* Deal biggest leveraged buyout so far this year
* $7 bln cash deal Apollo's second this month
* ADT to merge with Protection 1 after deal closes (Adds background on the financing, analyst comment, industry background)
By Koh Gui Qing and Greg Roumeliotis
Feb 16 (Reuters) - Private equity firm Apollo Global Management LLC said on Tuesday it had agreed to buy U.S. security company ADT Corp in the biggest leveraged buyout (LBO) of the year thus far, defying a challenging financing market for such deals.
LBOs have been few and far between so far this year as banks have been reluctant to finance deals, fearing they would not be able to sell on the debt due to the market volatility. Apollo tested its relationships with its lenders, tapped new investors, and used a portfolio company to put together the deal with ADT.
Apollo said it would pay $42 in cash for every ADT share, valuing its equity at close to $7 billion, a 56 percent premium over Friday's closing price. It will merge the company with Protection 1, a smaller U.S. peer it acquired last year. The combined company will be valued at $15 billion, including debt, Apollo said.
While Apollo and its co-investors agreed to provide $4.5 billion for the deal - a big equity check by LBO industry standards - the majority of the deal will be funded with bank debt and other financing.
By comparison, when Apollo agreed to acquire the previously unaffiliated for-profit education provider Apollo Education Group Inc earlier this month for $1.1 billion, the New York-based firm and its co-investors agreed to fund the deal entirely by themselves, without bank debt.
A string of leveraged buyout deals have stalled in recent weeks as the financing from banks dried up, in one of the biggest challenges for the private equity industry since the 2008 financial crisis.
Apollo secured $1.6 billion in first lien term loans and $3.1 billion in new second lien financing for the ADT deal. Barclays, Deutsche Bank and Royal Bank of Canada, which funded Apollo's acquisition of Protection 1 last year, also agreed to finance the ADT deal. Credit Suisse and Jefferies declined to participate in ADT, however, even though they also backed Protection 1 last year. Citigroup and the credit investment platform of Canadian pension fund PSP, which were not in the Protection 1 deal, stepped up for the ADT deal.
The investment arm of Koch Industries Inc also agreed to provide $750 million in financing in the form of preferred securities. Apollo will use Protection 1 to guarantee $3.8 billion of ADT's existing bonds, allowing them to be rolled over into the deal.
Based in Boca Raton, Florida, ADT makes burglary alarm and video surveillance systems for homes and businesses. Electronic security companies are attractive to private equity firms due to their high contractual recurring revenue, according to William Blair & Co analyst Nicholas Heymann.
"The more customers use (security services), the less likely they are going to leave it because they begin to build their lifestyles around it," Heymann said.
ADT holds about 27 percent share of North America's home and business security market, pegged at $35 billion in 2015. Vivint Inc, owned by private equity firm Blackstone Group LP, holds about 4 percent and Protection 1 about 3 percent.
This year, the home and business security markets are estimated to grow by 4 to 5 percent and 3 to 6 percent, respectively, Heymann said. ADT was spun off from fire safety systems maker Tyco International Plc in 2012.
The ADT deal, which is expected to close by June, includes a 40-day "go-shop" period, allowing ADT to seek a better offer.
"Given ADT's uniquely large market share, and the take-out multiple, it is not out of the question that another player would take a look at it during the go-shop period," Credit Suisse analyst Julian Mitchell said.
Berkshire Hathaway Inc and billionaire John Malone could be among those interested, Heymann said.
Protection 1 CEO Timothy Whall will head the combined company, which will have proforma annual revenue of over $4.2 billion.
Goldman Sachs and Bank of America advised ADT on the deal.
Reporting by Gui Qing Koh and Greg Roumeliotis in New York; additional reporting by Ankit Ajmera in Bengaluru; Editing by Kirti Pandey and Matthew Lewis