Eight months after its private equity-fuelled merger with two US companies and one from the UK, the Carlow security monitoring company, Netwatch, has a plan to grow group revenues by two-thirds – to €100 million – by 2020. The company is going green, just not in the environmental sense. Netwatch believes it can light up its fortunes as the security firm of choice in the $15 billion (€13.2 billion) North American legal cannabis market.
The newly-formed Netwatch Group's effervescent chief executive, David Walsh, gets even more excited than usual when discussing the business opportunity for this Irish-headquartered multinational from the ongoing legalisation of marijuana across the US and Canada. "This is not a wave. It's a tsunami," he says.
Legalised
The weed has been well and truly freed across most of North America. Although it remains illegal under federal law, cannabis has so far been legalised in 31 US states for medicinal purposes. Nine of those states also legalised it for recreational use.
Market analysts believe it is only a matter of time before the US prohibition on pot is fully dismantled. Its legal cannabis market was worth $8.5 billion last year, and grew by 40 per cent. Energias Market Research estimates it could be $28 billion by 2024.
Fulfilling a campaign promise by prime minister Justin Trudeau, Canada decriminalised cannabis two months ago, for both medicinal and recreational use. Seasoned smokers and nascent tokers alike queued around the block when the prohibition ended in October. Canada's market is estimated by CIBC at $6.5 billion.
Marijuana may be legal in most of the US, where Netwatch is extremely active, but that doesn’t mean there are no rules. States place strict licensing conditions on producers. In general, cultivation farms must be kept miles away from retail outlets and dispensaries. Where the bud is grown, and also where it is sold, must be heavily secured to prevent criminals hijacking truckloads to sell on the black market. This is where Netwatch, which provides high-tech remote video monitoring, comes in.
"We got in at the very start," says Walsh, who co-founded Netwatch with his business partner, Niall Kelly, in 2003. "We've already got about 130 cannabis sites in the US."
Netwatch installs high-tech, smart security cameras at the premises of its clients, most of which are fed back to its monitoring hub on the outskirts of Carlow town, where about 200 are employed. If an intruder, for example, appears onscreen, its technology triggers an alert at the hub, where staff can watch in real-time. A verbal warning can be delivered from Carlow through speakers at the location, and the police and client can be notified. It is an ideal and efficient system for watching over cannabis plants.
Netwatch entered the US market in 2012, and gained credibility in the northeast region by appointing former Boston chief of police, and one-time head of the Garda Inspectorate, Kathleen O’Toole as a director of the business.
Licences
As Walsh explains: "We positioned ourselves with customers that were applying for medicinal cannabis licences in, say Massachusetts. We'd get them to influence legislators in terms of writing the documentation for the licences, and the security requirements. Many of the licence forms use the phrase 'Netwatch or equivalent'."
Walsh says Netwatch generates “about €10 million” of its annual revenues – that’s close to half the total revenues booked by the Irish company before the merger – from the US cannabis market alone.
“I have absolutely no doubt that within five years we’ll get €100 million annually out of it. That’s fully recurring, contracted revenues, and it is also excluding Canada,” he claims.
Netwatch has yet to enter the Canadian market, but Walsh says the group is working on an entry plan. “As it happens, one of our guys will be in Canada next week.”
While the growth focus is on the US and Canada, there is plenty for Walsh to be proud of back home. Netwatch is the biggest thing to come out of Carlow since Saoirse Ronan. He delights in building a multinational from the pleasant riverside town, a little over an hour outside Dublin. He tells anybody who will listen that Netwatch will become the world leader in its field. The recent merger has supercharged his plan.
In a deal financed by UK private equity firm, Riverside, Netwatch merged in April with Californian alarms company, National Monitoring Centre (NMC), as well as Texan security monitoring company CalAtlantic and OnWatch Multifire in the UK. Walsh is particularly excited about NMC's network of about 1,000 agent resellers, who he hopes to harness to sell Netwatch's proprietary systems to new customers.
Deal
The combined entity is now called the Netwatch Group, which gives an indication as to which was the senior company in the merger. Group staff numbers are about 600, with overall recurring service revenues of about €60 million.
So how much was the deal worth? Walsh says Riverside has a policy of not revealing any financial details. To give him his dues, he duly suppresses his naturally garrulous demeanour. Walsh won’t budge. “I’m telling you nothing,” he grins.
Luckily, publicly-filed company documents for the merger paint a reasonably detailed picture. Company filings suggest the merger, which was more than 18 months in the offing, was codenamed Project Olive. The filings suggest that, in April, shares were issued in the holdco at the apex of the new group structure to the tune of about €88 million, which may indicate the value put on the business by Riverside.
The filings show Riverside has taken control of about 75 per cent of the holdco. The next largest shareholder is Walsh, with about 12.5 per cent, or one eighth, of the business. Kelly appears to have about 7 per cent, with a smattering of shares allocated to the executives in NMC, CalAtlantic and Multifire.
The documents don’t state this, but the paucity of the stakes attributed to the other three companies suggests Riverside simply bought out the former owners of those businesses, and then simply rolled the lot into Netwatch.
Walsh's friend Samir Samhouri, who sold tech hardware firm Xtralis for more than $500 million in 2016, helped him to assemble the deal and has joined the group board as chairman. It appears Riverside may be willing to fund further acquisitions to turn Netwatch into a truly global player. As well as Ireland, the US and UK, Walsh indicates it also wants to grow its presence in continental Europe and Asia, where it has just opened an office in Hong Kong.
“Until now, we were just doing ad-hoc stuff with clients across Europe,” says Walsh. “Now we have to do something meaningful in Europe and in Asia from Hong Kong. It makes sense for us to acquire companies in regions where English is not their first language.”
It sounds like there is already another deal in the pipeline. Is there? Walsh grins again and turns puce. Having a secretive private equity partner is definitely cramping his natural communications style, although he appears to be enjoying the intrigue.
Growth
"Look at a country like France, for instance. If we were going in there we'd buy a company instead of trying to grow organically."
Is there a specific European company you are looking at buying?
“We’re looking at different targets.”
Do those targets know they are being looked at?
“They do.”
Walsh cracks a little, and lets out a massive sigh.
“Okay then, I can confirm we are in a process with a company in continental Europe. The deal will be done within six months if it is going to be done at all. Riverside is very open to backing us in acquisitions.”
Now that Netwatch has jumped on the private equity train, Walsh is acutely aware that his institutional backers will look to disembark at some stage. Private equity firms generally have a deal horizon of three to five years, occasionally longer.
Netwatch, Walsh acknowledges, is certainly a potential candidate for a future stock market listing. But he believes it is probably more likely that in several years time, Netwatch will go back to the private equity market to do a refinancing deal.
Does he enjoy working with private equity types, who are notorious as the ball breakers of institutional capitalism?
“They’ve given us more discipline. We are working very well with Riverside. As long as you’re beating the figures, private equity tends to leave you alone. We are ahead of target, but Riverside still wants to know what structures you’re putting in place for a year ahead of now.”
Netwatch's future is global, Walsh firmly believes. The Kerryman also remains an evangelist for his adopted home town of Carlow, where it sponsors everything from the local rugby team to the GAA grounds, Netwatch Cullen Park. Keeping the headquarters in the town was a "red line" for the merger.
"We're trying to build something like the new Kerry Group, although we're in a different sector, and we are going to do it out of Carlow. And I believe we can. Look what Denis Brosnan did out of Listowel. And when you think about it, Listowel and Carlow are pretty similar. There is no reason why we can't do it from here."
If its North American cannabis plan comes off, Netwatch’s success won’t just be down to pot luck either.
