Top 3 SPAC Targets – Security

SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among potential targets in the security industry. We look at why they are compelling and why each could be a fit for a blank-check merger.

Security is on the market’s mind and is expected to grow at a CAGR of 10.6% between 2021 and 2026, reaching $713.4 billion that year. Labor shortages, novel AI tools and new high-tech threats have combined to make for a scramble for solutions by nearly every industry.

At the retail level, increased shoplifting has put pressure on low-margin businesses already squeezed by supply chain disruptions. Theft is a major part of what most retailers classify has “incremental shortage” or “shrink”, which Target (NYSE:TGT) recently estimated would cost it as much as $600 million this year.

Industry insurance frequently is unobtainable for petty theft, so the only remedy is prevention. With a recession still in the cards, the case for retail theft going away on its own is hard to make. Despite these factors, security companies going public have still not beaten market headwinds lately.

Knightscope (NASDAQ:KSCP), which utilizes automated robots to patrol spaces, priced its January IPO at $10 per share, but stumbled out of the gate and has not hit that price again since its debut. It has been trading below $3 since late August.

Similarly, cybersecurity firm SentinelOne (NYSE:S) priced at $46 per share in its June 2021 debut but it has been falling ever since hitting an early November 2021 high of $78.53. It closed Thursday at $15.03, despite beating its last reported revenue guidance.

De-SPACs have clearly not been spared the market downturn, but SPACs can at least offer sellers earn-out structures that IPOs cannot. These have traditionally been tied to share price performance, but in an environment where practically everything is trading down, sellers are increasingly tying their distribution to operational milestones.

In the end, a public company in 2022 can do everything right in increasing its profitability and beating its guidance but still be buried by an unforgiving market. In such a case, the de-SPAC shareholders by can still win by meeting their goals via an earnout even when companies going public via IPO or direct listing cannot.

Titan Security

As Knightscope’s robots have found, there is still high demand for human security personnel and Titan Security Group has built a growing domain in the Midwest providing those services.

The Chicago-based company provides a range of consulting and staffing services around designing security and access control. This includes bespoke planning for events and 24/7 remote monitoring and protection.

It has been regionally expanding its model both organically and inorganically since receiving a capital boost from private equity firm Quad-C in 2021. It has since moved into the Nashville market and acquired Michigan-based security staffing company Prudential in September.

This acquisition added 700 employees to the company’s headcount and tacked on 14 states to its service area, reaching as far south as Texas and northeast to New York. This more traditional-style security company format was the target of one of the more interesting rumored deals that did not come to fruition in early 2022.

At the time, there was talk that the two Warburg Pincus-backed SPACs – WPCA and WPCB – would join forces with one of the Barry Sternlicht-backed SPACs – JUGG, HCNE, JWSM – to collectively combine and take security giant Allied Universal public in a $20 billion merger.

As fun as that sounded, it never happened. But it tipped the hand of where many high-level SPAC sponsors were thinking in terms of the security space. While Allied Universal may have been too big for even three SPACs to consume with its 800,000-person workforce, Titan Security could present a similar play with fewer complications.

All of the five SPACs rumored to be connected to the Allied Universal deal are still searching with between two and six months left on their initial transaction deadlines.

Transmit Security

But, keeping the front doors locked is increasingly becoming a smaller part of the concern for companies in 2022.

Boston-based Transmit Security is focused on the digital interactions companies have with their customers. It provides customer identity solutions that aim to get away from the gradual escalation in verification security around passwords.

In fact, the company’s website says plainly, “We hate passwords and legacy [multi-factor authentication] as much as your customers do. These outdated methods are insecure, add friction and multiply costs.”

Instead, Transmit has pathways to digital onboarding customers so that they will be verified without adding additional entry hurdles. Transmit also aims to consolidate the process for other confirmed vendors of identity security like Google (NASDAQ:GOOG) and Meta (NASDAQ:META) that now provide this service for a price.

Disrupting the hold those two companies have on the process is certainly worth something and Transmit reportedly secured a $2.2 billion pre-money valuation in its June 2021 capital raise. Aside from avoiding Meta and Google fees, Transmit estimates that dodging a password can reduce account resets by 96%, which significantly reduces abandoned ecommerce carts and churn over time.

That last capital raise brought in $543 million to boost its efforts and major brands are already speaking its language. Microsoft (NASDAQ:MSFT) has made Windows 10 password-free, and other tech giants are likely angling to do the same.

Kastle Systems

Back in the physical world, there are only so many companies that approach security in a way that matches the hybrid spaces that now make up much of real estate.

Falls Church, Virginia-based Kastle Systems has specifically developed cloud-based systems to manage office spaces, multi-use buildings and event spaces. The company has also already leveraged its broad existing deployment to provide public building occupancy indicators, which appears to be a potential field for recurring revenue that the company could deepen.

Altogether, this mix of passive tools and sticky services could make Kastle the sort of stock that the market would enjoy in both bull and bear markets. The company, which did $123 million in revenue in 2020 according to security trade magazine, SDM, has been owned by former Carlyle Group principal Mark Ein since 2007.

A wide range of general operator-led SPACs could be interested in a target like Kastle, but Apollo Strategic Growth II (NYSE:APGB) may be the right fit for both sides. Run by Apollo’s Senior Partner of Private Equity Sanjay Patel, the team could likely find value in Kastle, and would likely have the means to replace any funds depleted from its $690 million trust through redemptions.

Apollo Strategic II has an initial transaction deadline of February 12, 2023.