Stanley Black & Decker, Inc. (SWK) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us on a very special day today. I'm here today with our CFO, Andreas Lindback. We're very excited about the acquisition of Stanley Security, about joining forces with this fine company and the opportunities ahead. And this is a real game changer for Securitas and for all of our stakeholders. So looking forward today to talk a little bit about the market and also then why we believe this makes so much sense and sets us up in a fantastic way for the coming years to develop the company. Stanley Security is a highly reputable leader in commercial electronic security, strong technology, commercial and innovation capabilities. Securitas, we have a strong platform as a leading protective services company. And by joining forces now, we are building the foundation to being the most attractive choice for our clients as a leading intelligent security solutions partner. And we will cover a lot of detail during the presentation, but let me share a few highlights. Stanley Security is the third largest global electronic security provider globally. Total sales of nearly SEK 1.7 billion, of which 40% is recurring revenue, and this is important because that's also a sign of the quality of the business and also an EBITDA margin close to 12%. So this makes a lot of sense for us because this enables us to take a significant step to greatly strengthen our electronic security and solutions capability but also towards realizing the ambition that we set a few years ago, to double solutions and electronic security by 2023. It will also enable us to accelerate the differentiation from our competitors in terms of offering innovation and client experience, and we have compelling synergies. So with this acquisition, we are very well positioned to play a leading role in a more technology-focused future. And that's the reason that we are saying we're not only doing a transformative transaction for Securitas but we also believe that we're going to have a very positive impact on the entire industry. But we're also changing the profile of Securitas from a financial perspective. And this will be immediately accretive to our operating margin. And with this transaction, more than 50% of the contribution to the group operating result will come from higher value and higher growth services, so electronic security and integrated solutions. And together with the other initiatives and the programs that we are driving, and I think those of you who follow us closely, you know we're driving quite a lot of change in modernization and digitization over the last few years. Together with those programs, this will also lead to substantial operating margin improvement over time. So it's really also very much about greatly strengthening our offering, our capability but also to set us up to drive a significant improvement of the margin over the coming years. But before we go into the details, let me just share some perspectives on the security industry and the key value drivers in the future. And this section is important because these are the main reasons as well why we are so excited about the acquisition of Stanley Security. So when you're looking at the future of the security industry, we see 3 main capabilities that are the most important value drivers. The power of presence, connected technology and making intelligent use of data. And we believe that the winners of tomorrow are the companies that are able to leverage and combine these assets in providing the best client experience. And that is also the reason that you're seeing clients in the middle here of the illustration to the left on this slide. And while these are 3 complementary assets, we also see significant difference in terms of value creation and growth opportunities in the next 5 to 10 years, looking at the different parts of the security services industry and how different capabilities will also develop in terms of growth, but also then the margin profile. So in the right-hand side here, you see for illustrative purposes then, guarding and electronic security. And here, we obviously have very significant strength in guarding today, we also have been continuously building up electronic security. And you also see that, that is also slightly higher growth, but also significantly higher margin profile. But then we've also over the last 5, 6 years been driving aggressively to also integrate different protective services into what we call security solutions. With Security Solutions, that's obviously based on the needs from clients to have more integrated services to work with more capable partners who are able to manage the security equation on their behalf. And that is one part of the industry that we are actively driving and developing where there is higher growth opportunity but also higher margin opportunity. But if you're looking from a longer-term perspective and in the next couple of years, we also see data-driven security as a service becoming increasingly important. And this is enabled by essentially having broad connectivity to all the equipment that we would have on client location and then be able to drive innovation based on that connectivity, leveraging the data, contextual data and relevant data that will enable us to optimize the security solution, but also to be able to work in a more predictive manner. And that is a part where if we talk about Stanley Security, and I will share a little bit more about that later on, where they have also been making significant investments in the next couple of years. And we are sharing the view in terms of the importance of those growth and margin opportunities in the years to come. So this is important in terms of the broader view, in terms of how we see the security services industry developing. If you're then looking at electronic security, specifically, this is a good market. It's a USD 70 billion market with good growth of around 4% annually, but we also see that there is very significant innovation opportunity. If you then ask the question, where does the growth need come from? Well, this is a growing market, and it's based on increasing needs from clients [ for ] more security but also increasingly complex security solutions. There is a growing emphasis when you're looking at the longer-term development of our industry that we have been talking about for a number of years on technology and data for all security solutions. But we also benefit from a broader trend where technology is becoming better obviously, also then enabling better services and more intelligence, but this also means that there is more connected devices in the future. And we see very significant growth opportunities then also based on security as a service, where we have more and more clients that are also saying that they're coming to us with the demand as well to not only do very good guarding on-site and mobile solutions, but also to be able to integrate more services based on connectivity and data. If you look at the industry, there is a number of players in the electronic security services industry locally. So on more of a national level. But there are rather few players when they're looking at global electronic security players, essentially companies with stronger capability across different geographies or continents. And we believe that if you're looking at the red dot here, there is a real position for us to take, with the global scale that we have and the size and capability, but also combining that with the strong emphasis on innovation and being able to scale innovation for the benefit of local clients as well as global clients in the coming years. And this is also fundamentally important also why we are very excited about now joining forces with Stanley Security. For those of you who follow us closely, you've seen these steps of the ladder before. And obviously, when you're looking at -- when you go upwards and to the right here, there is more technology, there is more emphasis on data-driven innovation. And with this transaction, we are taking a very significant step in terms of shifting the entire profile of Securitas in that direction. But let us now shift to Stanley Security. So Stanley Security is the #3 player globally in commercial electronic security and a leader in advanced health solutions in North America. They have a solid reputation in the market. They stand for high standards, quality and innovation. And this is a team of 7,800 highly qualified team members with deep technical and commercial expertise. If you're looking at the perimeter here in terms of what we are acquiring, there is almost a perfect fit in terms of the markets in North America and Western Europe that are very important markets in the Securitas strategy for the future. So this is obviously something which is very positive, but also then enabling us to add more than 500,000 clients or customers, but also then as a combined entity -- or millions of sites that we are serving. From a Securitas perspective, there is a very high strategic fit with a dedicated electronic security business. And then, as I said, with a very strong focus on key markets. If you're looking at Stanley Security, they have very strong technical and commercial capabilities in installation, maintenance and monitoring. And that is really the left-hand side of the illustration that you're seeing here. That is really the core part of the business today. But there is also a growing emphasis and significant investments that the Stanley team have been making over the last couple of years in terms of also driving the solutions and innovation that is highly relevant for the future. So when you're thinking about this business, there is a very strong fit. There is a very strong quality and the sound electronic security business, but there is also then a lot of emphasis in terms of the future solutions. So let me talk more about security as a service. And I should say that we acquired the operations in 5 markets from Stanley last year, and these have been successfully integrated. And in those markets, we have also seen a very positive impact, not only in terms of talent and capability, but they have also enabled us to reach more critical mass and relevance in the market that has also enabled us to also greatly improve the profitability. And I just want to say that I have a lot of respect for the Stanley Security and health care teams. And through the diligence process and all the interaction that we've had, I have become increasingly excited about the opportunities ahead, and that's something that I'm sharing with all the leaders that Securitas that have been involved in this process. So let us then shift to some of the opportunities that we are seeing with this great combination. So this is all about creating the intelligent security solutions partner for our clients. And looking at this from a pure electronic security perspective, we're creating a strong global ES player with combined sales over $3 billion. And this is the largest acquisition that we have ever made. And we received more scale, capability and presence with this acquisition than what we have done with all the other ES acquisitions that we have done in the last 5, 6 years. We have a strong complementarity in terms of client segments and expertise. And another important benefit that I touched upon before is that we also have an opportunity to leverage the depths and the breadths of technology solutions knowledge, to really drive innovation and bring the most attractive solutions to our clients. And the strategic fit is important. As I mentioned, I mean, here, we are highlighting Europe and North America. But as you know, we have also recently been making important acquisitions in Ibero-America and also in our EMEA divisions. But when you look at this acquisition, then very high strategic fit because we create a strong electronic security platform, but also a strong electronic security platform that enables us to also drive more integrated solutions. And this platform will enable us to accelerate growth of higher-value services and drive margin expansion. And like I mentioned before, scale and critical mass are important for relevance and profitability in electronic security. So in combination with our increasingly strong presence in Ibero-America and EMEA, this enables us to significantly strengthen our technology capabilities for our local as well as for our global clients. And if we then shift to the growth drivers, the main enablers to accelerate the sales growth of higher-value services will be the sales organization, sharpening our offering and then fueling this development also with innovation. And if you're looking at the offering, I think what becomes quite unique when you look at us joining forces is that we will have a very attractive offering for our clients, and we will be able to manage and also to help our clients with everything from advisory and corporate risk management through technology to our great people who are on customer or client location. We have identified significant commercial and revenue synergies through active leverage of existing client relationships in guarding, integrated solutions, monitoring and installation and maintenance. And like I mentioned before, this combination will have hundreds of thousands of clients and millions of client sites that we are serving and in the future there, where connected technology becomes a very important part of the security equation. But we do believe that this becomes -- this combination becomes more than the merger of 2 good companies. It is really about positioning us in a perfect way to accelerate innovation in developing the solutions for the future. And by joining forces, we will be in a unique position to really drive this innovation in the years ahead. Innovation with high relevance for complementary client segments, develop and deliver leading technology and connectivity offerings, leveraging then the competence of more than 5,000 technicians and engineers. And with the combined strength and integration and monitoring, we can also then drive upselling, migrate clients to higher-margin technology solutions and where the value to the client is significantly enhanced. So with that, I will hand over to you, Andreas, for some more details related to the transactions. And then I will wrap it up, and we will open up for Q&A.

Thank you, Magnus. Looking then into some further details around the financial highlights and the financing of the acquisition. So this acquisition is done on a cash basis. In other words, we are paying the purchase price fully at closing here. The purchase price is USD 3.2 billion, and that is on a cash and debt-free basis. As Magnus said here earlier, this acquisition is transformative to us and it's also immediately changing our margin profile as a business. We also see strong opportunities to accelerate our growth in the attractive electronic security and solution market and we also see strong commercial synergy opportunities, given the strong match of geographical footprint and the large base of clients we will have together. This provides opportunities to drive cross-selling, offering solutions to our clients and drive innovation going forward. The acquisition also has attractive efficiency and cost synergies of USD 50 million, which we will realize over the coming 3 years or 3 years from closing. Our synergy estimates has been built up through a detailed bottom-up process throughout the due diligence process, and we are comfortable here we will be able to deliver on this USD 50 million. The acquisition EBITDA multiple based on 2021 is 13x, which is including the cost synergies mentioned, but it does not include the material commercial synergies or the positive strategic impact from us joining forces together. Stanley Security's strong EBITDA margin of close to 12% has an immediate strong positive impact and accretion to our operating margin. And the acquisition is also expected to be accretive to the EPS during the first full year after closing. The costs related to the acquisition is estimated to around USD 135 million, and that will be recognized over 2022 and 2023. Approximately 1/3 of these costs are related to transaction costs, which also includes costs related to the rights issue and part of the bridge financing. The remaining parts are related to integration, restructuring and carve out costs all related to the acquisition. This also means we are taking a major step in our strategic ambition to double our solutions and electronic security business by 2023, as Magnus mentioned here earlier. The combined revenue from Stanley Security and our existing solutions and electronic security business will be around USD 4.2 billion or around SEK 38 billion. If we then move to look into the financing of the transaction. The acquisition will from the start here initially be funded by a fully committed bridge facility that has been provided by SEB. And after the closing, we will do a takeout in the equity and long-term debt markets. The equity component of the refinancing will be via regular rights issue that we will start as soon as possible after we have the closing in place. And the amount of the rights issue will be approximately USD 915 million. We already have strong support for the transaction and the rights issue. In total, shareholders representing more than 44% of the share capital today have given commitments or declarations of intent to support the rights issue. Three of our main shareholders here, Latour, MSAB and EQT have committed to take up their pro rata share of the rights issue and also guaranteed an additional 21.9% of the rights issue. Didner & Gerge Fonder, Carnegie Fonder and Länsförsäkringar Fondförvaltning have declared their intention to vote in favor of the rights issue and also subscribe for their pro rata shares of the rights issue. All in all, we have strong support here from our larger shareholders, both for the transaction and the opportunity to transform Securitas. As most of you know, our balance sheet before the acquisition has been in very strong shape with a net debt EBITDA of 2.1 and no covenants in our facilities. We have here intentionally been strengthening our balance sheet over time to ensure we are in a strong position when a transformative opportunity fitting perfectly with our strategy arises, and we are basically at this point here today. This means we will increase our leverage temporarily while we are committed to, and we also expect to remain investment grade. The rights issue will, of course, be supportive to also maintain this objective. The transaction will now go through customary regulatory approvals and is expected to close the first half year of 2022. And as I said here earlier, we will then start with our takeout process as soon as possible thereafter. Lastly here, this is a very exciting and important moment for all of us at Securitas and Stanley Security, where we immediately are changing the margin profile of Securitas, but we also have a strong platform to continue to drive in growth, innovation and driving our margins even further going forward. So subject to closing here, of course, but I also want to take the opportunity to welcome many new clients and colleagues to Securitas in a very exciting journey ahead. With that said, I'm handing back to you, Magnus.

Many thanks, Andreas. So to wrap this up before the Q&A, joining forces with Stanley Security is a game changer. It is about creating a winning team in the security services industry. And like Andreas said, we're really excited to welcome the new team members at closing. We're shifting the profile of Securitas in terms of the offering, but also in terms of the value creation. So immediately margin accretive, over 50% of the contribution to the operating result will come from the higher value and the higher growth security solutions and electronic security. And we will accelerate the differentiation from our competitors in terms of offering, innovation and client experience. And from the perspective of key trends in the industry, we will be very well positioned to play a leading role, more connected technology and data in the years to come. And together with the initiatives and programs that we are driving over the last -- especially the last 24 months, this will lead to substantial operating margin improvement over time. So this is a milestone. We are shaping the new Securitas by joining forces with Stanley Security. And in the future, with presence, connected technology and intelligent use of data will be the key drivers of success. We are taking a gigantic step in creating the leading intelligent security solutions partner for our clients. So with that, we'd like to thank you for joining us for this session. And now happy to open up the Q&A session.

Our first question comes from the line of Rahul Chopra of HSBC.

I have 3 questions, if I may. First is on the growth profile for Stanley Security business. So it seems that the business has underperformed compared to 4% growth, which you are alluding to for the security business. Maybe just can you just give us more comment on how you think the growth profile for the security business will be under Securitas' umbrella now? Second question is on the degree of maybe some sense of customer service overlap between the 2 companies and maybe some opportunities for cross-sell that will be helpful. And my final question is on the leverage side. You think the leverage will be 3.5x. So what it clearly means to your capital allocation policies and your appetite for small bolt-ons after the M&A?

Thank you very much. So I'll cover the first 2 questions, and then I think, Andreas, you can comment, if you like, on the leverage. First of all, if you're looking at the growth, Stanley Security, they have been investing quite a lot in their business and also driving transformation programs in the last 2 to 3 years in a similar way to what we have done. So I think they have also seen the importance of modernizing, digitizing and also then investing quite a lot in the future electronic security solutions and security as a service. Also have done very significant changes in terms of leadership team, and I see a strong organization, a very strong team. So I think to your question in terms of the growth profile, electronic security as a market is growing or expected to grow around 4% per year. We should be able to grow faster than the market based on the strength of our offering, based on the strength of the team, that is a clear expectation. But then obviously, always protecting value and our margins in that journey. I think the second question is a very important one, and that is then coming into the kind of the revenue or the commercial synergies. And I think you asked about cross-selling. From a Securitas perspective, we have around 150,000 customers today if we are excluding monitoring-only clients and serving hundreds of thousands of different client sites. If you look at Stanley Security, they have around 500,000 customers serving, combined then between the 2 of us, millions of client locations. And when you look at this from a synergy or kind of a commercial synergy perspective, there are many clients who need guarding, on-site guarding or mobile guarding or the type of response that we bring. But if you're looking at almost all business clients, almost all of them need technology and electronic security. So when you're looking at this client base and our protective services offering, we are very well positioned to be able to work with our clients, develop new and more integrated services based on their risk, based on their need. And that is obviously a tremendous opportunity that we are unlocking as well with this significant addition in terms of competence of the Stanley security team, but also the presence. So I think we are in a very good position to drive and to develop this business with existing clients, but we should also be able to attract new clients and customers in the years ahead. Do you want to comment on the leverage, Andreas?

Absolutely. I mean, as I said here initially, we have a strong balance sheet in place and we are also utilizing that fact here in the acquisition, but also in a responsible way. Also important to mention here, we are committed to remain investment grade here. So -- but leverage is going up through this acquisition. So focus for us over the coming time here will be to also deleverage, focus on good, solid cash flow management to also get back to a more normal leverage position in the midterm here. And looking then on the M&A side of things, we will, of course, after closing, in the short term of the closing, focusing on deleveraging. So there will be less acquisitions. There might be 1 or 2 smaller ones depending on where they are in the pipeline, but focus is on deleveraging. Then if you're looking more mid- to long term, when we are seeing positive deleveraging effects, we might continue with bolt-on acquisitions going forward. But obviously, we do not have any plans for any transformative acquisitions or what we have announced here today. So in all, committed investment grade will focus on cash flow management and deleverage in the short term.

Thank you. Our next question comes from the line of Anvesh Agrawal of Morgan Stanley.

I just got 3 questions. First on synergies. I mean, the $50 million of cost synergies, you said it's sort of based on bottom-up analysis. If you can share about further details like what are the various parts that you are baking in within that EUR 50 million synergies? And will those be back-end loaded in your 3-year program? Or do you sort of expect them to split evenly across the first 3 years of the program? Then can you just give some color on the CapEx profile of the Stanley Security business? I mean, you've given the EBITDA number, but it would be helpful if you can sort of give the EBIT margin and what -- how should we think about the CapEx? And then finally, just -- I mean on the leverage, what is the sort of the sensible leverage that you again plan to come down to after which you can again start to do the acquisition or how you're thinking about the capital allocation?

Thank you, Anvesh. In terms of the synergies, yes, this -- we feel very comfortable about these synergies. There will obviously be some overlap in terms of us now building more critical mass in existing footprint. So I think there, obviously, that will be mostly focused on more back-end, back-office common shared systems and so forth. But the most important thing here is obviously that this is a transformative acquisition. And when we're looking at the synergies, this transaction has an immediate positive impact in terms of our operating margin as a group, but the real value creation is going to come through the integration effort and the value that we are creating by combining forces here. So that is definitely the source that will be the most important when you're looking over the next 3 to 5 years.

So on the questions here on leverage and CapEx. And if we start with leverage. I mean, we have a target of around 2.5% in leverage net debt to EBITDA, and that is what we would work to get back to in the midterm here. And then related to the CapEx, you should expect in this business that this is a business that is having a less CapEx need than Securitas today, I would say. I mean we are running then as we have communicated earlier, less than 3%, but you should expect the levels to be less than that going forward. We will have to -- we can come back here also later on with more exact information.

Isn't the electric security more higher CapEx than the guarding business? So why would Stanley Security have a lower CapEx than Securitas?

Well, it is because we are very focused on also investing into solutions where we are investing into the client contracts, and we do that to a larger extent than Stanley security today.

Our next question comes from the line of Rory McKenzie at UBS.

Just 2 questions from me, please. Can you talk more about how you plan to combine the products and services in the 2 companies? Do you see this as kind of broadening the menu you can offer? Or will you take the best of both portfolios into 1 streamlined offering? Maybe actually, you could talk about the experience so far after you bought those 5 country operations in Europe. What stats can give us on the kind of post-acquisition growth or post-acquisition client interest, once you've combined those offerings? And then secondly, I appreciate the strategic importance of the deal, but it does look a relatively expensive price. Excluding synergies, it's something like 20x 2021 EBIT. Can you talk about the returns hurdles that you judged this against? And when you expect this to be value accretive rather than just EPS accretive. We estimate that maybe you're talking about a kind of pretax return on capital of only 7%, 8% even by 2024. So what are the comments on the returns profile, please.

Thank you, Rory. If you're looking at how do we combine this? Well, first of all, the important thing is that we've built a very strong core electronic security business. And there it's the combination of installations, capability, monitoring and maintenance. But there our experience, to your question in terms of the 5 other units is that what we have achieved here is more relevance in the market, more of critical mass in terms of capability, what we are able to offer to our clients. And that we have then seen together with some synergies in the back end because we are continuously investing and protecting in all the technical and commercial capability when we do this work. That has also materialized in a very good way in terms of the client offering, but also the profitability profile. And so that is the first aspect. It's really the core electronic security capability where we are building further or significantly strengthening, I should say, our capability in terms of doing enterprise level electronic security integration work and then maintenance of that for our clients over the time. But the other aspect here, which is obviously very interesting, and that's something that we have been looking somewhat at that, but where we will also put a lot of emphasis post close is how we also leverage the platform because we will have a very significant platform of connected devices, obviously, connected clients. And through that, we also see a number of promising activities from Stanley Security as well that they have been developing. We are doing quite a lot as well, as you know, in terms of our intelligent services. And here, it's really about making sure that we are speeding up that innovation effort for the benefit of our clients as we go forward. And I'll let Andreas come in on some of the more detailed question you asked about towards the end here. But in terms of the purchase price, yes, this is a full price. But this is also where this type of an asset would be trading from my perspective. This is a very significant platform. It's a transformative platform for us. It would be a transformative platform for other interested parties. And if you're looking at the valuation here, I agree in terms of higher multiples, but we have very strong confidence in terms of the cost synergies. We have very high confidence in terms of the commercial opportunities that we're able to create here in terms of generating very good value and leverage this as a platform to really expand and substantially increase our margins over time. So that is really the main kind of perspective that we have taken. But I would also say that if you compare valuation of these types of assets today compared to 10 years ago, they are more expensive now. And the question then is, for us, as a team, we are the finest security services company in the world today. We are significantly distancing ourselves from the competition with this. So here, it's also a matter of who do you really want to be in the future, which is much more tech focused and enabled and also where intelligent use of data will make a significant difference to the client proposition. And we want to take that position. And in that perspective and context, this is the right time to make a transformative, I agree aggressive move, but it will really set us on a different path for the future.

I fully agree here as well. And I think it's important also to look into the value creation that we are mentioning here as well around the cost synergies that we are having material opportunities within. And we have also not included any of the commercial benefits, in the multiple of 13 here as well. So I can just fully align here with Magnus.

And can you just comment on the -- maybe just the normal business kind of return hurdles as you're weighing up investing in acquisitions or organic CapEx in general. It maybe sounds like this was tested against a different set of criteria given it's so transformational. Is that fair to say?

We are always looking at good returns and return on capital employed as well, right? But as Magnus is saying here as well, when we are assessing this case, we have the effects of cost and commercial synergies, but we also have a really strong effect here into how we can transform Securitas going forward as well. So looking into that business case overall, this will also generate good returns over time.

Our next question comes from the line of [ Stefan Kernson ] of APG.

Just -- news just broke that Standard & Poor are considering to lower your investment-grade rating. What would change like that have for impact for you? And then secondly, can you give some more flavors on the commercial synergies? And if you have a ballpark number, what that can mean in terms of USD dollars?

So as we have said here related to our rating, we are committed to remain investment grade. And if there would be decline there with 1 notch that would not have any material impacts to us. So yes, in essence, if we would be downgraded 1 notch, no material impact to the business here going forward.

And [ Stefan ], to your question in terms of the commercial synergies. We have very strong complementarity. So when you're looking at the segments where we have strength versus segments where Stanley Security have strength, there is a really good complementarity. There is also then obviously the opportunity to leverage the different protective services for existing and also for new clients. So we're not breaking out specific numbers in terms of commercial synergies. But like I said, earlier, that is really the main piece that will help us and accelerate the growth of higher-value services, but also to help us and expand margins over the years to come.

Okay. And then just one follow-up, and correct me if I'm wrong here, but a large part of Stanley Security stem from the acquisition they made in 2011 of Niscayah, which has a history from Securitas. How much has that part evolved since it was acquired from -- by Stanley Security?

Yes. So I think it's almost 15 years since the separation from Securitas as a company. There has obviously been an evolution. I think when I look at these 2 key points that I would make. One is that we've been following closely, of course, and also looking at much more detail what's happening in the last 12, 24 months because that is really the more relevant for where we are right now and also the basis for the valuation going forward. And we see very significant investments, sharpening of the business in terms of strategy and focus and also increasing confidence in terms of the direction going forward. So I think that is very positive. But I should also say that no disrespect here to Stanley Black & Decker as a company because they are obviously a fantastic company as a group. But this type of a business from my perspective, one significant difference is that when you look at Stanley Security, this will be at the center of our strategy in the strategy and the development for years to come. And that is something which is very important as well, when you are core to the business or if you just one of the businesses. And I think that is one that will make a difference. And if we make a difference internally for people because they will also -- everyone will also know that I'm really at the center here on the development of the new Securitas for the next 5 to 10 years, essentially, but also for the clients because they also know that our full focus is on security and safety, on bringing the best integrated solutions and intelligent security solutions to our clients in close partnership. So those are important. But then I would also mention one other aspect and that is that, to your question about how has this developed? We bought 5 entities last year in Germany, in Portugal, Switzerland, Singapore and in India. And all of these have been very well integrated, very strong integration in terms of leaders and competence, but also from a cultural perspective. But if you're looking also from a financial perspective, they've also enabled us to build this critical mass that I referenced a little bit earlier. That has also enabled us to greatly also enhance the profitability in this market. So -- You can say that we were kind of warming up in a way with those, but also then a high degree of confidence after that experience and the transaction there that we made, together with Stanley, of those 5 entities.

I can add on that also with that experience where we have been working together with Stanley on integrating these 5 countries. Obviously, that experience and it's actually the same teams as well, will be very important for us here when we are planning for the integration over the coming months before closing, and also for us to be able to post closing, integrate in a fast way, but also be able to execute on synergies effectively.

Our next question comes from the line of Viktor Lindeberg of Carnegie.

Thank you. A couple of follow-ups from my side and maybe starting on 2 more high-level topics, 1 being your ongoing transformation programs and how we should think of the ongoing focus as these are sizable programs and also, I suspect, taking management capabilities at the end of the day. Obviously, the targets you've set up for margin accretion going into 2022 and '24 in Europe will be positively affected now by the margin mix. But underlying operationally, how will this be impacted? Second, in some markets, you may become a bit of a dominant player now. How should we think about competitive authorities view on this transaction? Any red flags or yellow flags that we should be mindful of? And how this potentially can be mitigated from your side? And if there is in that sense, [ tilted ] synergies to any specific markets that we should be mindful of? So starting off on those 2 maybe.

Thank you, Viktor. And I can take the second question first because I think that's a quicker answer. I mean we have analyzed this in quite some detail. We feel comfortable. When you're looking at security services industry, it's generally not a very consolidated market. There are many, many different players, and there are also many different types of services that you could provide. So obviously, subject to customary regulatory approval, but we feel comfortable from that perspective. If you come then to the first question and the relationship to the ongoing transformation programs. Well, those programs we are running and driving, as you know, with full attention and that doesn't change. The programs that we have been driving when I look at North America, as we previously announced, we're ending that program and also the global IT program at the end of this year. And that is obviously from a timing perspective, good, because it means that we've done a lot of the heavy lifting. There we're shifting emphasis more to benefit realization, to make sure that we are optimizing and achieving all objectives that we've set out to achieve or preferably more. Looking at Europe, we are now kind of 1 year into the more detailed work here. And they are obviously going into more critical time in terms of moving to more harmonized ways of working, accelerating solutions capability, et cetera. But all of that work and -- will also serve us in a good way because it means that we will be operating based on more modern platforms. And that we also expect will also generate significant advantage also when we look at the integration effort over the coming 12 to 24 months. So I think the last question that you asked in terms of how should we think about the targets? Well, those targets that we set for the transformation programs, we have full focus on delivering those. So that is number one. If you're then looking at Stanley Security and this acquisition, this obviously has, as we highlighted, Andreas and myself, an immediate positive impact on the margin. But also with a clear expectation, we will be in a good position to substantially improve margins over time. And when you think more about those details there, obviously, we need to make sure that we drive all the work between signing and closing, and then we will come back with further updates on those topics. But I would say that the timing is quite good for us given that we are quite a long way into the transformation and the extensive modernization that we have been driving over the last couple of years. So we have a stronger platform today in large parts of the business, and then also a very clear road map when you look at Europe and Ibero-America in those 2 programs where we are now fully at work.

Understood. Thanks for clearing that. On your transaction costs, you mentioned here, you have M&A-related costs of -- I think it's about USD 135 million. It's quite sizable in context of the total purchase price and also looking relative to the earnings of what you acquire. So maybe can you just tell us a bit -- you have, I think, in the past also have had quite high integration costs. What are these related to? Is it employee-related efficiencies, systems or a combination of many aspects here? Because I think they stand out a bit compared to other companies that I have covered over the years.

I think you can say, as we said -- as I said here earlier, 1/3 of this is then more transaction-related cost. And then your question here is more related to the second part here. And you can say, in essence, it consists of 3 things. It consists of integration costs, which is based on when we are integrating Stanley into Securitas. One example would be rebranding there. And then it also will consist of restructuring costs to achieve the cost synergies that we have put in place. But then it is also in this situation, given that this is a carve-out acquisition as well, there are also some costs related to that carve-out in itself, to make sure that we are standing Stanley Security up in a really good way coming into our structure as well. So those would be the 3 key components of the costs here.

Understood. Final nitty gritty 2 things. Can you just confirm -- you had a question on those synergies and the 3-year realization here. And you mentioned, Magnus, this overlap in existing footprint. Is that where we should see the USD 50 million coming from? Second, you will raise equity maybe beginning of next year. How should we think about dividend for the fiscal year of 2021? In consensus is expecting about SEK 1.7 billion cash out of the company while you were asking for about SEK 8 billion new fresh money. So curious here.

Yes. Thank you. So on the cost synergies, yes, confirming this is within -- primarily within that existing footprint where we see the most of those opportunities. Dividend is obviously a question for the Board and for the owners. But we have a clear policy. And up to this point, we have not discussed changing that policy as a result of this transaction. So I think that is the most important message at this point in time.

Our next question comes from the line of Sylvia Barker at JPMorgan.

Firstly, could I just ask a little bit on the background of the transaction? How long have you been in discussions? Did you look at other assets? Clearly you know the asset from owning it previously in its previous situation, but it would just be helpful to have a bit of background on that. And then if we think about your competitive environment at the moment, are [ Allied ] and [ D4S ] changing their strategy at all? Have they been investing in more electronic security? Could you maybe just elaborate on how you see yourself as a relative player in the U.S. and in Europe after the acquisition were to close? And then could I just check quickly on interest, what interest should we assume on the bridge facility and how quickly are you looking to repay that?

Thank you, Sylvia. So on the background of the transaction, When I took over as CEO, which was in March 2018, this is one part that I saw very clearly would be a transformative shift in terms of accelerating the development of Securitas. But it's obviously one thing to have an interest in buying and being able to close the transaction like this one. But if you're looking without going into too much detail, we've had a good dialogue, we had a very good experience with the 5 entities that we acquired last year and now then very happy to be able to finalize this. And I say that because this is a very high fit. It's the ideal combination from a Securitas perspective, and there is no other company. There has been no other company. There is no other company that we would rate more highly in terms of the value of this combination based on joining forces, the complementarity and all the other aspects that I mentioned earlier. And there, obviously, if you put this in perspective to all the other acquisitions that we have made, we have been quite active doing around 20, 25 acquisitions since 2015, I believe. But if you look at this one, this is obviously significantly larger than all those other acquisitions combined. But there is also a certain learning journey from my perspective when you do something like this. I would also say that we know electronic security a lot better today. We have a lot of really strong leaders in electronic security who, together with the Stanley Security team will be able to lead this business in the future. And those are also kind of enabling factors that also enabled us with confidence to really say, "Now is the time." And they're obviously bringing that up as well with the seller to make that case. And I think that is also important in terms of how do you do this. This is not just about buying a company. There are so many other aspects, buying is just one. But the real value creation, I think we are building in the integration and what we are creating together for the future because this is about creating something which is new, something which no one else has anything similar. So I think that brings me very much also into the second question, that's the differentiation. I mean focusing on us, we -- I see that we are distancing ourselves significantly from the competition with this transaction. And with this transaction, if you look at this one, I don't see anyone else without going into -- without going into any detail, that is going with as much conviction and momentum down this path as Securitas. And that's something that I'm looking forward to also talking to clients because many clients have also said that we have a tremendous relationship with you, but we would also like to see that you have stronger technical capability across key markets. Well, this is something that we're also now enabling. And while many other players are kind of building more of portfolio within more of the traditional guarding. So I think there is a difference in terms of strategy. I'm convinced that this strategy is a winning strategy for the future, where we can drive that differentiation immediately, but also then make sure that we are accelerating as well the innovation in the coming years. So I think those are the main comments. But if -- coming back to this transaction, there has been very good coordination together with Stanley Black & Decker as the seller, and that's something that -- that work that we have been doing together between the 2 teams is also a very good foundation for making sure that this becomes something very positive for our employees in the new entity, but also then for clients and all the stakeholders that we have.

And on the takeout there, I mean, this is obviously very much depending on when we will close, which is then subject to when we are getting the approvals from the authorities here. But there after that, we will basically execute on the rights issue as soon as possible thereafter. So there should not be a long time lag in any way there. And then as the rights issue is sold, we will also go out to the debt market very quickly. So I would not expect this to be a long period between closing until we have the takeout done. On the terms there, and we're not talking about the commercial terms, but you should expect normal sort of commercial but competitive terms in place for the bridge facility.

Can I just check on the EBITA margin? I know that someone asked earlier, but can we just double check that, that is around 10%. It sounds like, just based on the EBITDA and the capital intensity that you've given?

Well, the EBITDA is 12%, and then you got the CapEx guidance there and the depreciation will be in line with the CapEx guidance there. So that's what we can say at this point.

Our next question comes from the line of Stefan Wård at Pareto Securities.

Two questions from me. One is regarding the profitability of the Stanley Security business. Is it correct that this is defined completely 100% that's -- as electronic security services.? And if so, it looks like that is substantially above the profitability that you have on your electronic security services. I'm a little bit curious of why that is and how you can sort of improve the Securitas part of electronic security. That's the first question. And the second one relates to when we combine this. This will go into the solutions and electronic security part of your business which currently is at around [ 22% ]. So I just want to confirm that this moves to about 31% of total sales. And also if this electronic security is about 70% of that total maybe a bit detailed questions, but if you could give me some color, I would much appreciate it.

On your second question here, yes, this will be part of the electronic security and solutions, that is correct. I need to come back on that percentage, 70% that you mentioned here. But what you are saying in terms of the percentage, this will consist of the total sales seems to be about right. From the -- I think you mentioned the 31% there. On your question related to profitability of Stanley Security here compared to our own. I mean, a couple of points. First, it's important that we are then measuring the same thing, so to say, where Stanley Security is close to 12% EBITDA profit. And we have communicated earlier in the Capital Markets Day that we have an EBITDA profitability of around 10% of the business. So from that perspective, I mean, the difference is not that large. Then obviously, you also have the health business, which is a smaller part, it is a small part of the Stanley Security but also a profitable part. But foremost, I would also say the profitability of the electronic security business is also very much about how much recurring revenue you have. And here, Stanley, have a really strong base with more than 40% of RMR, which is also driving the profitability.

One follow-up there then. If I take the SEK 1.3 billion that you mention is electronic security of your total SEK 2.5 billion. How much of that SEK 1.3 billion would be recurring?

That we have not disclosed before.

But It is a lower percentage than what we are buying from Stanley. So yes, obviously, and that's -- I made that comment in passing before, but the recurring revenue is one important focus area for us in terms of improving. I would say it's a sign of the quality of the business in electronic security. So that is one that we also have a lot of emphasis in terms of improving over time organically, but we've also done some acquisitions that have also helped this in a positive way.

Taking a step back there. I mean this is very much also, like Magnus is saying, has been part of our focus both organically and through acquisitions, also before Stanley Security here. And this, as you have seen as well, we just released another acquisition, a much smaller one with Supreme Security here as well, very much focused on RMR generating business.

Okay. On your -- on the existing Securitas electronic security and solutions business, if you combine that, is it the same sort of profitability level across the different -- 3 different business areas would you say? Or is it big differences between Europe and North America and Ibero-America in that specific segment or part of the business?

I would say, on average, it is fairly similar, but when you look at that electronic security then being roughly a 10% margin business. When you look at solutions and integrated solutions, that can vary a little bit. So depending if you're talking about a larger integrated on-site solution versus a smaller SME or we would call that more of a mobile solution, where the technologies and monitoring is a significantly bigger part of the overall. There you could see significantly higher margins on larger integrated on-site solutions than probably below that average. So -- but if you look across the geographies, profitability levels and impact fairly similar.

Okay. That essentially means that the overall margin in the solutions and electronic security part of the business should stabilize as electronic security increases from roughly half to north of 70%. That's the same figure I referred to earlier. But electronic security will increase as part of total electronic security and solutions, right? So that should help margins stabilize a bit?

I agree with your reasoning. And I think it's important as well. I mean, we highlight proactively the fact that more than 50% of the margin will be generated from electronic security and solutions. And we do that because it's higher growth and also higher value. So that is also where we need to put a lot of the emphasis also in terms of how do you think about Securitas going forward? What is most important in terms of the financial development and the margin development. And there, we feel that we are very well positioned with this platform essentially that we are now building and all the competence in electronic security and solutions.

Your next question comes from the line of Johan Eliason of Kepler Cheuvreux.

I have a couple of questions. First of all, you mentioned here several times, you bought some units last year from Stanley and the rest today. I'm just curious why that was. And -- was it sort of a test balloon from Stanley side or from your side? And then secondly, I mean it looks like paid less than onetime sales for these initial units and now you pay almost 2x sales for the rest of the business there. Were there any significant differences there?

Yes. Thank you, Johan. Well, one could only speculate in terms of how things would work out. But like I said, I mean, we've had a good dialogue. I have personally been also quite active in terms of reaching out and sharing our interest. We got the opportunity with those 5 markets, and we took that opportunity. Those markets were smaller markets. And I would also say more kind of subscale in terms of their operations. but that worked quite well for us because we were also subscale in a number of those markets, like in Germany, for example, or in Portugal or in Singapore. So the combination there enabled us to do something quite different. If you're looking at this transaction and different pricing, et cetera, well, there is a different type of profitability here. And this is really a platform. If you're looking at this collection of markets with a presence in North America, which is the world's largest electronic security market, that is a high-value asset, same thing with the European presence. So the good thing for us is that we have experience, we know that we are dealing with a serious company on the sell side. And obviously, we had an opportunity also to get to know each other and I believe also built a lot of trust in the process as well by doing the first 5 markets in the first transaction.

Okay. Excellent. Then just on this margin coming back to the 12% EBITDA. And you obviously point out that Stanley is U.S. GAAP and you are IFRS 16 with the in leasing accounting. This 12%, will it be sort of that moving over to the IFRS 16 accounting? Or should we expect sort of just mechanical higher or lower sort of when you start reporting it? And in line with that, this $50 million of cost synergies, are those basically 100% cash? Well, net the tax impact then obviously .

Starting here with the cost synergies, I would say that, that will be 100% or in all material respects, cash. Yes. When it comes to the GAAP to IFRS conversion outside the IFRS 16, here we see limited impact, generally. Then there will be an impact here coming from IFRS 16 that we will have to get back to as well. But we also don't -- we also see that this one will not be very big.

Okay. Excellent. That was -- then I just had a final follow up, a little bit. You mentioned that the CapEx profile of this business you acquired was more attractive than what you are currently running on? And you mentioned that you were investing in customer solutions more, and that's the reason behind it. I guess that implies that you sort of own more of the equipment at the customer side than Stanley would do in their business model. At the same time, they seem to have a higher share of recurring revenues. Isn't that an odd combination? If you take more ownership of equipment by the customers, shouldn't you have a better opportunity to have more recurring revenues? Or am I missing something here?

This is very different business services. First of all, I mean, Stanley is first, the core services that they do is system integration, where you're basically installing equipment on the site and that has -- and that you do not put on your own balance sheet outside possibly some inventory. Then when it comes to our solutions, we are really investing into the sites, taking different kind of -- or investments into our balance sheet to get a longer contract with higher customer retention and better margins. And that can be a combination of many different type of services overall, our 6 protective services. When it comes to the recurring part of the Stanley Security business, that is mainly related to monitoring and maintenance services where you have recurring contracts with your clients, but you do not have a CapEx need to invest into to get those recurring services, so to say. So these are different services, hence, the difference here also in the CapEx requirements.

Our next question is from the line of Kean Marden at Jefferies.

I've got a couple of sort of quite specific ones, first of all, if you could just bear with me. I've been asked by a few investors. So first of all, what is the tax rate that we should assume attached with the business that you're acquiring?

Do you want to take them 1 by 1 or shall -- so related to the tax rate here, we will have to come back to you on this further on, but you should not expect any sort of surprises here, if you're looking at the -- where the operations and where the profitability are in Stanley Security today. But we will need to come back with a sort of stronger guidance on that going forward.

Okay. So sensible assumption at the moment is just to use sort of the Securitas tax rate currently, yes?

That can be a start starting point, but you also need to look at where Stanley Security has its operations as well.

Yes, agreed. And then secondly, when you assessed the transaction, what was the post-tax weighted average cost of capital that you assumed for your hurdle rate for returns?

We are not disclosing the expected returns that we are using here. So that one I will not be able to answer.

Okay. And then if we look at the slides from earlier, is the correct interpretation from some of your slides that this business should deliver sort of mid- to high single-digit trend organic revenue growth? And if we add in sort of synergies and a bit of operational gearing, we should be looking at an EBIT margin in sort of the low to mid-teens over a sort of 4- to 5-year period?

Yes. So I mean if you're looking at the growth profile, electronic security as a market, we believe, is growing around 4%. We are focused on value and quality, but we believe based on the strength of this combination that we should be able to grow slightly faster than the market, so north of the 4%.

And then on the margin, please?

And when you're looking at the margin, I mean, we have given indications in terms of how we look at the market in the material. When you're looking at guarding, there is a certain range because that differs quite a lot between different markets around the world, looking at electronic security around the 10%. But where we also then see that with security solutions on average in that type of range, but with a faster growth profile. And there, obviously, the emerging but very important, more connected technology, security as a service and more data-driven solutions. We expect that to be a faster-growing segment in the years ahead and that's obviously a place where we also want to take a strong position.

And we currently have one further first in the queue. That's [ Arnold Ian ] from [ Sun Source ] Technologies.

I have a question regarding health care, and that is what is the future plan of Stanley Healthcare within Securitas?

Thank you Yes. So there is a smaller part, but which is the fine business, essentially 2 different types of solutions here. One solutions that are technology solutions for hospitals primarily focused on the North American business. And then there is another solution, which is more focused on elderly care. This is a fine business, intention is that we will keep and continue to develop this business over time.

And as there are no further questions from the queue, I'll hand back to our speakers for the closing comments.

Yes. Thanks a lot to all of you for joining us. It is really a very special day and moment for Securitas and for Stanley Security. We are very excited about closing and being able to welcome the new team members and also, obviously, with the important ambition of really making sure that what is already a fine company in this industry will really set the agenda in a positive way, as being intelligent security solutions company for the future. So thanks a lot to all of you for joining us today, for the good conversation and questions and looking forward to continuing the dialogue in the months ahead. Thank you.