Protection One a Growing Burden to Parent Firm

How far should a rich parent company go to rescue an ailing subsidiary?

That’s the question posed by Culver City-based Protection One, the nation’s No. 2 home security firm, whose mounting financial woes are cutting into the earnings of its parent, Kansas utility Western Resources.

Since 1991, Protection One has pursued a fast-growth policy, financing the purchase of smaller security companies with high-yield junk bonds and quickly increasing its market share.

But its stock has plummeted over the last year as the debt-laden company disclosed that its accounting practices were under review by regulators, and as service glitches resulted in an exodus among its 1.6 million customers, pushing the annualized attrition rate up to 16%.

Western, which owns 85% of Protection One’s shares, has installed its own executives to run the unit, offered to buy up to $50 million of its $700 million in bonds and is restructuring the way the firm prospects for customers.

But analysts and minority shareholders are wondering if the best solution is for Protection One to be sold--although it isn’t clear what value the publicly traded shares would have in that case.

“Do they [Western] want to devote company resources to this? Unless they feel a strong conviction they can turn it around, it’s probably in their long-term best interests to sell the company and move on,” said David Burks, an analyst at JJB Hilliard, WL Lyons.

Indeed, Western last month said it is considering the sale, spinoff or refinancing of the company and said it would decide the issue by April.

An obvious buyer for the company--which monitors and services residential and commercial alarms--would be Tyco International, which owns the top alarm firm, ADT Inc.

But a sale now would result in a huge write-off for Western, which acquired its stake for $320 million in 1997. With creditors first in line, the market is treating Protection One’s stock as having little or no value. The stock closed Thursday at $2.63 a share on the New York Stock Exchange, though it has bounced from a recent low of $1.38.

Protection One’s third-quarter results provided little encouragement. The firm restated its 1998 and early 1999 results to reflect a “revaluation” of the cost of acquiring certain customers. For the quarter, it posted a net loss of 32 cents a share, compared with a net profit of 1 cent a share a year earlier.

Tony Somma, a former Western executive who is now Protection One’s chief financial officer, said the firm is scrambling to halt the loss of customers and improve service.

Somma said many customers may have left because of billing mix-ups, lengthy waits on the telephone or service delays. To reduce attrition, Protection One added 150 customer service representatives earlier this year and is integrating the telephone and computer systems linking its call centers.

To find new customers, Protection One has traditionally relied on a network of 250 dealers that market its contracts. When a customer signs up, Protection One buys the contract from the dealer for a price based on the customer’s monthly fee.

But the company believes it has been paying too much for the contracts and has begun notifying dealers that it won’t renew its deals with them at existing rates. That has provoked outrage among the dealers and resulted in a sharp drop in the number of new customers coming aboard, from 25,000 in March to 10,600 last month.

Aside from the shift in the dealer program, Protection One has hired an outside marketing firm, Paradigm Direct of Fort Lee, N.J., to bring in 50,000 monitored security accounts next year--a tactic that raised eyebrows in the alarm industry. Protection One would pay $775 for each new account, a substantial cut from the price it had been paying its dealers.

Paradigm’s involvement represents another investment by Western: It bought 40% of Paradigm, for $31 million, to help secure the firm’s assistance with Protection One.

Western’s own shares, at $19.94 on the NYSE, are hovering near a 52-week low.

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Red Alert

Protection One’s shares, as low as $1.38 recently, have rebounded slightly. Monthly closes and latest on the New York Stock Exchange (ticker symbol: POI):

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Thurs.: $2.63, down 13 cents

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Source: Bloomberg News