Deal Watch: Shadow of Uncertainty

The environmental industry is still experiencing a bit of a lull in terms of the mega-mergers that we saw in 1999 and early 2000. Increasingly uncertain economic times and the plunging stock market have probably caused some would-be acquirers to back off - to wait and see how the demand for broader environmental services will fare in the near-term future. Nonetheless, the industry remains ripe for considerable further consolidation, and smaller transactions continue to perk along at a consistent rate - particularly on the engineering/consulting side of the business and within the water and wastewater treatment sector.

The Big Get Bigger

One of the larger recent deals in the engineering and consulting sector involved the sale of the international engineering business of LawGibb to Jacobs Engineering Group Inc. This transaction, for which specific terms were not announced, was completed in February. This business unit in question had operated under the Gibb name and had contributed revenues of approximately $100 million to LawGibb group, or roughly one-third of the company's overall revenues. The deal will nicely complement the overseas capabilities of the recently quite acquisitive Jacobs - now one of the largest of the publicly traded engineering firms. LawGibb did not disclose why it decided to divest the business.

Elsewhere in the consulting and engineering business, AMEC roughly doubled the size of its operations in the United States with the purchase of Ogden Environmental and Energy Services, a subsidiary of Ogden Corporation. AMEC picked up approximately $80 million in revenue and 650 professional staff for an announced purchase price of $17.5 million -- a revenue multiple well below recent averages.

A number of British acquirers have surfaced in the last twelve months, and AMEC is by far the most aggressive. About a year ago, AMEC had made its first major step towards building a considerable North American presence, with the purchase of AGRA Consultants - one of the largest Canadian players. Mott McDonald, another major British firm also made a substantial U.S. acquisition in early 2001, purchasing the Killam Group through its North American joint venture with Hatch Associates of Canada - Hatch Mott McDonald Inc.


During the tougher times of the late 1990s, most of these environmental firms found public ownership a situation which conferred few benefits but considerable additional costs -- and hence many have sought to shed their public status.

Shifting from Public to Private Ownership

Also in early 2001 two formerly public engineering and consulting firms successfully completed transactions which essentially allowed them to return to private ownership. GZA GeoEnvironmental, a northeastern environmental consultant which had been a small-cap public stock for over 10 years, completed an employee buyout valued at $17 million. The deal was finalized early this year through a corporate vehicle named Futureco, which was financed by internal managers and outside investors.

In mid-March, Weston announced the likely completion of its long-sought ownership transition as well. In a deal led by executive management and largely financed by American Capital Strategies Limited - a publicly traded equity investment group -- the Weston family and public shareholders were taken out at per share prices of $5.38 and $5.02, respectively. Although the extent of the management holding was not announced, the firm expects to see at least 40 percent of the firm's ownership to transition into an ESOP over the next several years. Shareholders vote to approve this transaction in late May. There was not expected to be any significant impact on company operations or employees in either the Weston or GZA transactions.

Interestingly, these two deals cap a series of recent investments in the environmental industry by private equity groups. As reported in January 2001, ENSR was recently taken private with the assistance of Dallas-based investment group Wingate Partners, and MACTEC underwent a financial restructuring in mid-1999 which shifted its ownership from an ESOP to a combined management/private equity situation. Major environmental testing firm Lancaster Labs was taken private early in 2000 by the Minneapolis-based private equity firm of Goldner, Hawn, Johnson and Morrison. As valuations decline, and as prospects for the longer-term future improve, it is likely that we may see more private equity re-enter this market.

More significantly, the last two years have seen a distinct trend towards the "re-privatization" of almost all of the mid-sized and publicly-traded environmental consulting firms - a group, which one industry executive referred to, a few years ago, as "the walking dead." Almost all of these companies had (perhaps unwisely) gone public during the hey-day of the late 1980s when environmental service firms were the darlings of Wall Street. During the tougher times of the late 1990s, most of these environmental firms found public ownership a situation which conferred few benefits but considerable additional costs - and hence many have sought to shed their public status. Emcon was acquired in 1999 by IT Group, Harding Lawson sold out in 2000 to privately-held MACTEC, Weston and GZA have now gone through employee-led buyouts and EA Engineering is currently in discussions with possible buyers. In terms of mid-sized public firms, this leaves only Versar - a small Washington, D.C.-based consul tant which is focusing more on non-environmental business lines, and TRC Companies, a slightly larger firm which has recently enjoyed a surging stock price and increased investor interest.


If the short-term prospects of the industry are coast into doubt -- and many believe that environmental spending is still largely discretionary -- buyers may be less eager to get into or expand in the business.

Smaller Scale Acquisitions

At a smaller level on the engineering and consulting side, Tetra Tech picked up Rocky Mountain Consultants, keeping its acquisition pace clipping along. Rocky Mountain Consultants was a Denver-based infrastructure services provider with revenues of $22 million and approximately 170 staff. Terms were not announced. Elsewhere, LFR Levine-Fricke, a west coast environmental consulting firm announced the purchase of Reimer Associates, a civil engineering firm with two offices in northern California.

On the water side of the business, both larger and smaller transactions continue to occur at a rapid pace. The shareholders of Azurix approved the "going private" transaction proposed by parent company Enron, ending one of the more spectacularly unsuccessful public runs of any recent water company. One of the larger water treatment chemical companies in the country - Sybron Chemicals -- announced that it would be acquired by the German giant Bayer AG in a deal valued at $325 million. Sybron had sales of $147 million and operating profits $15 million - equating to a revenue multiple of 2.2 and an P/E multiple of over 21! Consumer products giant Procter and Gamble continued its move into the water industry with the purchase of part of Cyclopss Corporation, a small publicly traded company in the ozone technology business. Procter and Gamble's first significant step into the business involved the acquisition of Recovery Engineering - a maker of home water filtration products - almost two years ago.<>

On a smaller scale, Floran International, a small publicly traded water storage cleaning and disinfection systems provider announced that it was teaming up with Water Solution Unlimited in order to market its products on a wider scale. Aqua International Partners, the San Francisco based unit of Texas Pacific Group, which has started to invest in various emerging market water service and product companies, announced a $15 million investment in Metering Technology Corporation (MTC). MTC is a developer of automatic meter reading systems, for both water and energy applications. All in all, water technology deals continue at a rapid pace.


More significantly, the last tow years have seen a distinct trend towards the "reprivatization" of almost all of the mid-sized and publicly-traded environmental consulting firms -- a group, which one industry executive referred to, a few years ago, as "the walking dead."

As of this writing, the stock market is plunging precipitously, and a dark shadow of concern and uncertainty seems to be settling in over the nation's economy. If this situation continues or intensifies, look for the pace of acquisitions and mergers in the environmental industry to slow, at least for awhile. If the short-term prospects of the industry are cast into doubt - and many believe that environmental spending is still largely discretionary - buyers may be less eager to get into or expand in the business. Second, for those firms utilizing their equity as currency for deals, widely fluctuating stock prices may cause caution and slow-down in acquisition activity. Once the economic picture becomes clearer, it seems likely that the pace of consolidation in this still fragmented industry will resume.




This article originally appeared in the June 2001 issue of Environmental Protection, Vol. 12, No. 6, p. 63.

This article originally appeared in the 06/01/2001 issue of Environmental Protection.

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