Friday, July 27, 2007

Hazardous IPOs?

Two different companies have filed for initial public offerings that will give investors very unique positions in hazardous waste. No pun intended!

EnergySolutions, Inc., a provider of nuclear waste management services for the power industry, filed for an initial public offering in May 2007. The deal is not yet effective, but preliminarily is expected to raise $500 million. EnergySolutions is a portfolio company, having rolled up three different operations - EnviroCare of Utah, Scientech D&D and BNG America.

The company claims that every nuclear licensee in the U.S. uses their services in on form or another and that has given them a 96% share of all commercial low-level radioactive waste in the U.S. Together the three portfolio companies earned $543.3 million in revenue in the twelve-month period ending March 2007. While it is not necessarily an indication of how they will perform together, on a proforma basis they earned $146.1 million in EBITDA.

EnergySolutions is dealing with dirty stuff, but their offering will be first class all the way. There is a host of top underwriters supporting the deal from Credit Suisse to Wedbush Morgan. The company is planning a NYSE listing and has asked for the symbol “ES.”

Management, including those who orchestrated the combination of the three operations, will also go first class. ENV Holdings, the current owner of all EnergySolutions stock, is selling an unspecified portion of their holdings in the offering. Then some members of the management, who also happen to be the principals of ENV Holdings, will receive $6.9 million in cash from the proceeds. The cash payments are pursuant to their employment agreements.

The rest of the proceeds are earmarked for repayment of $770.0 million in debt that was used for the roll-up. As the creditor, Citicorp is the big winner here. Thus is it not surprising that Citigroup Global Markets is on the front cover as an underwriter.

If nuclear waste or roll-ups make you nervous, consider the IPO of
Heritage-Crystal Clean, Inc. Heritage cleans parts for automotive dealers and others. They also provided containerized waste and used oil and vacuum services. Heritage estimates those markets together command $5 billion in annual revenue.

Heritage is no roll-up. It has been in business for over eight years and has built from scratch its forty-eight branch network around the U.S. It claims 34,000 customers. Nonetheless, the Company reported only $77.1 million in sales in the twelve-month period ending March 2007. A small fish in a big pond!

Yet Heritage is regarded as the second largest parts cleaning service provider in the U.S. This means there are many other even smaller fish swimming in these waters. As a public company, Heritage would have the advantage of access to capital for a consolidation of what is apparently a highly fragmented business. Unfortunately, the proceeds of this deal will be used to redeem preferred stock and pay down debt. Heritage is profitable - $4.2 million in net income in the last twelve months - so we expect the recapitalization will provide a good foundation for future strategic moves.

Neither deal is effective nor does it appear that the SEC is not finished reviewing the filing of other registrant. However, we see these two names as deals to watch in the coming months


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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