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New home audio leader is driven, Directed    
By Mike Freeman    Tuesday, September 26 2006, 12:27 AM     
 
THE AUDIENCE IS LISTENING 
 
 
In a faux home-theater room at Directed Electronics, Jim Minarik fiddles with the remote control to call up an Eagles concert on a flat-screen television.

The chief executive of Directed - a Vista, Calif., company whose roots are in car alarms - Minarik points to two speakers in the ceiling, two thin tower speakers next to the TV and a cube-shaped woofer underneath. As the band breaks into "Hotel California," he cranks up the volume so each bass note seems to vibrate the sofa.

The demonstration highlights Directed Electronics' aim to make noise in the home theater market.

Founded in 1982 by U.S. Rep. Darrell Issa, R-Vista, Directed spent more than a decade primarily as a car alarm maker. But over the past five years, the company has diversified into in-car video, car audio, satellite radios and home audio.

Recently, Directed announced that it was buying Polk Audio for $136 million. In the speaker business since 1972, Baltimore-based Polk Audio is one of the better known brand names in home audio. The sale is expected to be completed soon.

Analysts liked the deal, in part because it's expected to contribute to Directed's earnings immediately. It complements Directed's DefinitiveTechnology brand, said Ralph Jean, an analyst with Wachovia Capital Markets. Directed purchased the brand in late 2004 for $50 million.

"We view Definitive as a slightly higher-end brand that is being distributed at specialty retailers such as Magnolia," wrote Jean in a research note. "The Polk brand is distributed via the large box consumer electronics retailers ... We believe Directed now is the market share leader in three major categories - car security and convenience, satellite radio and home speakers."

The acquisition is another step in Minarik's blueprint for diversifying the company in the hotly competitive consumer electronics market. "When we were just vehicle security, the market we were competing in within the U.S. was a $350 million market," Minarik said. "Today, when you add satellite radio, home audio, mobile audio, mobile video, we're now competing in a $2.6 billion market. "

The Polk Audio deal gives Directed another potential growth story to tell Wall Street beyond satellite radio, according to analysts. The primary supplier of Sirius satellite radios and accessory products, Directed has seen its sales soar.

The company began carrying Sirius products in 2004. By 2005, the Sirius business accounted for 39 percent of the company's revenue - or roughly $120 million. Satellite radio is the main reason Directed's sales jumped more than 60 percent last year to $304 million.

Before the Polk Audio acquisition, Directed was on pace to do more than $430 million in sales this year. "I would say without the satellite angle, I don't know if this would be a terribly interesting stock," said Bud Leedom, publisher of the California Stock Report. "That's really what's providing the growth."

Satellite radio is not without risks. Both Sirius and XM have failed to meet profitability targets, despite corralling about 15 million subscribers to date. And the pace of subscriber growth, while fast now, is expected to taper off.

Market research from the Consumer Electronics Association found that shipments of in-vehicle satellite radio receivers grew from $209 million in 2004 to $447 million in 2005. But the association only forecasts satellite radio sales to reach $470 million in 2007. "I've been a student of the satellite radio business since its inception," Minarik said. "Nobody is more aware than I am that it loses a ton of money. At the same time, XM and Sirius have multibillion dollar market capitalizations. Analysts that cover satellite radio all project 30 million to 40 million subscribers."

Although he doesn't say so directly, Minarik agrees with Leedom that the Polk Audio acquisition adds another leg to Directed's product portfolio that has the potential for growth.

With the increased popularity of flat panel televisions and the emergence of high-definition sets, more consumers are seeking home theater loudspeakers.

According to Minarik, the combined Polk Audio and Definitive Technology products will have the top market share in the home theater market, ahead of Bose.

"There are many reason why we did the Polk acquisition," Minarik said. "One is it's one of our strategic areas for growth. It's also an offset for this exploding satellite radio category."

Before he got into politics, Issa founded Directed in 1982 with $5,000. He developed the company to roughly $85 million in sales before selling a majority stake 1999 to private equity group Trivest. Issa maintains a seat on Directed's board of directors and owns about a 4 percent stake in the company, according to filings with federal regulators.

Trivest brought in Minarik, a former Clarion Audio executive with more than 25 years of experience in consumer electronics. While Minarik has expanding Directed beyond vehicle security, he's quick to point out that car alarms and remote starters remain the company's core business, including the Viper and Python brand names. "Our philosophy has been to have the brands that matter in each of our respective markets," he said. "So in vehicle security, we have all the brands that matter."

This fall, the company is introducing a remote starter that can start a car from 1 mile away.

In car audio, the company has Orion, Precision Power, A/D/S and other brands. In home audio, it has Definitive Technology and now Polk.

The acquisition of Polk Audio will make Directed a roughly $500 million company, with about 430 employees, said Minarik. "With home audio, it's a highly fragmented market," Minarik said. "Bose has the No. 1 market share. It's hard to overtake Bose with a single brand. But we are able to achieve No. 1 market position collectively with our two brands."

Matt Polk, a co-founder of the 130-employee company, did not reveal specifics of the deal, but he did say the home theater market is consolidating. A week before Directed agreed to buy Polk Audio, speaker maker Klipsch Group of Indianapolis purchased Audio Products International of Toronto for an undisclosed price. "There are a lot of opportunities," Polk said. "But that means there can be risk. Consolidation makes sense in that it makes it much more possible to go after some of the opportunities while mitigating the risk by being part of a larger organization."

Polk and co-founder George Klopfer will remain with the company, developing new products.

Directed first talked to Polk Audio in 2003. "We've known these guys for a while," Polk said. "It's not like we're getting in bed with a stranger."

Minarik said talks didn't go anywhere two years ago. "Their side of the story is after a few months of talks they decided they were not ready to sell," he said. "Our side of the story is we showed them how they could make a lot more money, and they did."

Then, Directed competed in an auction to purchase Polk, with private equity funds offering rival bids.

"I will tell you that the price we offered two years ago was a whole lot less, but the company was a lot less profitable," he said. "It's a better company today than it was two years ago."

Polk Audio will add to Directed earnings without layoffs. But Minarik also hopes to find cost savings. For example, the companies both use the same contract manufacturers in Asia. So Minarik expects to get bulk buying discounts and other benefits. 

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