Chit Chat Stocks - APi Group (Ticker: APG) with Ben Tewey

Episode Date: April 20, 2023

APi Group Corporation (APG) is a roll-up of safety inspection companies that provide services for fire, HVAC, and entry systems. Listen as Brett and Ryan ask Ben questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Ben's work? Check out his Substack here: https://vestrule.substack.com/ Contact us: [e-mail] Timestamps APi Group | (3:28) Competitive Advantages | (13:32) Commercial Real Estate | (24:58) Valuation | (33:35) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer. Today, we've got our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on Ben Tuohy, and we're talking about API Group. Ben is the author of Vestral Substack. Highly recommend. This was one, and I talked about this last time we interviewed him, where I was reading his articles and deep for a long time prior to reaching out. And I just assumed he was like someone in the industry that's been working for like 10 or 15 years. And he turns out to be a college age kid who's really smart. So yeah, I'm sure you'll hear that throughout the interview. But before we get to that,

we want to talk about our sponsor. Today's episode is presented by Stratosphere. Stratosphere is our investing home screen for fundamental research. Brett is bringing up the chart right now. He's showing it if you're watching this live. And Stratosphere is awesome. We literally use it every day. Brett mentioned that last time, but I mean it. We use it on a daily basis. They have really great data visualizations. They have all the SEC files for all our companies updated automatically and aggregated into one place. It's very convenient. And then probably the best part of the platform is the custom built KPI tools that you really can't get anywhere else. And they date back more than 10 years in some cases, which I just find really incredible that they've been

able to build all that out. So, Ditch Yahoo Finance and up your investing knowledge by using stratosphere.io. We use it as our investing home screen. You can too for free by going to stratosphere.io. Or if you're looking for a paid plan, which has a whole lot of extra benefits, you can use promo code CCM and get 15% off. That is stratosphere.io. Go ahead, check it out. We also have an interview with the founder, a brief interview that we have after the episode. So stick around if you want to hear that. But without further ado, here's our interview with Ben Tuohy. Welcome to Chit Chat Money.

On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital. And Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in.

Today, we are joined by now two-time guest, Ben Tuohy. He is the author of Vest Rule Capital. the Vestral sub stack. We'll link to Vestral sub stack in the show notes. Highly recommend going there. If you haven't already, we had been on to discuss Verimobility, I think a couple months ago, and listeners really seem to enjoy that show. So we're happy to definitely have you on again. And today we're talking about a company that has a slightly misleading name. It is API Group, although it has nothing to do with application programming interfaces or software really in general. But I guess this is kind of an oddball company. I'm

assuming most people haven't heard of it. So how did you come across this to begin with? And then can you provide any relevant history for the company that you think investors should know? Yeah, absolutely. Thank you guys for having me back on. I had a blast last time. So I'm glad to be back and chatting today. So how I came across this idea, I know Variable Mobility was a SPAC. So again, still looking at SPACs. And of course, Twitter is an incredible idea generation platform. So I was talking with one Twitter user, Market Euphoria, who has covered the business pretty extensively. And he reached out and was basically saying, hey, have you looked into API group at all? And I was, I said, no, of course, and immediately went to work. It was a SPAC.

And I know that they were kind of baby thrown out with the bathwater recently. So I wanted to see what was going on there and kind of dug into the business. At first, fire protection industry was kind of made my eyes glaze over. But once you start to dig into the actual thesis, it became really interesting. And to kind of give some background on history, The business was founded in 1926, so it's been around for over a century. Rupin Anderson was the founder, and it was founded in St. Paul, Minnesota. And really, who I credit the cultural or spiritual founder of this business is Rupin's son, Lee, who took over the business in 1964. He basically embarked on the acquisition strategy that we see today.

So he started rolling up a bunch of different contracting businesses throughout the North and moving into Western states in the 60s, 70s and 80s. He probably acquired about a dozen businesses. So this is companies like the Jamar Group, Viking Automatic Sprinkler, Western States Fire Protection. And it reminds me a lot of those old Ben Graham type names or like the American Fire Protection Company and things like that. So these are very blue collar businesses. And Lee ran the business from 1964 until 2002 when he stepped back and current CEO, Russ Becker, stepped in in 2002. Russ originally worked at Jamar, which is one of the operating subsidiaries that I talked about, and then moved up to the CEO about seven years after joining as president of Jamar. So, Russ, in all the interviews I've watched with him, he's terrific. He's honest. He is full of integrity.

He's energetic, passionate, focused on culture. He's a really nuts and bolts operator. And he has completed 90 acquisitions since taking over in 2005 as CEO. So, plenty of ability there with allocating capital. And then the really important inflection point in this business was during 2008. So they were a construction contracting, subcontracting business focused on installation and fire protection and things like that. And it's no secret that new construction turned over in 2008. And they had a peak to trough decline in revenue of 25 percent in 2008 and 2009.

And that really hit them. They're like, we can't do this again. We need to somehow get out of the super cyclical industry, capital intensive. So they shifted away from what you call a contract or installation business, which was 85% of their business in the global financial crisis. And they've slowly shifted that to this inspection and monitoring business that is now north of 50%, which is much more stable, much more recurring. And this kind of showed up during COVID where the safety services segment, which is the gem of this business. only fell 4% during COVID. And it's tough to imagine a tougher environment for commercial construction with no one in any buildings at all and totally shut down. So business is much more resilient. And then I mentioned how they went public via SPAC in October of 2019 by J2, which

is run by Martin Franklin, Jim Lilly. And you'll recognize those names from Jarden, which is one of their public companies that they ran for over a decade. And we can talk about that, I'm sure, later. Yeah, no, it's a great overview. We're going to hit management again, because it is very important for a business of this nature. But I think for listeners, they may be a bit confused on what these companies are, what this market even is. So let's go deeper on the business segments. Can you explain the basics of the ones you mentioned there? And my follow-up is you said you liked one of them, I forget the exact name of it, much better than the others. And you called that the gem. So why do you think that one has higher quality than maybe the other ones? And

yeah, well, what's special about this fire safety business? Sure, sure. So I know I talk fast, but the first group, the first business, they segment their business into two pieces. So you have safety services. So this is the gem of the business. It's about 70% of revenue, 68% of EBITDA, which is a depressed number because they just acquired a huge business over in Europe called Chubb, which we can dive into later. But these in safety services, they're run on a decentralized basis with local branches. So these local branches go out and they'll inspect fire alarms and sprinklers and the backflow devices and then other fire protection devices and things like that. And then there's also a small HVAC component of the

safety services business, but it's pretty immaterial. I think it's like 10% of segment revenue. So not huge to the thesis. But the key thing to know about fire protection is that these inspections are statutorily mandated. So they're required by law to happen one to two times a year. So it's really highly recurring and they're cheap projects. I think it's $5,000 to do for complete commercial construction. So that's a small ticket compared to the huge value of having your business or your commercial building certified so employees can work in there. So again, that has to happen every six months or every year. So you'll hear statutorily mandated or required by law. And I think it really helps to frame what matters to customers, right?

So small businesses will kind of make that decision based on price, but larger accounts. So if you think multinational corporations, regional, national corporations, what really matters to them is not the price of a $5,000 contract. They don't really care about saving $1,000 here or there. What matters is going to be, I think, ease of contact, reliability of service, reputation of the inspector, response time. It's so much easier because API Group has this broad geographic reach that they can service equally geographically diverse customers, which means they can act as a consolidator of spend. So instead of having, gosh, 30, 40, X, Y, Z amount of inspections or inspectors per building, you have one, what API Group calls their National Service

Group point of contact. So you can see how it's an easy headache if you have $45,000 contracts to keep track of all of that and bill and things like that. But API Group can really simplify just by consolidating spend. And they can collect more data and see customers from that national instead of just one building perspective, which is important. And then kind of structural tailwind and drivers here. It's tough to see people getting less and less concerned about fire safety, right? You think about all the famous fires that have happened. There's the Baltimore fire. There's the Triangle Shirtwaist fire. These things are not going to go in reverse. They're just going get more and more stringent. Buildings are getting more complex and the replacement cost

of commercial real estate is just going up. So it's important to kind of ensure or make sure that these are up to code and up to regulation. So that's the 70%. That's the gem of the business. And then the other 30% is called specialty services. So 30% of revenue, 32% of EBITDA, which, like I said, will probably mix lower. It's lower margin, a lot lumpier, and probably deserves a lower multiple than safety services. And we can get into some of the precedent transactions of safety services business. But the specialty business, they'll do repair and maintenance of water, sewer, telecom, other critical national infrastructure. So again, tied to us infrastructure spending um and then again probably not as high quality of a business

probably lower margin and then to address finally to adjust to the question of moat here i don't want to kind of suggest that this is some death star type business that it's no visa or master card or anything like that but i think there there is a certain culture and process power and economies of scale that they've built up over time um and despite you know contract business being lumpy they've shifted to this recurring inspection services uh which has 10 to 20 percent higher margins than contracts so you get structural margin expansion over time um there's structural growth like organic growth here um and inspection the inspection business itself i mean And if safety services is a $4.5 billion business and $5,000 per project, that's a lot of projects

to do. So they can really differentiate themselves from mom and pops just by having stickier customer relationships and focusing on kind of gritty work, playing the long game to build up relationships over time. You mentioned there kind of one of the advantages of being a national player, but I know in your write-up, you talked about a couple more advantages. is what gives them an edge over the smaller players? Or I guess, what advantages in general are there to being so large? So yeah, I think it's a good question.

Just by looking at some of the numbers, they have below average industry churn, and they have a higher return on invested capital than peers. So you look at that and you're like, okay, obviously there's some sort of competitive advantage here. And you see that show up in, I talked about the geographic scale. The single point of contact is important. And then I think the really important thing to hone in here is this inspection first go to market as opposed to winning contract revenue. So because they're leading with inspection first, you get some switching costs. So the person that you have inspect your building is a natural choice for the person who's going to expect your next building. So there's some switching costs as you we've seen API do some acquisitions to build up like full cycle end to end solutions for the entire life cycle of a business.

So as they increase more services or penetration increases, switching costs are going to go up. And I think scale also allows API to just do more inspections faster. So you have this ability to build up route density so you can literally get to more customers in a day, which is helpful. But once you're on a site, as the tester is going through, they're automatically sending data and reports back to the back office, who is immediately getting started on a deficiency report. Whereas a mom and pop would have to go through the building, mark down everything that they're seeing, and then they'd have to go back that night and type a deficiency report. So they can literally turn around efficiency reports faster and get these buildings past code faster, which is huge for especially new construction, but also just making sure commercial real estate stays open and ongoing. So there's also four ancillary or kind of marginal things that the inspection first go-to-market helps with. So high volume, low ticket structure means you have low customer concentration, so no customers 5% or more of revenue.

Short contract length, so that mitigates contract risk. So customers are literally just not stepping out of contracts once they sign them. You can see this through contract loss rate, which they report, which is, I think, lower than 2% at this point. And then raw material and other risks, input cost risk is mitigated through the short contract length. So inflation is not a huge deal in this business. Contracts are usually 6 to 12 months at most. And then inspection and monitoring is 50% of revenue now. It's growing 10%.

A lot of that's retrofit. So we talked about how business is less cyclical now. And then the last thing is that you can establish these long lasting first call relationships. So you're competing less on price. Makes sense. I guess one question that you ask yourself in your write-up, and I kind of want to just pose it to you now is around the basically existing businesses as opposed to the new businesses that they acquire. Do you think that they can basically grow cashflow

in the future? And then is there any, I guess, just thoughts around organic growth overall? Yeah. So this has been kind of a debate between bulls and bears and everyone looking at the name. So, first of all, right, fire protection is not a sexy industry, and I don't think anyone is really growing up and saying, I want to go check sprinklers. So, the question is, where's demand coming from? And most of the industry reports and projections that I've read have called out a low to mid-single digit, call it 2% to 4% organic growth rate here, just in the industry overall. So this is new commercial buildings being put up. This is, it's really driven more or less by, it's hard to see the fire safety codes getting any less stringent, like I talked about earlier. Insurance companies mandate it, and it's required by federal law to have your building inspected. So there's that structural driver there. So they can take price. So you could call it two, four or 5% price each year. And then there's also buildings are getting more complicated. So increasing system and building complexity is driving a bunch of variations in building design. And my girlfriend is an architecture major, and some of the things she draws up is incredible.

And as an inspector of a building, I would have a nightmare trying to inspect it. So that replacement cost going up of commercial real estate is also driving some pricing and volume increases. And I think really the mantra here is that an ounce of prevention is worth a pound of cure. You would rather spend your $5,000 up front and go and have to rebuild an entire building. um and talking about the kind of the competitive dynamics in the business so regardless of geography this industry is really really fragmented which i think makes a lot of intuitive sense so um areas to entry are pretty low right local mom and pop operators have limited regulation there's low startup costs you just kind of pop up some field inspectors sales reps and back office

employees. And then they can build out a local inspection business from there. And especially if they're focusing on regional markets or specific niches and verticals, it's pretty easy to start these things up. Like I said, these businesses, these mom and pops will tend to gravitate toward high ticket, low number of contracts. So they'll target one to $1 million contract on a new construction versus $5,000 of a million dollar revenue business, right? So instead of having 20,000 contracts, they'll have these mom and pops will have one just because it's easier, same dollar number, right? Still getting a million dollars of revenue, but much more difficult to keep all those

reports in line and get them out on time and keep all those customer relationships happy. So there's kind of a structural advantage that an API group or an MCOR, a large fire safety businesses, they can serve as smaller players and smaller contract values. No, that's super interesting on the just maybe counterintuitive, how the smaller service providers have the larger contracts. I never thought of it that way. I did have about three follow-up questions there, but you kept answering them. So we'll move on to the next one. I wanted to look at the M&A side of things. It's super important here. You mentioned 90 acquisitions since 2002, I believe, or maybe it was 2005. Thank you, Ryan. How much room is there

to keep deploying capital? I know you mentioned your notes here about incremental returns and incremental invested capital. Why don't we add talking about the Chubb acquisition as well, because I know that's important. Anything M&A, they think is important for listeners to understand. Sure thing. So there's two sides to this business, right? You have the existing businesses that we already covered, and then it's what are they doing with that growing cash flow stream? So management has said that they tend to avoid auctions, and they're using their network

to buy subscale players. They've guided to about $10 million of EBITDA for an illustrative acquisition. They say they're paying four to seven times EBITDA, and then they have 7% EBITDA margins. And so if you kind of pencil the math, that's implying, gosh, 0.35 times EBITDA sales number. So pretty clearly accretive. And they lay out a pretty convincing path to get these local operators up from 7% to 15% margins over time. And if you pencil the math, they're acquiring about $142 million of revenue if the business is doing $10 million of EBITDA at 7% margins. And they imply that they can get them up to $200 million of revenue and 15% margins within two

years. So what they're implying, there's a lot of cost synergies and some revenue and cross-selling capabilities. And I dig into those in the write-up. But just to give the quick overview, I think they've been generally successful at accomplishing both of those. So by my estimate, I think they've acquired about 20 businesses, completed 20 acquisitions since going public in 2019. And for context on how large this market is, there's 4,000 to 6,000 family-owned life safety businesses in North America. And I suspect it makes intuitive sense that this number is continuously growing, right? We talked about the fragmented market. We talked about the low barriers to entry. So I wouldn't be surprised if maybe you acquire 20 or 30 new players,

there's probably 20 or 30 or more new entrants per year. So that's a really long runway to lay a lot of capital going forward. And with Chubb, Chubb acts as kind of a platform and accelerant to move into Europe, Australia, Asia, and acquire more of these small life safety businesses. So I assume Europe is probably just as fragmented as the US and probably has, if not more, life safety family operated businesses. So I think if you exclude synergies, I think these local mom and pops can be rolled up for somewhere like six to 10 times EBITDA and then for larger acquirers that are going to benefit from scale and cost synergies and volume discounts and headcount reduction and all these synergies that we've talked about. You can probably roll up mom and pops for three, four, five times EBITDA, which, again, is clearly accretive. And then at 10 times EBITDA, if you're ignoring all synergies, I think that you're probably earning a low double-digit IRR on incremental M&A.

And then once you lump in all of your synergies, so these are – it's all the costs and revenue synergies that we talked about, and we can hop into some of that. but you're probably earning, gosh, a high teens, low 20s percent IRR on M&A. So pretty high returns on incremental capital that they can lay out going forward. How are they funding it? Is it all internal or they do debt financing? How does that work? So historically, a lot of it's been internal, right? So I think pre going public, I think all of it was internal. But the Chubb acquisition, which was a $3 billion acquisition that was funded with some preferreds that they issued to Blackstone and Viking. And so that there's some equity dilution there because it's convertible in the future at 2026. So there's some dilution there on the equity side. They have

ramped up a little bit of debt, but a lot of it. And I think from my assumptions and what I did in the write-up, I assume that they're done this large scale M&A and they're moving more to that small scale, high velocity of deal. And I think that can all be funded from cash flow from operations. One question that was kind of coming to mind, and maybe it's more of a risk and maybe it's not a risk at all, but you talked a lot about the commercial real estate, obviously tons of different kinds of commercial real estate, but would a slowdown in the commercial real estate space be a headwind to them at any point? It's kind of a hot topic right now. We've seen a lot of the, I think, prominent commercial real estate investors concerned. So would that hurt them at

all? Or have you thought about that in any way? So this is a pretty classic bear case that people will bring up. They'll look at it and be like, this is a construction business. Construction is going to roll over and this business is going to get crushed. And the pushback here is, look, 50% of this business is tied to this statutorily mandated, required by law, safety services business. It's inspection and monitoring, 10% to 20% higher margins. And what I really point to is back during the GFC, you had that 25% fall in revenue, but then during COVID, they had a 4% fall in revenue. And over that time, you had services go from 15% of revenue all the way up to 50, 55, 60%, whatever it is today. So I directly attribute the more resilient,

more recurring revenue to that shift to services. So I would say, no, that 50, 60% of the business is safe, but there is 40%, call it, I mean, it's lower margin revenues or 30, 35% of EBITDA is exposed to construction. It's something worth watching. Yes. Okay. One more question then Actually, we got a couple more questions, but roll-ups can be, I think, difficult to analyze sometimes, especially for people who aren't familiar with them. So what's a red flag that you look for when assessing a roll-up? There are plenty. So I think low insider ownership is a really important one, right?

Because if you want them to be aligned with you, that way they're not just issuing equity left and right. They're not diluting you. So insider ownership matters a lot. I think if their justification is purely multiple arbitrage with no clear synergies, and they just have an emphasis on financial engineering, I think that's a red flag, right? So the classic example here is when Quaker Oats acquired Snapple for $1.7 billion. Those businesses looked like they might have synergies, and they did not. And that acquisition, from what I understand, was a complete disaster.

um so if you have kind of an mba type and not a nuts and bolts operator kind of guy at the top um that that's a red flag i think if there's declining organic revenue growth or fuzzy disclosures around that um the accounting at a roll-up is really inherently opaque um so with the constant changes and moving parts you really want a management team that's going to shoot straight with you even more so than usual um and you can see this with a laundry list of disclosures and ad backs. And I think if you want to make it concrete and look at an example, your classic example here is WorldCom, right? That was a complete disaster with constant ad backs and things like that. And then if inherently a roll-up is a small, you're acquiring

a bunch of small players and trying to aggregate some marginal gains, and you're trying to get economies of scale here. So if you go out and do a transformational acquisition, I think that's a thesis break, right? And I think it's really fair to call out and say that Chubb at 14 times EBITDA was a platform acquisition at API Group. And that was probably a thesis break from the previous US life safety rollout. So I know there were some investors who looked at that and kind of put their hands up and backed off and said, this is not what I originally bought into. And I think that's fair. And I think that's preventing thesis creep, which is good investing. And then another part is a focus on culture, right? So I was listening to an Acquired episode and they talked about the AOL and Time Warner episode and how those cultures clashed. And I think if you listen to Russ talk at all, you'll see that he has an incredible focus.

Russ Becker, the CEO, if you listen and talk at all, he has an incredible focus on culture and if it's the right fit. And even to speak to how strong their culture is, they have a podcast, if you want to get kind of in the weeds here, that's called API Group, the Building Great Leaders podcast. And they have 75 plus interviews of people at API Group. So you can really get a feel for how the day-to-day operations run, or at least how these people think about the business. And then how this would show up in financial statements, I would just look at how incremental ROICs are trending, what's deal size, what are the multiples they're paying compared to what they're saying. So that's a good way to track some roll-up red flags. No, that's a great overview.

And yeah, it is important to track the discipline on the acquisition hurdle rates and all that good stuff. It seems like when looking at a roll-up, they either turn into the best performing stocks ever, Constellation Software, Danaher, or they totally blow up. I remember, what did we cover, Ryan? Mohawk Group was a few years back that turned into the Amazon seller. Oh, they changed. Well, Ethereum. Ethereum after. Yeah, after. Maybe another red flag is the name change.

Yeah, the name change after everything went south. But yeah, I mean, we don't need to talk about the philosophy of the roll-up strategy forever. Let's talk valuation. And I guess maybe first, is there any follow-up you want to talk about on management before we get into valuation? And if not, how are you valuing this coming today? What does it trade at? All that good stuff. And you mentioned insider ownership. Do you have any figures for API groups management on that? Yeah, sure. So I'll just quickly run

over management. I think Russ Becker is a super strong operator. He joined from Jamar, which is an operating subsidiary in 95. And like I said, his focus on culture is really, really apparent. He owns, according to the last proxy statement, 1.1% of the company, which is about $58 million today. And assuming because he's worked there since 1995, I assume that's a pretty big portion of his personal net worth. So I think he's aligned and rowing in the same direction as shareholders right now. If you look at the new CFO, Kevin Crum, he just came over from Ecolab. He has a lot of M&A experience. He was at Ecolab when they did the $8 billion Nalco acquisition, which was, again, another European platform business that Ecolab acquired. So pretty

directly applicable to Chubb, which is a European platform business that they have to integrate. Right. And then with the SPAC sponsors, I think the go to line, if you're looking at Martin Franklin and the J2 crew, as I call them, is basically look at all the value that they created. Oh, my gosh, Benson Eye Care, Chardon, 32 percent IRR. Oh, my gosh, they're incredible capital allocators. And like, I think that's true. I think they're very good investors, but they also have some bruises and some black eyes, right? Nomad Foods has underperformed the S&P. Element Solutions has underperformed the S&P. And these are both businesses that they've been involved with. So I would say that management is aligned here. There's a SPAC promote that

Martin Franklin and the J2 crews of Jim Lilly and Ian Ashkin take part in. So we can get into some of the economics of it, but I think it's pretty well aligned. They get, it was 141 million shares. And if, so let's say the stock goes from 20 to 25, I know there's a high watermark, but I don't want to hurt myself on the math here. If the stock goes from 20 to 25, they get 20% of that increase. So they are very much incentivized to get the stock price up and get it valued in line with peers. And that promote will go away in 2026. At that point, you'll have a business where insiders own, gosh, $450 million of a $4 billion business right now. So I think insiders are very well aligned here. Let's hit valuation. Any numbers there? I'm sure it'll be quick, but

I know listeners, whenever they listen to one of these things, they want to know, okay, is this at 40 times earnings or is this at 10 times earnings? Because that changes everything. So what do they trade at and what do you think future earnings power looks like? So I promise you, I'm not pitching a 40 times free cashflow business here. They trade at 11 to 12 times EBITDA. And they recently acquired Chubb at 14 times. So you could argue that API Group is a better business than Chubb. I'm being a little conservative here. If you just keep the multiple flat at 12 times EBITDA, right? I think they can do a billion dollars EBITDA on 25. At two times net debt, you get about a $10 billion equity value, 278 million shares,

but some dilution, right? You get a $36 share price today compared, or a $36 share price in 25 compared to 21, 22 today. So that's a high teens, low 20s IRR. And I will say, if you look my write-up, the EBITDA number I put out is 950. I just didn't want to hurt myself with the math here on the live podcast. So I went with a billion dollars flat. Now, imprecise models are usually better anyways. Ryan, did you have a follow-up you want to do? Yeah, I think I'm going to be... Oh, I was going to ask about the SPAC. I guess one thing, I think SPAC is kind of like a swear word now in investing. It seems like anytime I hear someone pitch a SPAC, I always think like, why did the company do it? They need to justify their,

explain yourself from the company's perspective. Do you have any thoughts around them going public via SPAC? Is it a positive or negative in any way for you? So I think it would be unfair to categorize them as one of the 2021 SPACs, right? They went public via SPAC in 2019. So this was pre-SPAC boom. And when you look at it, right, Lee Anderson, he was 80. He had worked in the business for 50 years. And I think he just wanted to retire. I think he wanted to be out. So API Group was brought public at seven, eight times EBITDA. And I think he just wanted a catalyst to kind of monetize everything that he built and get money while he was still able and active to enjoy it. So I think it was more just a willing seller at a reasonable price.

All right. Let's wrap things up, Brian, unless you have another follow-up, Brian, or no? Okay. Let's wrap things up. Last question we ask everyone. It's the pre-mortem. What could go wrong here? Yeah. So I mentioned last time, but I love this question. I think this is really well worth, and I think it's good to spend time here, right? So two of the primary risks in this thesis are, it revolves around, can you scale M&A, right? And then the competition to acquire those deals. So if PE comes in, multiples are going to come up, your IRRs are going to go down. If they can't scale M&A, meaning they can't do a high velocity of small deals at four to seven times EBITDA, I think as you move, I have a chart or

an exhibit in my write-up that there's a pretty clear correlation between deal size and multiple paid. So as your deal size increases, your multiple paid is going up, which means your incremental IRRs are coming down. So if either one of those two happens, return on incremental invested capital is going to fall further and faster than I expect in my model. And we've talked about it. Chubb is really key to the thesis here. The integration is going well so far. But I think you're at a time one to two years in where you're past a lot of the low hanging fruit. And now you're looking at revenue and cross-selling synergies, which is inherently more difficult to get. And I think if the Chubb acquisition stumbles or integration stumbles, I think that hurts the thesis pretty heavily here.

And then kind of a long-term risk, right? I think any difference in quality or breadth and depth of service here is pretty immaterial. So the difference between an MCOR and API group actually servicing customers is probably really small. and the services tend to be pretty homogenous. So I think if this industry were to consolidate over the next 5, 10, 15 years, then you'll see some pricing competition, which could compress margins. But again, I think that's further out than your three- to five-year thesis that I'm looking at right now.

Okay, that's all the questions we have. Ben, for anyone that's listening and wants to see more of your work, what are the best resources? So the two easiest ways to find me are on Twitter, which is BestRuleCapital. But because some of the Twitter things and Substack things that have gone on, it's also probably pretty useful to find me on Substack at BestRule, D-E-S-T-R-U-L-E. Yes, and there are a lot of good write-ups, so highly recommend everyone go and check it out. That is going to do it, though. We should throw a disclosure on this.

Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Ben, for coming on the show again, and we'll see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io, Brayden Dennis. Brayden, welcome. I wanted to basically give listeners that are interested

in Stratosphere, more context around what the platform is. So let's start there. What is Stratosphere and then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a listener myself. I like the deep dives. I like the different guests, the different perspectives on some interesting companies. So I think it's a good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out like, how can I overlay 10 years of financial side-by-side up to 35 years

we have now? And how can I actually build out a proper database of company KPIs that are not just revenue, but like, if you're looking at like Costco, like how many warehouses do they have? How many paid members are, are in like our Costco members? Or, you know, if I want to do a comp against like the streaming, like how many Netflix subs versus HBO plus discovery plus no Disney plus, like how do I build out proper comps of those? Cause those are the metrics that actually move the business. Those are the ones that actually move the needle more than any like gap financial metric you'll find. And so it started off as just purely a passion project. And I figured, let's just make the leap into entrepreneurship and see where it goes. And

you know, it brought, brought us here today. Yeah. And like you mentioned it, it is the stuff that you can't find anywhere else, at least not in a, I mean, you could find it page by page on their financials. Exactly. You can go through 35 PDF filings and find it, be my guest. And And that's basically what we did for a long time. So what do, I guess, maybe describe the pricing model so people know, but you're going to say there's a free platform. What do free users get? Yeah, good thing.

Because our mission was to always build a free platform. And so we really kept true to our mission and give an amazing platform for free, which gives you 10 years of financial statements on 40,000 global securities. So we don't list you just to US securities, it's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. You can look at the press releases right inside the app, news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are all the features you'll get on the free tier. Now, on the middle tier, the personal tier, you're going to unlock up to

35 years of financials and just kind of like nice to have, like quality of life, like notifications being built in, price targets for building models, like business owner mode where you can hide prices, like kind of like just that next level for individual investors who want to level up. And then the top tier is for like investment teams and professionals who want to unlock that KPI data and request KPI coverage as well. Like a firm will be like, here, we want these 10 names in our coverage and in your coverage. And then you'll have basically our entire universe that we're looking at, which is great, right? Because like earning season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, like it's right there

in one place, especially easy to handle around the peak of verning season. That matters a lot for these people. And so we have a premium tier for that as well. That's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans, but I think that covers it pretty well. Uh, if you're interested, please go ahead and check out stratosphere.io. We'll, we'll have a link in the description as well, but, uh, thank you, Brayden, for joining us. Brian, keep it up.

I really like what you and Brett are doing and, uh, I'll be listening along.