Taking a Breather

Relative to the normally hectic pace of mergers and acquisitions that we have grown used to in the environmental industry, we are continuing to experience a bit of a lull in 2001. Although no one seems to be openly using the R word (recession), there is little doubt that at least a shadow of doubt or concern continues to hang over the economy. Combined with an uncertainty regarding the direction of the new administration, these circumstances are leading to occasional project delays, a perceptible slowdown in terms of business volume and a general feeling of market uncertainty. All of this, when combined with a debt market which has recently become considerably tighter, is making it more difficult to conclude or finance proposed deals. Nevertheless, deals do continue to happen, particularly in the area of "going private" transaction and financial restructuring.

Going Private

The completion of two major transactions dominated the news this quarter in the engineering and consulting sector of the business. Roy F. Weston Inc.'s deal to go private was finally closed in early June -- at a little over $5 per share, a premium to recent market price and at a relatively high multiple to recent earnings and cashflow generation. (In terms of revenue or book value multiples, however, the transaction price was well below recent average figures.) American Capital Strategies, a publicly traded private equity group, invested $30 million ($3 million in equity and $27 million in subordinated debt) while Bank of America provided a follow-up $49 million senior credit facility. A group of about 10 senior Weston executives also invested approximately $1 million in the deal. Over time, a broadly-owned employee stock ownership plane (ESOP) is projected to own up to 40 percent of the company's shares. Management indicated that it expected to be able to thrive and grow better under private ownershi p than under its previous publicly owned status. This seems to be a common and consistent trend in the environmental services industry today, as opposed to the mid and late 1980s when many environmental consulting firms were rushing to go public, today the remaining public companies seem to be rushing to "go private."

As opposed to the mid and late 1980s when many environmental consulting firms were rushing to go public, today the remaining public companies seem to be rushing to "go private."

A Bid from Across the Atlantic

In early April, Environmental Resources Management Group (ERM), a leading international environmental consulting firm based in Exton, Pa. (a close neighbor of Weston, and indeed, a firm started by ex-Weston employees) announced a $285 million management buyout led by the major British venture firm, 3i Capital. ERM has had a rather unique but highly successful operating structure, consisting of loosely affiliated local partnerships or "franchises" that were partially owned by local management; as a group, the firm has 2500 employees in 120 offices across 34 countries, and annual revenues of approximately $300 million. In addition, although ERM is a privately held company and hence does not publicly release financial information, the firm has long had a reputation as being one of the most profitable firms in the industry. (Although earnings or earnings before interest, taxes, depreciation and amortization (EBITDA) multiples on the deal were unfortunately not available, the enterprise value to r evenue ratio -- at approximately 0.95 -- was well above any recent deals that have taken place in this industry.) ERM is one of the few major consultants whose growth strategy has stayed fairly focused on the environmental business; it has not attempted to diversify into infrastructure and civil work, as have the vast majority of other originally environmental consultants. Maybe there is a lesson here.

The structure of this deal was somewhat similar in overall nature to the Weston transaction. 3i agreed to back management and invest $78 million in the company. 3i partner Bank of Scotland provided an additional $121 million in senior debt, and Intermediate Capital Group of London added $25 million in mezzanine capital. The remaining capital was put up by senior officers and principals of ERM. The firm intends to centralize its operating structure in order to better serve its expanding base of international clients, and indications were that it might be headed for an eventual IPO on the London markets.

Other M&A Happenings

In other smaller transactions, Tetra Tech continued its acquisition plans by acquiring most of the assets of Maxim Technologies, a Dallas-based consulting firm that focuses on energy and mining markets in the midwest and mountain states. Maxim had gross annual revenues of approximately $35 million and around 300 employees; terms of the deal were not announced. U.S. Laboratories continues to put together transactions on a smaller scale; it recently acquired the Las Vegas operations of AMEC, and has enjoyed a marked run-up in its stock price over the past several months. Edmonton, Alberta-based Stantec is continuing to emerge as a significant consolidator in the United States; having already built a substantial business in Canada, the firm now derives over half of its $200 million in annual revenues from within the States.

Although most U.S. consultants have focused on domestic expansion, there are a few larger firms which continue to implement international diversification and expansion plans -- Earth Tech, the environmental and infrastructure unit of Tyco International, recently announced the expansion of its global practice via the acquisition of two water engineering firms, one in Mexico and one in Ireland.

In contrast to the last few years, consolidation activity in the water and wastewater treatment sector has also cooled considerably.

In the instrumentation and environmental monitoring sector, the major consolidator - Danaher Corporation -- continues its rapid acquisition pace, recently acquiring Lifschultz Industries, a company that manufactures temperature gauges and monitors. This deal, valued at roughly $33 million, was a fairly small one for Danaher, which now boasts annual revenues of almost $4 billion.

In the hazardous waste arena, consolidation continues on a smaller scale. American Ecology, a small but long-time player in the hazardous waste disposal business, acquired competitor Envirosafe Services, whose main asset was a Part B certified hazardous waste landfill in Idaho. Permafix Environmental Services, a small publicly traded firm in the nuclear waste management business, issued new shares to acquire the mixed waste treatment facility of Materials and Energy Corporation (M&EC) in Oak Ridge, Tenn.

In other sectors of the environmental business, deal activity also seems to be taking a breather. In the solid waste management sector, where local and regional consolidation activity has been intense in recent years, deal activity is sharply off. Regional consolidators like Waste Connections, Republic Services and Waste Industries have been quieter this year. Likewise, in contrast to the last few years, consolidation activity in the water and wastewater treatment sector has also cooled considerably. However, as economic and regulatory trends become clearer, look for M&A activity in these sectors to pick up again.

This article originally appeared in the September 2001 issue of Environmental Protection, Vol. 12, No. 9, p. 45.

This article originally appeared in the 09/01/2001 issue of Environmental Protection.

About the Author

Sabrina Barker is a senior policy advisor with the United Nations GEMS/Water Programme and has 15 years' experience in international socioeconomic development. Her background is in international relations and biology. Currently, she is working on international relations and political economy of water resources and ecology. Barker can be reached through www.gemswater.org or by phone at (819) 953.0912.