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Telus Corp. is buying one of the largest home-security businesses in the country, paying $700-million in cash for ADT Security Services Inc. as telecommunications giants race to expand their product bundles.

The deal is Telus’s second home-security acquisition in as many years, having already acquired the Western Canadian operations of AlarmForce Industries in early 2018.

At the moment, Telus’s security division services around 100,000 clients. The ADT purchase will add another roughly 500,000 Canadian customers.

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While the acquisition will make Telus a major player in home security in Canada, the telecom will have to invest in the ADT operation to fix some existing challenges. ADT incurred an US$88-million goodwill-impairment charge on the business late last year, and at the time ADT’s chief executive attributed the woes to “unique dynamics in the marketplace.”

These challenges included integrating ADT’s 2014 acquisition of Protectron and the competitive landscape in Canada. To help turn things around, ADT shuffled its Canadian leadership and hired a new country head last year.

Home and business security is viewed as a natural fit for telecom companies because of the opportunity to cross-sell phone, cable and internet services. Rogers Communications Inc. has run a home-security division since 2011, and BCE Inc. attracted attention by acquiring the bulk of AlarmForce last year, alongside Telus.

Product bundles have also proved to reduce customer churn – an industry term for client turnover. The more services a single household has with a single company, the more of a nuisance it can be to switch to a competitor.

“Home security is an important aspect of the connected home strategy with significant cross-selling opportunities with Telus’ current wireline products,” Canaccord Genuity analyst Aravinda Galappatthige wrote in a note to clients.

“The objective is to lower churn and price-sensitivity by bundling an increasing number of products at the household level," he added.

Telecoms are also vying to be major players in the internet of things, a term used when talking about everyday products that have computing devices embedded in them. Examples include household systems that allow homeowners to lock their doors or control their thermostats from afar.

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Beyond the benefits of making such services part of a product bundle, telecoms also hope to glean insights from the data they transmit – in the same way that technology giants such as Amazon.com Inc. and Alphabet Inc.'s Google learn from with the in-home devices, such as the Echo pod.

ADT is based in Boca Raton, Fla., and has operations in the United States and Canada. Detailed financials of its Canadian business were not provided, but the U.S. company recently disclosed that Canada contributes about 5 per cent – US$230-million – of its total revenue. The company’s CEO also recently said the Canadian business delivers positive free cash flow.

ADT was previously owned by a private equity firm but went public in early 2018. In the prospectus for the offering ADT disclosed that its Canadian arm delivered adjusted earnings before interest, taxes, depreciation and amortization of US$54-million in the six months ended March, 2016.

But analysts have had to estimate recent results. ADT’s total EBITDA is roughly 50 per cent, and Canaccord Genuity’s Mr. Galappatthige says the Canadian division’s margin could hover around 40 per cent.

Analyst Adam Shine at National Bank Financial used a “reasonably conservative margin” of 30 per cent for his estimates.

“We expect margins to move down in 2020 as Telus works to stem losses, strengthen the offering and improve customer service, with margins poised to move above 30 per cent post-2020 as synergies are optimized and cross-selling opportunities sought,” he wrote in a note to clients.

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Although Canada’s three major telecoms are all building out security divisions, Telus’s acquisition of ADT fits into its broader push beyond traditional phone, cable and internet services. Notably, it has been building a health division focused on digitizing and improving medical services; last year, for instance, the company launched a program that creates a secure video link between doctors and patients so they can talk face to face by mobile phone.

Last week, Telus announced that chief operating officer Josh Blair, who oversaw the company’s health business, was leaving. He was the second potential successor to Telus CEO Darren Entwistle to depart this year, after David Fuller, who ran the consumer telecom business, left in January.

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