Investors Cast Watchful Eye on Initial Pinkerton Offering
If the Securities and Exchange Commission had more of a sense of humor, Pinkerton’s Inc. could be advertising its upcoming initial stock offering using photos of Butch Cassidy and the Sundance Kid. It was Pinkerton’s private security agents who tracked down the infamous pair in 1911.
Unfortunately for Pinkerton’s, the SEC frowns on that kind of self-promotion. Even so, the fabled Van Nuys-based company’s stock offering, expected in April, is attracting plenty of attention, local brokers say.
Pinkerton’s plans to sell 1.333 million shares to the public at $14 to $16 each. Because of the firm’s colorful history, many investors are taking notice. But just how well the stock will perform after the offering--and long term--is a big question mark. Pinkerton’s, whose business today primarily is security guard services, is a company in transition. Heavily in debt, its success will depend in part on that most chancy of elements: a good marketing plan to raise the value of the franchise in customers’ eyes.
By all accounts, security should be a growth field in the ‘90s. David Marzo, an analyst with Rosenkrantz, Lyon & Ross in New York, believes that a tougher economy in the next few years will raise the risk of crime and increase demand for home and business protection. Local police budget cutbacks and a rising tide of criminals let loose for lack of prison space also should boost demand for protection, Marzo said.
For Pinkerton’s, which derives 98% of its revenue from guard services, that should mean healthy growth. The question is whether Pinkerton’s can make good money off that growth. Chasing Butch and Sundance was glamorous, but the security business today is a highly competitive one that anyone can enter. And that means low profit margins: about 1% on sales.
Pinkerton’s CEO, Thomas Wathen, knew all about that when he bought Pinkerton’s from American Brands in January, 1988. Wathen founded California Plant Protection in 1947 and grew it into a major player in the security field. (CPP provided security for the ’84 Olympics.) When rival Pinkerton’s was put up for sale, Wathen saw a chance to grab and revitalize the best-known security name of all.
With the merger, the combined firm took the Pinkerton’s name and the famous “watchful eye” symbol. Then Wathen went to work on the giant he’d created, slashing costs. The result: Pinkerton’s gross profit jumped 20% last year even as revenue fell 7%. The firm’s net profit last year was $1.16 a share, versus a loss of 24 cents in 1988.
The cut in revenue says a lot about the low margins in the business: Wathen jettisoned many contracts that simply weren’t worth Pinkerton’s while. Just last December, the New York Racing Assn. ended its 100-year-old contract with Pinkerton’s after Wathen asked for a 1% price hike for security at Belmont, Aqueduct and Saratoga race tracks. Archrival Wackenhut got the contract.
Therein lies the challenge for Wathen in the ‘90s: Can he attract a sufficient number of new clients who will pay a decent rate for Pinkerton’s protection in a very competitive field? Also, can he expand in the private investigations field, a tiny part of Pinkerton’s now but an area of high profit potential?
Because of SEC rules, neither Wathen nor his investment bankers (Smith Barney, Harris Upham & Co.) can say much beyond what’s in the stock offering prospectus. But Marzo is a believer in Wathen. He notes that one of Wathen’s goals is to capitalize on Pinkerton’s name. “It’s the greatest name in the business, and it hasn’t been marketed,” Marzo argues, despite Pinkerton’s impressive size: 208 offices in 40 states, 40,000 employees and contracts with 275 of the Fortune 500.
Marzo sees Pinkerton’s successfully pitching itself as one of the few high-quality firms in a business that has a lousy reputation. “The level of security guard service in general is appalling,” Marzo said. “It can only go up.”
While Wathen, 60, wins kudos for his business savvy, the financial aspects of Pinkerton’s offering trouble some investors:
* About 85% of the cash from the stock offering will be used to reduce debt incurred in the 1988 merger. But Pinkerton’s will remain highly leveraged and “will have very little financial or operational flexibility,” it warns in its prospectus. However, the company would be helped by a refinancing of $60 million of its long-term debt, via the sale of notes to two major insurance companies. (Pinkerton’s doesn’t name them but said it has a preliminary commitment from them.)
* After the offering, Pinkerton’s will have a negative tangible net worth of $2.01 a share. That is largely because of accounting rules for the $65-million premium that Wathen paid for Pinkerton’s above the value of its real assets. Still, Richard Carney of Cramblit & Carney in Los Angeles, a $900 million-asset money manager, would rather see stronger finances. “I think it’s too early to be bringing this company public,” he said.
Finally, Wathen, who is selling 666,667 shares in the offering, will use about half of his proceeds to repay debt to Pinkerton’s. Even with his stock sale, Wathen will control about 60% of Pinkerton’s stock after the offering. So for all practical purposes, he alone will control the company’s destiny.
Some of Wathen’s fans say he’s a worthy successor to Allan Pinkerton, the legendary Scotsman who founded Pinkerton’s in Chicago in 1850 and whose motto was “We Never Sleep.” If Wathen is going to produce the earnings growth that will make Pinkerton’s stock a star in the 1990s, he may have to give up more than a little sleep himself.
PRIVATE EYE GOES PUBLIC Pinkerton’s Inc., the Van Nuys-based security firm, plans to sell stock to the public next month. The company mushroomed in size with a 1988 merger, and a cost-cutting plan helped boost profits last year. But heavy debt leaves big questions about long-term earnings growth. Financial data, in millions (except per-share data)
‘86 ’87 ’88 ’89 Revenue $243 $251 $649 $605 Gross profit $21.7 $22.1 $55.7 $66.8 Interest paid $0.7 $0.4 $11.7 $11.8 Net profit $2.2 $3.7 -$0.6 $6.3 Per share $0.39 $0.74 -$0.24 $1.16 Long-term debt $4.1 $2.7 $82.0 $76.5
* Stock to be sold: 1,333,333 shares by the company, 666,667 by Chief Executive Thomas Wathen. Expected price: $14 to $16 each.
* Shares to be outstanding after the offering: 5,540,623
Source: Pinkerton’s Inc. prospectus
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