APi Group: Safety Services at Scale - [Business Breakdowns, EP.204]
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I'm Zach Fuss, and today we are breaking down API Group, a leading provider of life safety and specialty services to buildings and construction projects. While it's not necessarily a household name, the services the company provides play a vital role in the buildings where we live and work. What started as a small plumbing company in the 1960s has evolved into a global leader in fire protection, security, and building services.

With over 100 acquisitions under their belt, they've strategically built a business that exceeds a billion dollars in EBITDA and sports a market cap exceeding $10 billion. The evolution of the business has come via an intentional shift from one-off construction projects to a recurring revenue model, generating a steady stream of income by providing essential services like inspections and maintenance of fire systems, elevators, security cameras, and more.

Today, over 55% of their revenue is recurring in nature with a near-term target of exceeding 60%. The business has enjoyed the success under the guidance of its CEO, Ross Becker, who has been with the company for over 20 years. Ross started as president of one of API Group's subsidiaries in 1998 and has been leading the company since 2004 and eventually led the business through its debut on the public markets more recently.

To help us break down API, I'm joined by Adam Whiten and Chad Garcia. Adam is the founder and portfolio manager of ADW Capital, and Chad is a portfolio manager at Ave Maria Mutual Funds. Chad and Adam will share their insights on the company's competitive advantage and go-to-market strategy, including its unique decentralized management structure and its strong culture.

We'll also explore the pivotal role of Sir Martin Franklin, the renowned investor whose track record includes prior successes with public companies such as Jarden, Restaurant Brands International, Nomad Foods, and Element Solutions. Martin brought API Group Public Vist back in 2019. We'll discuss his involvement in the company's strategic direction and his unique incentive structure, which aims to align his interests with those of its outside shareholders.

We hope you enjoy this breakdown of API Group. All right, Chad, Adam, thank you so much for joining us to discuss API Group, a business that came public via SPAC and has grown its EBITDA base, I think almost fourfold since. Maybe just to kick things off, brief introduction to yourselves and how you got involved with this particular business and investment, and then we'll dive deeper into the business from there. So perhaps, Adam, go first.

So my background is I launched my own investment partnership in 2011. We've done some activism, but I think over the course of our career, we've gravitated towards owner-operated companies. I was invested in a company called Diamond Resorts. And the vice chairman of Diamond Resorts is actually the father-in-law of Martin Franklin's son. So he directed me to API Group and said, these guys are builders of businesses. And they had great success at Jardin.

And they were super excited about this opportunity. And that started my interest. And I guess the rest is history. We've been invested since late 2019. And it's been a great ride.

Chad Garcia. I work at Ave Maria Mutual Funds. I'm on our growth front and run our Focus Fund, which is a legally non-diversified mutual fund. We have around 15 positions in that fund, of which API Group is one of the larger ones. I was involved with two other Martin Franklin companies, Element Solutions and No Man Food. So I got to understand how he views things and how he runs the businesses that he takes private via SPAC. And then

When the API came out, I was a little late to it. I knew it came out, but I put it on the back burner. But during COVID, I took a hard look at it and took a position in late 2020, early 2021.

Great. So API Group at the most basic level is this life safety and services business. I think you guys will both give great perspective, some deeper on the business and the culture, but perhaps just to kick things off, a basic overview of what this business represents, and then we'll come back to how it came public, the importance of the partnership with Martin Franklin and his team, and how the business is differentiated on a go-forward basis. The business is broken down into two divisions.

The first, and in my opinion, the most interesting part of it is the safety services division. So the characteristics of this division is that it's high in recurring revenue, high margin, and has low capital needs. The services that they provide are often statutorily mandated. So they're doing inspections of critical systems and buildings. Their activities are inspecting and servicing fire protection systems,

commercial plumbing and HVAC systems, fire alarms, closed circuit security cameras, and access control. And then they recently added servicing and maintaining elevators and escalators. That's going to be pretty interesting for them and should drive some nice cross-selling opportunities. The industries that they're in are highly fragmented. If you look at fire safety, API is the largest player with maybe 10% market share. There are a couple public companies

There are a handful of private equity firms, but for the most part, these businesses are family businesses. If you look inside a typical one, they're looking for a handful of large projects a year. These projects can run between $150,000 to $1 million. So an example would be a building gets built.

firm looks to install the sprinkler system within that building. It would be a nice large project for them. They'll have 10, 15, 20 of these a year. Afterward, they would hand the business over to the owner. The owner would need to find a firm to do the statutory mandated inspections. Those inspections would happen one to four times a year and would run $1,000, $2,000 per inspection. API believes that every dollar spent in inspection leads to $3 to $4 in high margin repair work. So while

While most of the highly fragmented part of the business is focused on taking down large projects, API is focused on completing a high number of inspection work that leads to high margin small projects. The other division is specialty services. So this is more construction related installation and services. It often serves critical parts of the infrastructure. So think about servicing and maintaining natural gas distribution pipelines.

installing fiber optic cable, doing work on data centers, maintaining manufacturing plants, and installing wastewater lines. The specialty business probably has deeper roots within API. The company was founded as a plumbing company by Reuben Anderson and a partner. In the early 1960s, Reuben's son, Lee Anderson, joined the firm.

after graduating from West Point and serving a stint in the Air Force. They completed several acquisitions pre-2000, mostly in ancillary construction services. Ultimately, they got into fire safety. And then in

In the great financial crisis, they lived through that and survived that. And they really appreciated how it's much nicer to have recurring revenue than project-based revenue. So the focus post-GFC is to increase the percentage of recurring revenue throughout the business. So just as a follow-up to that, what percentage of the business today is recurring or reoccurring in nature? 55% plus.

And then on the conversion of a dollar, converting it to three to four dollars in repair work, can you just elaborate a little bit on that dynamic and how it works out? Well, I'll just give it to you from my perspective. I live in Southwest Florida and we go through air conditioners quite a bit. Whenever I have to put a new AC in, it's expensive and I get multiple bids, but

But when the AP serviceman comes and just does routine maintenance twice a year, any little deficiency he finds, and they always do, which runs probably $1,000, $1,500, I just pay. So I think you have that dynamic too with large buildings, where if you're going to install a half million, a million dollar system, you're going to take a lot of bids and you're going to negotiate hard. But when somebody comes out and does the biannual inspection that they have to do, if they see a corroded pipe,

or a fire panel that doesn't work, I'm sure it just gets fixed. So prior to coming public, I understand this business did well over 100 acquisitions. You're just highlighting the financial profile of the business today. What is API Group? How big is it? What are the revenue bases look like, profitability, etc.?

Look, obviously the business looks a lot different than it did when it went public. There were actually three divisions, specialty, an industrial segment that they merged in with specialty as they were purging assets. And then obviously the life safety segment, which originally had the fire safety business and HVAC, but I think most recently they've moved HVAC into specialty.

I sort of look at it in terms of what is the EBIT contribution. Obviously, the margins of each segment are a little bit different, but I think it's safe to say that the business this year will probably make about $1,100.

of EBITDA, maybe a little bit more. The CapEx is funny because they buy and sell trucks and equipment, but we think that net CapEx is about 65 million on a net basis, gross CapEx minus asset dispositions. So you should think about it as 1050 plus of EBIT and about $800 million of free cash flow on a...

call it $10 billion market cap. From an EBIT contribution basis, we think that most of the CapEx is actually on the specialty side. The capital requirements on safety are relatively low. It's just buying trucks and little machine tools and stuff like that. It's not a super capital-intensive business, which is what we like. And I think over the life of API Group, what you've seen is as they've continued to divest and

and close the more capital-intensive business lines, and fire safety has become a larger percentage of the business, the capital intensity has come down materially. So I think on an EBIT basis, I think it's probably like a 90-10 contribution between

plus or minus in 2025 between the life safety segment, which would be the fire alarm security monitoring, and then 10% in the specialty services, which I think Chad pointed out is more capital intensive, but is in the telecom space where they're doing pipeline integrity testing. They have recurring revenue in that as well. So it looks very different. I think since the company's gone public, even over the last five years, there's been a really great emphasis on making the life safety segment bigger through acquisition. They bought Chubb, which

which was a carve-out of Carrier. They bought another business called SK. They bought another business called Elevate, which is in the elevator service maintenance. And they basically sold or I would say shut down other businesses in the specialty and industrial segments. I would say over the last five years, I think the asset transformation has accelerated meaningfully.

And I think prospectively, the company will continue to emphasize the low capital intensity, high recurring revenue parts of the business. So the way we look at it is this is a business that trades at an 8% free cash flow yield, should grow organically,

roughly mid-high single digits and should be able to continue to acquire small mom and pop or even medium-sized businesses in that five to seven times EBITDA, and then should be able to acquire what I would sort of medium-sized businesses in that, pick a number, 10 to 12 times EBITDA in the fire alarm security monitoring and elevator segment.

So if you think about business quality here, obviously moving to a more recurring or occurring in nature business is paramount. I think they've done a great job since the SPAC combination and achieving that. What is it that makes this like a defensible, durable business? And what are the drivers of that organic growth?

It's mostly volume with some price and then product mix. And that's at the safety services division where a lot of the organic growth is happening. Just a quick aside, the safety business has a lot of project work from their Chubb acquisition. And they have found 55, 60 branches at Chubb that were money losing. So they have been culling a lot of contracts at Chubb to stem that. They're down to maybe a

less than 10 money losing branches at Chubb. So the organic growth has been hampered by their efforts to increase the margins and get out of bad business. So where you're seeing the organic growth at API is in the safety services division. And this is really driven by growing their inspection revenue.

So as of the third quarter in 24, they've had 17 quarters in a row of double digit growth in inspection revenue. And what's behind that is the service first culture, which is driving that growth within their existing locations. But they're also getting a large benefit of converting acquired companies from being project focused to being service focused.

So let me give you an example of how they do this. There's a company to talk about a bit when they're talking to investors. It's a company that they acquired in Boston. This business was led by two brothers. It was doing maybe $10, $15 million a year in revenue via 20 or 30 large contracts and is making about 7% EBITDA margin.

A few years after API acquired the business, the business got to $20 million in revenue with 50% of that coming from inspections and making 14% EBITDA margins.

So what did it take to make that change? Well, first, before they closed the deal, they had to get commitment from the entrepreneurs who were selling that they were going to be committed to a service-first business model. After they acquired it, they needed to bring on a sales team to sell inspections. They needed to bring on inspectors to complete the inspections, and then they needed to put processes in place to create deficiency reports from the inspections.

and convert those reports to sales wins of repair business. And then finally, they needed to set the staff up where the staff, instead of working on a small amount of large projects, could handle a large number of smaller repair works. So that required a massive investment from API and time and resources, but also it required a commitment to the service-first focus to the point where it becomes a cultural within an organization.

The thing is, when you're evaluating public companies, so many of the management teams will talk about their culture and the importance of it. I know that the CEO of the business has been there for decades, but it's very difficult as an outsider to truly appreciate what differentiates a company's culture. What is it about this business that leads you to believe that the culture is actually different, that they can acquire and integrate these companies and help improve them for the better through whatever the API group playbook is?

One of the unique characteristics about this business is that very early on, Lee Anderson

created an ESOP. So the employees participated in the growth of the business. So every year, I think the joke around the town is that Lee's secretary, I think got like almost $20 million from the ESOP when they converted into API shares or when the buyout happened. So I think one of the unique characteristics about this company is that while it is a large corporate organization, there is somewhat of an entrepreneurial culture. I think Paul Grunow, his family had an HVAC business and they sold the business. And

I'm dense from memory about like in the mid 2000s, Paul is now the chief learning officer. So what I think is super unique about this business is that when someone sells their business to API group, they have the opportunity to join the corporate leadership team if they can compete and deliver and then grow within the business. And I think another super interesting thing is because it has this decentralized business model and there are all these different businesses, they have what I would call a cross-functional leadership program. So you can actually go from being...

I think Mark Polowitz, as I recall, was the controller of the company. He didn't have a direct line to become CFO, so he went to run a different business unit. And I think there are very few companies that I've ever encountered in my life where a leader can go from one division to the next. And I think what makes it unique is, A, you have this ownership culture. People are invested in the success of the company, which started long before the company was even public. And then, B, the ability to move from different roles and different divisions. In fact,

Ironically, we're investing in a company called Par Technology, and they've adapted a very similar structure where as you succeed in the business, if there's not a role directly in front of you within your division, they'll move you to the next one. And I think API Group has fostered this culture of, if you can run fast, we're going to keep you moving. So I think that's something very, very unique about the culture and why this thing works. So to that point around the importance of leadership, but also management structure,

You've got what are related adjacent, but also disparate businesses in fire safety, elevator services, HVAC, some E&C type businesses. How do they manage all these seemingly different businesses to come together as one business unit?

Well, Russ has been doing this for a long time because he's been CEO for almost two decades. But it's interesting to look at the Martin Franklin paper and maybe this is something he identified when he bought the business. If you look at Jarden, Jarden was a business that was a consumer products conglomerate.

It had a diversity of various products. It had geographic diversity. And then the business units were ran by general managers. And I think the same applies to API. You have a bunch of individual businesses. Some are in the same field. Some are related. You have geographic diversity. And they're ran by general managers on a decentralized basis.

So I think in API's case, they have some guardrails in place with respect to how large of a contract for a large project a general manager can commit to. If they're entertaining a large project, it'll have to get approved by corporate. If it's extremely large, it probably has to get approved by Russ himself.

But other than that, the general managers are responsible for their businesses. But what the company does is it tracks the financials of the KPIs of each business, and those are disseminated to all the business leaders on a monthly basis.

So if you're a recently acquired business and you're looking at your percentage of service revenue and it's low, well, you can look and see who in the company who's made that transition successfully. And API encourages their business managers to reach out to the ones that are successful and visit their businesses and shadow those business leaders. The ones that are successful can go into the lower performing businesses and audit them and give them coaching.

So I think in the end, you have a decentralized business management style with appropriate guardrails and a culture that's conducive to improvement. I'll just add the company established a group called the National Services Group, where they basically keep track of all the different customers in different states. So obviously, you have branch level leadership. And from what I understand, each individual branch has their KPIs, whether it's free cash flow, EBITDA, return on invested capital that come down from the mothership.

So they have branch P&L responsibility. And obviously, as the company shifted from project-level work to service-level work company-wide, there was this individual thing being like, okay, within this branch, we're trying to get from project to service. Within this branch, how can you do that within the confines of P&L responsibility? And then above that, you have this national services group where it says, okay, how can we zoom down to the individual branch and say, okay, we're

We're doing fire safety for Walmart, for example, because they don't pay well. But for example, we're doing Facebook data centers and we're building out a data center and maybe it applies on the specialty side. It's like, oh, can we go and sell the alarm system or the suppression system? That's what National Services Group is. They try and match the customer relationships with the business branches. And that's how the mothership helps to do on the cross-sell. And then obviously, when

When the company makes decisions about how they want to position the business mix, those things come down from the mothership to the individual regional groups. So for example, fire safety, Perkin Elmer is one of the groups. They'll have a bunch of different businesses that roll up into that. And then on the specialty side, same thing. I think there's like Lejeune Steel and a couple other companies. But the idea is that within these individual businesses, they'll roll up into a larger, generally regional group, and stuff will come down from the mothership. How do you want to do this? It goes down to the branches.

The individual managers will have their own P&L responsibility. And then on the top level cross-selling, you have this corporate group, which helps to sort of get additional business opportunities because they can see stuff across all the different branches.

That also plays into how capital allocation is addressed broadly with this business. So I think to illustrate that, maybe go back to the business deal that they consummated with Martin Franklin's team back in 2019. It seems like Martin was able to bring this business together at a pretty attractive valuation. And if you think about the upgrading of the business quality, clearly today in the public markets, it demands a much higher multiple. So I'd love to hear about what you've learned from Martin as he was thinking about bringing this business together and then what they've done with the management team.

at API to grow the business from that point on. I think what Martin has done very well is he basically gets very good entry multiples based on what you would call capital demands or personal demands. So what had happened with API Group is that Lee Anderson had gotten sick actually twice and there was really not a succession plan. While there was a great corporate team and leadership and Russ and everything, but there wasn't really a succession plan for him. And I think he was very worried that his wife would be stuck dealing with this and his ownership in it.

So I think it was very important that there was a good capital allocator steward of his business. And they had run a process actually twice. And I think they had come close with a large-scale private equity firm. I think it was Carlyle. And I think that the plan was that they were going to split up the businesses. So they were going to sell the life safety business to Blackstone, ironically. And then Carlyle was basically going to do a dividend recap of the lower quality industrial businesses. I

I think Lee Anderson didn't like the sound of that, and I know Rustin liked the sound of that. So that died on the operating table when Lee figured out that the business was going to get carved up. And I think Martin came to the table and was like, look, no earnouts, no rollover equity, no carve out, no this, no that. We're going to take over your company with modest leverage, and we're basically going to invest capital behind what we think are the high margin and growth segments.

So as it usually works, Martin and his team went up to Minnesota. And I think Russ and Co said, look, I think we can work with these guys. And that was the genesis of the transaction. And just to give you the history, as I said before, they took the company public in September 2019. It had gotten listed on the pink sheets, went through COVID, stock went down a bunch. I think they bought back a little. Company got uplisted to the New York Stock Exchange in May of 2020.

They acquired a small business in Europe called SK, which was in the fire protection space. That was, I think, towards the end of 2020. Throughout 2021, they continued to do what I would call tuck in M&A. And then obviously, they went for the big mega deal. At the end of 21, they acquired Chubb Fire and Security in a carve out from Carrier. They took on a bunch of debt at low interest rates and raised some common equity.

Obviously, it wasn't necessarily a great time to buy a business in Europe, but they've done a phenomenal job with it. They've cut a ton of costs. They've gotten rid of a lot of unprofitable business. And I would say that they emerged through 22 and 23 pretty strong with low leverage.

And then in 24, a more accelerated tuck-in M&A program. I think they probably put $300 million of capital on the ground in tuck-in M&A. And then obviously they bought Elevated, which is their elevator service and maintenance business. So characterized 2024 as like, hey, let's clean up the capital structure. We got rid of the Blackstone pref. We raised common equity to buy Elevated. The great cash conversion this year and accelerated tuck-in M&A, which gets us into 2025, where

where the business is arguably under levered. I think on my math, don't quote me on this, I think they've had about $2.3 billion of debt, not including the cash generation in the fourth quarter. So call it a couple billion. EBITDA, as I said before, is probably over a billion, probably like around 1100. So maybe a little bit more. So it's nicely squarely under two times debt to EBITDA. And they're going to generate about...

pick a number. They're going to generate about $800 million of free cash. And hopefully, if they can deploy, it's going to probably be hard to deploy $800 million in Tuckin M&A. But look, with their Chubb platform in Europe and Asia plus US, could they get to $300 or $400 million? Sure. So they should be able to buy $50, $60 million, hopefully, of EBITDA through the Tuckin program. And then they will opportunistically buy other platforms. Preston Pyshenko

As the businesses become more recurring revenue and less project-oriented, the argument would be that they can run it with higher leverage, probably more than three times. So they're probably looking to do maybe another $500 million of what I would call sort of medium-sized deals. They would be interested in buying another platform. When I think about the other platforms that exist, I would think about US alarm and monitoring and security. I think in Europe, they have Chubb, which is more of an alarm monitoring security business.

They don't really have a huge security and alarm and monitoring business. And that's obviously highly recurring revenue and low capital intensity and high margin. So I would say like a natural area in addition to acquiring more elevator assets would be the alarm and security monitoring business. So they may end up paying a little bit more to get control of one of those things and then do bolt-ons around that. But yeah, look, it's a unique period of time for API group because a lot of people are

A lot of the private equity-backed peers have a lot of leverage. And I think the hope is that they're focusing on their balance sheets and focusing on managing their capital structures while we sort of have an underlevered balance sheet. So the hope is that private equity over the last year has really paid huge numbers for deals. I think the KKR paid 22 times for a company called Marmic, which I think Russ would tell you is a piece of crab.

This is what we're hoping. And I think maybe it's just not hope, maybe it's just belief, but there's like a golden age for that because the private equity guys are swimming in their adjustable rate mortgages, so to speak. And API's got a nice balance sheet and good access to capital and generating good cash. So what does my grandfather used to say? When chance meets opportunity, they're now in an enviable spot where multiples should come down and less competition for deals and they're sort of well-capitalized. Preston Pysheniko When you look at the way that Mark

Martin Franklin participates in the upside. I know it's somewhat atypical to what you normally see in some of these SPAC combinations, but Martin has a credible track record of value creation. Can you just discuss a little bit about how the structure works and how his incentives kick in? He gets quote-unquote 20% upside on the founder shares. So by design, as the company gets larger, the dilution gets smaller. So there were 140 million shares when it started, founder shares.

As he executes, he gets a carry on those founders' shares. So when the stock goes from 10 to 20, there's $10 of gains. So it'd be 10 times 140 is, this is an extreme example, that'd be like $280 million. Those get issued in shares and then the share count grows by that amount. So he only gets paid on the 140 million shares.

And then the shares that get issued over time in connection with M&A, they did the Chubb deal, they raised equity with Citigroup. They did Elevated, they raised common equity. So the Blackstone preferred got converted to common. So the idea is that the number of shares that he gets paid on goes down as the company gets larger. And that's by design. There's shares that get issued to him, he doesn't get promote on those. The shares that get issued in conjunction with transaction doesn't get paid on those. So as

as time wears on, the quantum of dilution on a percentage basis goes down as the business gets larger. Does that make sense? No, absolutely. And if I look at the fully diluted share count today, what percentage brought Shirk's of the business to SmartNone? Well, he gets paid on 140 million founder shares, but I think he has, again,

Again, I'm just doing this from memory. But my guess is, is he's probably got ownership across everything of probably close to like 30 million shares. I bucket Martin, Jim, and Ian all together. That's what I would call the Mariposa team.

It's worth pointing out that SPACs have a bad reputation because people have used it to take low-quality companies public and then dump shares on retail shareholders, where Martin uses SPACs as more of permanent capital vehicles. And you pointed out that he has a great reputation.

At Jarden, he compounded his shareholder capital at 34% over a CAGR over 16 years. But it hasn't always been smooth at some of the other companies that he's taken public via SPACs. One is Element Solutions. He got a little over his skis on some acquisitions and did an acquisition with a lot of debt and preferred shares. And it ended up being painful for common shareholders for a while, but he stuck with it. And he didn't dump it along the way. He stuck with it and turned it around and ultimately got back to above water for shareholders.

I appreciate why the recurring revenue business is so strong. I think if you look at what organic growth has trended like over the past quarters and years, clearly there's an aspect of this business that has some cyclicality. I guess, how do you think about the puts and takes on what is cyclical here and what's not and the exposure to different end markets and what you guys need to pay attention to as you continue to monitor the growth in the business?

I think the organic growth has been the hot button issue for the company over the last few years. In 20 and 21, you sort of had a lot of inflation. So when you think about the structure of a lot of the projects, especially on the life safety side, I think some of the ground, especially as well, it allows for material cost pass through. And so what you saw is very high rates of revenue growth, but not the same margin contribution. So you saw these 15s and 18s. I

I brought strokes. Was it real revenue if it's just material cost passed through an inflation? So I think there was decent revenue growth in the 20 and 21-

even into 22 period. In 23 and 24, I think that there was a very great emphasis as they were thinking about how do we generate better cash generation and quote unquote, better margin and predictability. I think you saw this on the HVAC side, you see this in the FIRE side. And on some level, I think you're seeing it on the specialty side, they'll just get out of the business if it's not generating the right returns on capital. But

I'd say over the last couple of years, the big focus has been getting the right margin project work and getting it and focusing the branches on getting inspection. Because when you get into the branch and you sell an inspection, you see all the products that aren't working. So that allows you to get what you would call service work, which would be like repair. So you come in there and you say, oh, the fire panel's broken. I'll sell you a new fire panel. And

that's the business that's recurring in nature. Maybe it's not a contractual recurring, but you come in there and it's what I would call the break-fix work and it's higher margin and you're dealing with the building directly. You're not dealing with some construction company. When you're dealing a project, what ends up happening is the developer goes to a contractor, you're dealing with a contractor, the contractor is trying to make money. So it's more of like a bid out process as opposed to like, hey, let's deal with the company directly. Remember, you're

You're usually working with either the building owner or a property management firm. You'll go in there, you'll get the inspection work. It'll be small share of wallet, $2,000, $3,000, maybe less. And you're dealing with that company. And whether it's the owner directly or the property management company, they want to know that they're dealing with the same person. So you come in there, you sell them the inspection. They say, hey, these guys are competent. They know what they're doing. And they say, hey, you need to repair this. And it's a much more familial and recurring relationship.

The company, I think, over the last couple of years has really been focused on getting to an inspection-first model, not wasting time and resources on project stuff because there is overlap in terms of the technicians between project and service. So when you devote too much resource to a project, those are resources that can't be used elsewhere. So what I would say is, and I think what Russ would say is that, look,

the, quote, pruning or recalibration of the business mix that's really taken place over the last couple of years, both on the M&A front and on the bid out or project internal resource development. I think that's largely behind us. Unless you have another huge spike of inflation or deflation, we should return to more normal reported organic revenue trends. And obviously, Russ has been with this business now for, I think, almost 30 years.

He's seen the evolution from what was really a construction business and a local services business to one that's a global fire and safety focused business with obviously adjacent lines that are growing. Can you just talk about how the Chubb acquisition changed the profile of what they have here and how it's enabled them to have grassroots in other spots of the world? Chubb is on some levels an atypical acquisition for API Group. And I think Russ would also tell you on some levels it's up the fairway.

Chubb was a very neglected asset inside of Carrier because it really was part of United Technologies and sort of very neglected inside of United Technologies.

And they had a fire extinguisher manufacturing business. The whole fire segment inside of UTX was just all over the place. So they stuffed it inside of Carrier because I think they were like, well, it doesn't really go into Otis. It wasn't an elevator business. It doesn't really go into Raytheon, which is really more of an aerospace business. So they're like, all right, let's just suck into Carrier. They'll figure it out. They'll either sell it or whatever. So it definitely was an orphan, neglected asset. API Group did have a European business, so they didn't know the business because

because they bought SK, which is in Benelux, and then they had a decent business in the UK. So it wasn't like they were totally foreign to that. But the thing about Chubb that I think is interesting is that it's more of a route-based business. So you put a guy, he goes into the van and he checks all these different things

It's more route-based. It's got alarm and monitoring, which, as I said, is not a huge mix in the United States. And I think what Russ saw as an opportunity is, look, there's a lot of unprofitable business in this, but we'll basically get the pricing right. We'll fire some customers.

we'll get the route density right. And then once that gets where it needs to be, we can start doing tuck and M&A, both in Europe and in Asia. And I think for what it's worth, I don't think there's as much competition. And as you know, Europe is big into regulations and all this nonsense. And so I think probably they look at it and say, Europe is a high big time regulatory place. There's less competition for assets. So

Maybe they can execute or they will execute on the same business opportunities in Europe that they execute in the United States in terms of tucking M&A. Does that mean elevators? Does that mean water stuff? There's less competition for assets, and that's a good place to start.

And if you kind of like look at the financial profile of the acquisition, I believe at the time they acquired the business, they bought it at like a pretty healthy multiple, I think over 14 times, pretty synergized. I believe they found something like $100 or $125 million plus of savings taking EBITDA from $200 to over $300 million.

But Adam spoke about earlier the profile of acquisitions on the larger side, paying higher multiples, but able to tuck in things at lower multiples. How do you think about the juxtaposition of those two capital allocation decisions?

So, again, I'm doing this from memory, but I think they paid $2.7 or $2.8 billion for Chubb. And then I think there was a working capital component to it. And then, of course, you also had to put money into it to basically fund all the restructuring because you had to spend a few hundred million dollars to get the synergies. So the way I think about it is you paid roughly around $3 billion for the company.

And again, from memory, it was doing about $200 million of EBITDA. Now that was during COVID on a lower number. So I think it was 2 billion euro, maybe a little bit more in the sub 10% margin. I think the idea was that you'd get the business to at least 3 billion euro. So maybe you call that 3.5 billion over time, getting the pricing right, coming off of COVID, whatnot.

So the idea would be you get the business to about three to three and a half billion US. And then what they said publicly at the analyst day is that Chubb would be 15 plus percent. So their business would have the same. In fact, they have higher gross margins at Chubb than they do at CoreAPI Life Safety because of the alarm and monitoring, which is a very, very high margin. The alarm business, I think, can get 60 percent gross margin. It's crazy.

So they have higher gross margins. So it's really just utilization and GNA to really do it. But yes, can Chubb get to 20% EBITDA margin? It should be able to. I think it'll have probably structurally lower growth just because Europe grows less. It'll have good price, but it won't have a ton of new units because Europe is just rusty and old. But I think the price will be good. So it probably grows slower than CoreAPI, LifeSafety.

I don't know if CoreLite API Life Safety grows 5, 6, 7, 8, and maybe it goes 3 or 4. It'll be less. But the idea is that if I can get the business to 3 billion in sales, steady state before you sort of do the organic compound, you get the business like 15%. That's 450 Avibada at 20% at 600. Split the baby, call it 500 million. Yeah, can this thing do 500 million Avibada? Did they pay 3.3? I mean, yeah, it's all nice on a spreadsheet. It's not as easy as that, but I think that was the underwriting case that, hey, it's

where else are we going to be able to deploy $3 billion? And whether the number ends up being 400 or 600, you can't deploy that type of capital and get that type of return. If you think about it, they paid 14 times or whatever it was for elevated, it was 13 times. And I think that business was going to do this year, or 24 to 50, VBITON, and the idea would be about 60 this year. So it

So they paid a pretty big number for that business. So look, they bought it because they wanted a platform that they could do tuck-ins against. But in general, I look at it and I say to myself, it's like buying an unoccupied building. If you can stabilize an unoccupied building, you can go and get it to like a 12 or 15 cap on lever, but you got to go and roll up your sleeves. And I think that's exactly what Chubb was. It's like, hey, we'll pay you a big number on reported, perhaps even a number that private equity couldn't even pay.

because they don't have the capabilities and they don't have all the GNA and the savings and the systems. But they paid a high reported number. But I would say to you, even if they got the low end of my EBITDA expectations, I still think they paid about seven and a half times for a large amount of EBITDA. And more importantly, they basically got a big platform. Think about it. What was CoreAPI before Chubb? Now they've done acquisitions and grown subsequent to that. But let's say CoreAPI was 450.

You arguably bought a business post-Synergy equal to your business and maybe even more. It's very rare that you can buy a business of the same size or greater at a lower multiple than what you're trading at. Now, we can argue as to whether API pre-2022 when they bought Shub, we can argue as to whether API was trading at 10 times or 12 times or whatever multiple you want to argue. It wasn't trading at six or seven. So they were able to raise pref equity from Blackstone and Viking at a very low coupon. And

And they were basically able to finance it really intelligently. And I think that the idea was, is that even in a really, really, really catastrophic scenario, it was very unlikely that they would be creating the business at a higher multiple than what API was trading at. In fact, it was almost impossible for them to create it at a multiple that was not significantly lower. I mean, it's not without heartache.

They took on the term loan. They levered up into an interest rate cycle, but because they financed the deal intelligently with the pref equity and the term loan with the swap, it was just a mark-to-market pain, not an actual financial pain.

And as you think about the United States going forward, doing Tuck and M&A will continue to exist. But I don't envision them taking a big business bet in the United States unless they can create it and unless the juice is worth the squeeze. Does that make sense? No, absolutely. If you think about it from a relative value perspective and trying to determine how to think about valuation for the company broadly. Right.

Route-based businesses, recurring revenue, demand incredibly high multiples, both in the public and private markets. There's a list of private market transactions in these end markets, anywhere from 15 to 20 times EBITDA, obviously, many of which were completed in a different interest rate environment. But I guess if you look across the spectrum, public and private, on comps,

Let me just cut you off. Our API group is trading under 11 times EBITDA. So the point you're trying to make is, the point that Chad and I joke around with is, why is API group trading at, if you include the cashflow from the fourth quarter, it's trading at under 11 times EBITDA? And you'd say, well, look at First Service, look at Otis, look at Cintas, look at all of them. And I think, look, a couple of that is just track record. And I think over time, as the company continues to deploy the capital intelligently, I think we're hoping that that multiple gap will narrow.

To be fair, the specialty business has been unpredictable in 2024. So I would say that specialty has weighed on investors, even though as a percentage of EBIT, as I said, it's really only 10%. But again, it's always, as you know, in these public companies, it's always the weakest 10% that gets everybody's eyeballs. But yeah, I don't have a great answer for it. API groups multiple will continue to appreciate as the EBITDA and EBIT margins continue to improve.

Once the consolidated organic growth gets reported, regardless of how the gross profit growth and margin, all that is played out like lowest common denominator as the reported organic regardless improves, I think that will give investors comfort that the business grows organically.

And investors probably put a too big of a onus on the incentive fee structure in terms of what's being paid to Mariposa. And remember, that incentive structure is only on for 25 and 26. So what I would say is I'd say, look, as we get through 25 and really get into 26, we

The emphasis on the incentive and carry will come down. And I think whatever discount institutional investors are putting onto the quote unquote dilution from Mariposa will go down. So I think over the next couple of years, it's going to be really an interesting time for API Group because they're working through Chubb, getting to the other side of it. The restructuring costs will come down. The cash conversion will continue to improve. Hopefully the competitive landscape for M&A will improve just as a function of the weakness of the private equity, as we've discussed.

So as they continue to put that capital to work and the organic growth steps up, the hope is that you will get multiple convergence. And Martin Franklin will likely do things to increase value per share and be even more incentive us to do that after 2026.

Absolutely. And I guess in an effort to tell both sides of the story, if the thesis does not play out as contemplated or said differently, what do you see as the primary risks to them not being able to execute on their plan? I don't actually think that there's a risk of them not being able to execute on the plan. If Chubb were blown up, it would have happened already. So it would have happened in 2022. Look, I don't see a ton of risk at Chubb. Does it grow 2% instead of growing 3% or 4%?

It's entirely possible, but I don't see that as a big issue. Again, Russ has been running USAPI now for call it 20 years. So I'm not super worried about the US fire business either. Again, whether you're achieving the multiple in the public markets, that's something that, as my friends used to say, that's a conversation between me and God and the world. And

You see tons of companies that just never escape velocity. But by the time the promote rolls off in 2026, I think there'll probably be a big universe of people that will be able to own this thing. But I think the universe of M&A opportunities is still large. The company generates cash. They'll buy back stock if the stock trades cheaply. It's not leveraged. And I would say that if they don't have M&A to do, which I find hard to believe,

they'll sell the company. But I just think that you look at the TAM, you look at the end market, I do not think FIRE is getting disintermediated by AI. You've got data from industry reports showing what pricing is in the industry. I don't

I don't really look at this and be like, there's a real operational execution risk. I think there's a melee's laissez-faire attitude towards the public markets and whatnot. But I can say that about many companies in the middle market. You'd like to think the $10 billion market cap is a company that people can own. But as you know, the market cap that is addressable to investors is that number just keeps increasing. So what I would say is I'd say, look, is this a company that could get acquired by a strategic or a consortium of private equity firms if this company continues to

to not get valued in the public markets, I'd say, yeah. In January 1st, 2027, I'd say, yeah, open for business. And just our concluding question in these conversations, we'll bear with you separately, are lessons that you can take from this investment and apply to others from either an operational perspective or purely from an investment playbook perspective?

I'd say that when you're investing in roll-ups and companies with promotes, I think it's really good to buy them when they're below watermark, like hedge fund managers. The time to buy API Group was when, and we did participate, but there've been great opportunities to buy API Group. I think one was during COVID. Another time was during 2022 after they had levered up to buy Chubb, but clearly they had their arms around it.

that's just been a lesson where it's like when you're buying companies that have these carrying incentive structures, there's obviously an incentive to get the thing back over watermark. So I think the time to buy them is when they're below. It doesn't mean that you're a slave to that rubric, but I would just say that if you're weighing the pendulum, I think buying it below water has been a good thing. And obviously-

on a rebalancing side, the more it gets above water. You sort of say to yourself, are you not aligned with the other guys who may be trying to put capital to work at lower prices because they want to extend the length of the runway? That's why I said everything evens out in 2027. You don't even have to really think about it.

But this has been a phenomenal investment. The executive management team has done a very nice job throughout a challenging period of high in COVID, high inflation, high interest rates. And I think as Jim would say, and Russ would say, we haven't really operated this company publicly in a normal environment. So I don't know when that will happen, but I suspect at some point things will be normal where interest rates aren't moving crazy and inflation is moving crazy. But

It's been a good experience. More so, I think what we've learned is that over this last couple of years, it's just shown how there just isn't a ton of demand for companies of this size. I think the major lesson is that you'd think that a company $10 billion would have an investor universe.

But the size, the concentric circles, the size of addressable investors, and I've learned this really through API group. It's like, oh, it gets 5 billion, it gets 10 billion. It's like, yeah, the addressable market of investors for companies like this has just shrunk dramatically. And I think to your point, it's like, well, what happens if it never trades at the multiple private markets? I'm like, yeah, that's the risk that you have. And you have to believe that you're with people that are aligned to extract that value either through share repurchase or through a sale of the company.

It's one of the things that we ask ourselves in any of our investments, which is if the multiple gap doesn't converge and you don't really get the true cost of capital, is the management team and board aligned with you in terms of doing everything in their power to extract the value? And that's the thing that we've taken away from this experience. How hard and how high the bar has been for companies to get what I would call on the conveyor belt.

Well, the first one from an investment standpoint is that the headline can drive the narrative as opposed to the fundamentals. So one example of this is when the first quarter that the company reported after they closed the Chubb acquisition, it looked like API produced very little free cash flow, which was the headline and the narrative and the

and that drove the stock price down for a good amount of time. And in reality, Chubb was delivered to them with a low amount of working capital and the purchase price was adjusted down radibly for that.

But when API made the investment into the business to rebuild the working capital to a normalized level, it just came out of cash flow from operations. But like I said, the purchase price offset that and the investment that ran through the cash flow from investing was lower. So the narrative should have been API paid a discount for Chubb, not that their free cash flow was light. But as an investor, if you're long it, that can be frustrating. But if you have the ability to deploy more capital into the opportunity, then it can be a gift.

The second lesson I would say is that stocks can be mispriced for a long time. And particularly in today's market, you see stocks that have high valuations that seem to perpetually have those valuations. And you see great businesses that are trading at low valuations that seem to not be able to expand their multiples.

So if you're looking for multiple expansion, then make sure you have a catalyst. And in API's case, maybe we have a couple coming up. They have an analyst day in May where I'm sure the revenue growth that they're going to present will be strong. They're likely to take the margin targets up from 13% to maybe 15%. And then you have a capital structure that seems to be getting simpler in the next couple of years. So maybe there's a couple of catalysts out there, but...

Otherwise, you need to look for investment returns from earnings growth and or share price or share count reduction. So in the case of API, while I would like to get some multiple expansion, and maybe we will, I'm hanging my head on earnings growth.

Well, I appreciate you both for coming on and having this conversation. I think very often it's become a joke to effectively be a private equity style investor in the public markets. Surely there's no better opportunity than one where you're effectively doing that. Obviously, this story has a lot of likes to it. Next few years will be interesting given the carry and promote structure of the sponsor. So I look forward to tracking. Thank you, Zach, for having us on. Great to be with you again, Zach.

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