volatility to be considered sane.

2) The Chinese capital market is restricted. Stock swap between a Chinese buyer and a non-Chinese target involves layers of regulatory scrutiny and restrictions. Practically speaking, i don't think it is even doable. Never seen a Chinese acquistion/merger with a non-chinese target involving stock swap.

Anyway, what I argued is that the offer premium provided by the Chinese has to be reasonable in the eyes of Chinese stock market investors and Chinese regulators. The fear that Chinese will take over the world resemble the same fear we had towards the Japs in 1980s. The sentiment might be similar, but the players and the circumstances are completely different.

The fear that Chinese will take over the world resemble the same fear we had towards the Japs in 1980s.

Who on IPVM is saying the 'Chinese will take over the world'? What specifically in my comments above lead you to object to this here?

I argued is that the offer premium provided by the Chinese has to be reasonable in the eyes of Chinese stock market investors and Chinese regulators.

And we agree here. My comments were in response to U4 who thought even 2x - 3x P/S seemed high. And my response, which I believe you concur with, is that is consistent with industry norms for strategic acquisitions.

Who on IPVM is saying the 'Chinese will take over the world'?

My bad.

The valuation multiples are different in different sectors: OEM/ODM/branded video manufacturers, independent VMS/analytics, end-to-end solution vendors, PSIM vendor, integrators and others.

If we just look at P/S, ignoring PE, EV/EBIT, EV/EBITDA, EV/operating cash flow etc., then roughly speaking, integrators and OEM/ODM video manufacturers have the lowest valuation, 1-2X P/S;

End-to-end solution vendors, like Mobotix and DvTel have arround 1.5-2.5X P/S valuation.

VMS/Analytics and PSIM have, on average, the highest valuation, 2-3X or even higher P/S.

And yes, I have a table capturing all M&A deals (public or private) in the physical security industry in the last 20 years. But can't share it to you. LOL. Feel free to ask questions here.

integrators and OEM/ODM video manufacturers have the lowest valuation, 1-2X P/S;

They are frequently lower than 1x or barely 1x. For example, Swann/Infinova was notably under 1x. Diebold / Securitas was just over 1x. And FLIR/Lorex was about 1x.

2x for an integrator or OEM is uncommon. With your M&A deal table, cite 3 integrator or OEM acquisitions where the P/S was 1.5 or higher?

Your are right, John, Integrator deals tend to have the lowest valuation. Many fall under 1X. 0.5-1x range is more suitable for integrators.

Convergint - Dakota; Appollo - Protection 1. you name it.

OEM or branded camera manufacturers tend to have 1-1.5X valuation. 1.5X is rare, but we do see a few. Mobotix, for instance, had a 1.96x valuation. But you could argue Mobotix is more like an end2end vendor.

Overall, in our industry, four main factors: growth potential, profitability, RMR and capital light or heavy, determine the company specific valuation. And then, you throw in the industry sector consideration as the ceiling and the floor of the multiple.

Could you share what you have for just the VMSes: Exacq, Milestone, VideoInsight, Seetec, DVTEL, Aimetis? P/S and P/E if you have it.

Smart Move by them in my opinion. I saw some of their alarm panels in some of their literature and was amazed that they were working into that segment. Just like John said, they are already popular with alarm dealers so why not. If they continue to use their strategy by implementing low cost but good quality like they do on their video surveillance products, they could disrupt the alarm industry.

In my opinion companies like Honeywell are the end target for Hack Vision.

Hik could buy the Pelco part of Schneider and pay a premium just to have a strong foot hold in the USA and then go after the Honeywell monsters.

Fred,

Hikvision seriously negotiated buying out Pelco in 2013 but the deal fell through. Back in 2013, when Hikvision's presence in the US was still limited and their success questionable, it had a lot of value.

Now, that Hikvision is nearly ubiquitous in the US, it makes a lot less sense. If I was Hikvision and was going to buy a big Western brand, I'd go for Avigilon (well I'd go for Genetec first, but that would be a much harder to deal to close).

John,

I was unaware of the Pelco attempt in 2013.

I agree with you that Avigilon would be an easy target right now and that would accomplish the name brand foot hold that they could use to launch deeper into the USA market.

Who knows what can happen when you have so much cash.

Nortek / linear would be a perfect acquisition if they are for sale.

I still think the 900 pound guerrillas like Honeywell are in their sites.

The Chinese are LONG term thinks and planners.

Most burglar alarm manufacturing companies sell in the 5 to 10 times EBITDA range. Been there done that, has been awhile but can't imagine it changed much. Then there was Radionics, paid 17.7m for what someone paid 88 million for 8 years earlier.

If Hikvision wants to buy in the US in my view, I would go for DMP. British alarm products don't sell outside Britain, alarm panels have weird features like engineer reset, I know this from buying Digital Audio. Ever seen a Pyronix product in the US???

Pelco try may have made sense at one time but I bet it turned out cheaper to do what they are doing with much less risk. It is not easy to turn around companies.

DMP would be the smart buy. I don't think they would sell. If they did, I'd be upset.

Hikvision China has issued a press release on the deal. Its emphasis is moderately different, focusing more on explaining how it helps Hikvision's overseas growth, emphasizing how Pyronix will help in localization and expansion in Europe.

Here is a copy of the Google Translated version:

Recently, Hangzhou Hikvision Digital Technology Co., Ltd. (hereinafter referred to as "Hikvision") acquired the British company Secure Holdings Limited (hereinafter referred to as "SHL"), both sides have completed delivery, SHL became subordinate Hikvision a wholly owned subsidiary.

SHL owns Pyronix brand, which has a high reputation in Europe. SHL main products include indoor detectors, outdoor detectors, outdoor alarm, wired and wireless security systems, intelligent terminal APP and cloud services. SHL is the UK market leader in intrusion alarm, attach great importance to technology and product innovation, product innovation continued to maintain a large investment of resources. SHL has participated in the United Kingdom and the European Union to develop industry standards for the European market have a deep understanding of industry regulations.

SHL After several years of operation, with mature technology and complete detection sensor alarm system product line, the transaction can be SHL rapid integration of products and technologies, to expand the existing product serial Hikvision, increase sea Conway apparent alarm field of technology and product reserves, while enhancing R & D capabilities and competitiveness Hikvision alarm products. SHL customers in the European market resources, channels, products and brands, etc., will become further explore overseas markets Hikvision useful support.

Over the past decade, Hikvision actively layout of the global market, and vigorously promote the localization strategy in overseas, making the company the ability to localization services overseas growing, HIKVISION brand has been recognized by more and more customers. Through this transaction, SHL existing R & D team and production capacity will be Hikvision research and development centers and supply chain effectively extends outside, the company quickly set up R & D centers and the creation of conditions in the supply chain in Europe. Establishing local R & D and supply capacity is another important step Hikvision localization strategy will continue to enhance the company's localization service capabilities and global competitiveness, helping companies to achieve further market development in the mature strategic planning.

Pyronix's booth at IFSEC, has the Hikvision logo now and matching red:

Update: Hikvision is starting to showcase Pyronix integrated with Hikvision video surveillance products, as this release states:

Illustrating that the company is not only a video surveillance manufacturer but a total 'end-to-end' system solutions provider, Hikvision will be showcasing their enhanced vertical solutions, and Pyronix home & business intruder alarms.

Update: New Hikvision financials show that Hikvision only paid ~$24 million USD for Pyronix (specifically the parent company who owns Pyronix SHL). That is a surprisingly low amount and less than Pyronix / SHL's annual revenue.

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