Business Breakdowns: APi Group - Safety Services at Scale

Episode 205 | Released: January 29, 2025
Host: Zach Fuss
Guests: Adam Wieden (ADW Capital), Chad Garcia (Ave Maria Mutual Funds)

Episode Overview

This episode dives deep into the APi Group, a prominent provider of life safety and specialty services to buildings and construction projects across the globe. While not a widely recognized name, APi Group plays a pivotal role in maintaining essential building infrastructure—fire protection, security systems, elevators, and more. The conversation explores the company's strategic evolution from project-based work to a resilient, recurring revenue model, its decentralized and entrepreneurial culture, and how leadership, especially post-SPAC and under the influence of investor Sir Martin Franklin, shaped its journey. The episode also examines APi’s competitive edge, acquisition strategy, capital allocation, risks, valuation dynamics, and lessons for investors.

Key Discussion Points & Insights

1. APi Group’s Business Model and Structure

[06:33-09:58]

• Two Core Divisions:

  • Safety Services:
    • High margin, high recurring revenue, low capital requirements.
    • Statutory/mandated services: fire protection systems, HVAC, security, inspections, now including elevators & escalators.
    • “API believes that every dollar spent in inspection leads to three to four dollars in high margin repair work.” (Chad Garcia, 06:56)
    • Highly fragmented industry with APi holding only ~10% market share—opportunity for further consolidation.
  • Specialty Services:
    • Construction/installation-heavy: natural gas pipelines, fiber optics, manufacturing plants, wastewater lines, more capital intensive.
    • Deeper historical roots but shifting focus toward recurring, service-oriented work post-financial crisis.

• Recurring Revenue Focus:

  • Over 55% of current revenue is recurring, targeting >60% in the near term.
  • “The focus post-GFC is to increase the percentage of recurring revenue throughout the business.” (Chad Garcia, 09:37)

2. Financial Profile, Size & Capital Allocation

[11:12-14:16]

• APi Group’s EBITDA has grown nearly fourfold post-SPAC.
• Estimated 2025 EBITDA: ~$1.1B; net CapEx: ~$65M; free cash flow: ~$800M on a $10B market cap.
• Majority of CapEx is channeled into Specialty Services.
• The transition away from capital-intensive segments has notably improved margins and cash flow.
• Acquisition Strategy:
  • Smaller acquisitions at 5-7x EBITDA; medium-sized at 10-12x.
  • Large deals (like Chubb) at higher multiples justified via post-acquisition synergies.

3. Competitive Advantage & Organic Growth Drivers

[14:16-17:03]

• Differentiation comes from shifting businesses from large, competitive projects to small, high-frequency, high-margin services—primarily inspections leading to repair work.
• Case Example: Acquisition of a Boston firm
  • Pre-acquisition: $10–15M revenue, 7% EBITDA margin.
  • Post-APi playbook: $20M revenue, 14% EBITDA margin, 50% from inspections.
• Growth Drivers:
  • Sales focus on routine inspections.
  • Systematized process of converting inspection findings into repair sales.
  • Investment in staff, sales, and cultural change at the local level.

4. Culture, Leadership & Decentralized Model

[17:03-23:10]

• Ownership Culture:
  • Early ESOP benefitted employees—“Lee's secretary, I think, got like almost $20 million from the ESOP...” (Adam Wieden, 17:28)
• Decentralization:
  • Branch managers have real P&L responsibility; ability to cross-move talent for leadership development.
  • Cross-division knowledge sharing is systematized, with successful managers coaching others.
• National Services Group:
  • Matches customer relationships with branches, enhances cross-selling, operational oversight, and reporting.

5. The Martin Franklin Influence & SPAC Transition

[23:10-29:04]

• SPAC Origins:

  • Martin Franklin brought APi public via SPAC in 2019, offering an owner-operator-friendly transaction without carve-outs or onerous earnouts.
  • “No earnouts, no rollover equity, no carve out… 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.” (Adam Wieden, 23:43)

• Acquisitive Growth:

  • Post-SPAC, focused on large deals (Chubb acquisition from Carrier, SK in Europe, Elevated in elevator services) and steady tuck-ins.
  • Emphasis on rationalizing legacy segments, pivoting to recurring revenue business lines.

6. Incentive Structure & Governance

[29:04-31:37]

• Unique Sponsor Incentive:
  • Martin Franklin and team receive "20% upside on the founder shares," with dilution per share declining as the business grows.
  • Unlike many SPACs, Franklin treats his vehicle as permanent capital, not a short-term flip, aligning incentives with long-term shareholders.
• Comparison to Other SPACs:
  • “SPACs have a bad reputation… Martin uses SPACs as more of permanent capital vehicles.” (Chad Garcia, 30:50)

7. Cyclicality, Risks & Growth Visibility

[31:37-34:47 | 44:45-46:46]

• Some historical cyclicality during inflation spikes, since material cost pass-through can distort reported revenue vs. profitability.
• Current focus on margin improvement, culling low-performing contracts, and deepening recurring business.
• Risk Factors:
  • Integration of large acquisitions (e.g., Chubb) but considered largely successful and de-risked.
  • Lower organic growth in Europe vs. US.
  • Public market undervaluation vs. private comps; possible take-private scenario if gaps persist post-2026.

8. Valuation & Market Perception

[42:08-44:45]

• Trading at a Discount:
  • “API Group is trading under 11 times EBITDA,” notably lower than peers (FirstService, Otis, Cintas) or private market transactions (many at 15–20x).
• Possible Catalysts:
  • Simplification of capital structure, increased recurring revenue, resolution of SPAC incentive structure post-2026, and continued cash deployment could all help close the valuation gap.

9. Lessons for Investors & Final Takeaways

[47:00-51:14]

• Adam Wieden:

  • “When you're investing in rollups and companies with promotes, I think it's really good to buy them when they're below watermark…” (47:00)
  • The importance of management alignment on value extraction if public valuations lag private or intrinsic value.
  • Observations on shrinking public-market investor universes for mid/large-cap rollups.

• Chad Garcia:

  • “The headline can drive the narrative as opposed to the fundamentals…” (49:20)
  • Stocks can remain mispriced for a long time—look for catalysts if you’re hoping for multiple expansion, otherwise, returns must come from business growth.
  • Points to upcoming catalysts (analyst day, margin target raises, capital structure improvements) that could unlock value.

Notable Quotes & Memorable Moments

• “API believes that every dollar spent in inspection leads to three to four dollars in high margin repair work.” — Chad Garcia [06:56]
• “One of the unique characteristics about this company is that while it is a large corporate organization, there is somewhat of an entrepreneurial culture.” — Adam Wieden [17:28]
• “No earnouts, no rollover equity, no carve out… 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.” — Adam Wieden [23:43]
• “SPACs have a bad reputation… Martin uses SPACs as more of permanent capital vehicles.” — Chad Garcia [30:50]
• “API Group is trading under 11 times EBITDA… and you'd say, well look at FirstService, look at Otis, look at Cintas—all of them trade at higher multiples.” — Adam Wieden [42:34]
• “When you're investing in rollups and companies with promotes, I think it's really good to buy them when they're below watermark…” — Adam Wieden [47:00]
• “Stocks can be mispriced for a long time.” — Chad Garcia [49:20]

Timestamps for Key Segments

• [02:43] Introduction to APi Group & Guests
• [06:33] Breakdown of Business Divisions & Model
• [11:12] Financials, Revenue, and CapEx Structure
• [14:16] Competitive Advantage and Organic Growth Playbook
• [17:03] Unique Culture & Decentralized Structure
• [19:18] Management, Incentives, and Branch Oversight
• [23:10] Martin Franklin’s Role & SPAC Origins
• [29:04] Sponsor Incentives & Shareholder Alignment
• [31:37] Organic Growth, Cyclicality & End Market Risks
• [34:47] Impact of Chubb Acquisition
• [42:08] Valuation Context vs. Peers & Private Market
• [44:45] Risks to Thesis & Takeover Scenarios
• [47:00] Investor Lessons & Closing Reflections

Conclusion

This episode provides a comprehensive look at how APi Group stands out in an often-overlooked but essential industry by effectively shifting from low-margin project work toward high-margin, recurring service revenues—backed by a proven, decentralized culture and demonstrated capital allocation discipline. The discussion was frank about the challenges of public market perception, the impact of SPAC structures, and the nuances of roll-up strategies, supplying listeners with real-world lessons for business and investment analysis.

For those seeking more detail, visit joincolossus.com for related content and other business breakdowns.