APi: Safety-as-a-"Subscription" in a Fragmented Market

You can listen to this Deep Dive here

For the second consecutive months, I am writing a Deep Dive on a company that came to public market via a SPAC. Martin Franklin, who is the main character behind J2 SPAC that ended up acquiring APi Group in October 2019, doesn’t seem to like the term SPAC. Here’s Franklin on a podcast in 2020:

I wish what I did wasn’t called a SPAC, but I started pretty early in this. I used it as a way to diversify my own investments. I partnered up with a guy called Nicholas Berggruen and we invested in three vehicles early on and what we decided to do was different from anybody at the time. We put a lot of our own money to work in these things rather than just being promoters.

…US SPAC structure tends to do more speculative transactions because the non-speculative targets won’t deal with US SPACs…I do a very different thing, I buy very fundamental companies that make a lot of money today, made a lot of money for many, many years before and hopefully, will make even more money in the future. It’s a hunting license to do publicly-listed acquisitions without having a foundation company prior to that.

My goal, personally, is to have a portfolio of five large nine-figure investments in great companies whose capital allocation decisions I have a say in, not a dictatorship. It’s a collaborative process but I can influence those outcomes.

APi Group does fit the description of a company that “made a lot of money for many, many years before and hopefully, will make even more money in the future.” But before we dig into APi, let me spend more time on Franklin who owns ~11% of APi Group, and will likely have a “say” in capital allocation decision.

Why was the SPAC called J2? Franklin dubbed the blank-cheque vehicle “J2” as a deliberate hat-tip to his earlier successful empire: Jarden. The “J” in J2 stands for “Jarden”.

To understand the fable of Jarden, we have to return to the early-2000s when Franklin snapped up a modest ~$300 million spin-off from Ball Corporation called Alltrista out of obscurity, renamed it Jarden, and spent the next 15 years turning odds-and-ends household brands into a $15 billion consumer-products empire. The playbook was simple: buy specialist labels that led their niche, wire them into Jarden’s sprawling sales network, and fund the next purchase without over-stretching the balance sheet. FoodSaver in 2002, Coleman and Sunbeam in 2005, K2 Sports in 2007…each deal widened the company’s reach while giving distributors a thicker catalogue to push at little incremental cost. As Jarden became larger over time, the company expanded its ambition beyond bolt-on deals.

Three of their largest deals (Yankee Candle for $1.75 Bn in September 2013, Waddington for $1.4 Bn in July 2015, and Jostens for $1.5 Bn in October 2015) came pretty late in the Jarden journey just before it was sold to Newell in December 2015.

By the time Newell Rubbermaid arrived with a ~$15 Bn cash-and-stock offer, Jarden had generated a ~50x return for early shareholders and an estimated half a billion dollar payday for Franklin himself. Interestingly, even though Jarden just did aforementioned large deals at HSD EBITDA multiples, it was able to sell Jarden to Newell at 13.7x LTM EBITDA multiple. Franklin clearly got the “buy low, sell high” memo!

The marriage, however, was rockier for the buyer. Integrating more than a hundred brands across two corporate cultures proved harder than PowerPoint promised. Synergy targets were met on paper, but debt swelled, growth stalled, and by 2018 Newell was locked in a public board-room brawl with activist fund Starboard. Jarden’s investors had exited near the top and Franklin wasn’t involved to see Jarden limping around within Newell. So, the fable of Jarden is a happy memory that Franklin wanted to recreate even though Jarden deal is perhaps a nightmare in hindsight for its current owner.

I am not quite sure how to interpret the chart above. Should we give more credit to Franklin and co that they managed to compound at such high rate for so long and the difficulty of the task could only be appreciated even more after the change of ownership? Or did the seller sense that the hodgepodge of numerous brands start to become too difficult to manage and was able to make it someone else’s problem at the right time? There might be a bit of both, but the latter is an admission that Franklin’s success with Jarden comes with an asterisk.

While being intimately involved with Jarden, Franklin realized that acquisitions can scale and still compound if you keep bureaucracy flat. He also developed a conviction that public money that is raised quickly and parked in a SPAC trust lets you be just as competitive (if not more) as private equity to pounce on a deal. Since 2006 he has floated a procession of blank-cheque vehicles, each aimed at a different sector and each repeating, with mixed success, the basic Jarden formula of “buy, bolt on, and professionalize.” Let me very briefly mention these deals.

Freedom Acquisition Holdings (2006) raised $528 Mn and merged with GLG Partners, then one of Europe’s hedge-fund behemoths. If you bought “Freedom” when they acquired GLG in 2007, you may have lost your freedom since it lost ~60% by the time GLG was acquired by Man Group in 2010.

Liberty Acquisition Holdings (2007) spent $900 million for a stake in Spain’s debt-laden media group Prisa in 2010. The Spanish recession and streaming’s assault on legacy broadcasters left the equity limping, and an investor in the SPAC likely lost almost all of their money. Ouch!

Justice Holdings (2011) was first big hit for Franklin in the SPAC world. They took a 29% slice of Burger King for $1.4 billion, relisted the chain on the NYSE, and watched it roll into Restaurant Brands International (QSR) alongside Tim Hortons three years later. If you bought this SPAC, you almost 5x-ed your money since then. Franklin, however, was mostly involved in QSR until 2019. Given that QSR stock didn’t do much in the last 5 years, that proved to be a good exit for him.

Now, let’s talk about four active investing vehicles that Franklin currently has in public markets.

Platform Acquisition Holdings (2013) bought specialty-chemicals group MacDermid for $1.8 billion and morphed into Platform Specialty Products, today’s Element Solutions.

Nomad Holdings (2014) paid €2.6 Bn for Iglo, Europe’s largest frozen-food company, and kept consolidating frozen peas and fish fingers across the continent.

Then came J2 Acquisition Ltd. (2017) which is the vehicle that married Franklin to APi Group. He and long-time Jarden lieutenants James Lillie and Ian Ashken injected $1.25 Bn of SPAC cash and their operational blueprint into APi’s fire-and-safety roll-up in late 2019.

Finally, Admiral Acquisition Ltd. (2023) raised about $550 million to buy Acuren, a North-American non-destructive-testing and industrial-inspection group, for ~$1.85 Bn.

As you can see below, performance of all these companies in the last five years have been largely a mixed bag except for APi group. Like Jarden, APi has been a home run for Franklin so far.

What threads these deals together is less the sector than the style: Franklin looks for markets where brand, route-to-market, or service density can be scaled through disciplined M&A, and then grafts a lean holding-company culture on top. If there’s any takeaway from all this is you cannot just blindly coattail Franklin; what matters much more is the company specific fundamentals. However, it’s a good prologue to internalize the track record, history, and philosophy of the major shareholder who will likely to continue to play a key role in strategic direction in APi.

So what exactly is APi Group?

From fire suppression and detection, emergency lighting, CCTV, access control, alarm panels, elevators, HVAC loops and mandated safety inspections to covering the mechanical, electrical and life-safety needs of buildings, APi Group designs, installs, monitors and maintains a full spectrum of services. Its crews also tackle specialty utility and infrastructure work such as water and wastewater lines, electric-grid upgrades, fiber-optic cabling and structural fabrication, giving customers a single provider for nearly every critical service in and around their properties. While none of these are cutting edge technology or services, they are quite critical to normal functioning of buildings and facilities APi Group serve.

I will expand on APi’s business with a more detailed discussion on its two segments, margin structure, and operating philosophy. Then I will talk about competitive dynamics, capital allocation history, and management incentives. I will show what is likely currently embedded into the stock price. Finally, I will offer some concluding thoughts and disclose my overall portfolio. Subscribe to keep reading!