3 Growing Industries in the Environmental Sector

In honor of Earth Day, we wanted to take a look into the recent trends of the environmental sector. To learn about the space, we spoke with John Quirk, Marcum Cronus’ Managing Director focused on the environmental sector.

In our conversation, Quirk highlighted three industries of note: solid waste, recycling, and hazardous and industrial waste. Each sector offers unique opportunities for financial sponsors.

As Quirk explained,

• strong cash flows make the solid waste industry attractive
• the number of family-owned businesses makes the recycling industry ripe for consolidation
• and the high barriers to entry make the hazardous and industrial waste industry appealing

Read the full conversation below:

On Solid Waste Companies:

“There has been a tremendous amount of consolidation of public solid waste companies over the past decade or so. This sector has been of interest to many financial buyers and private equity firms because solid waste companies typically have very stable cash flows with Ebitda margins in the range of 25% for fully integrated firms that collect waste, take it to their own transfer station and dispose of it in their own landfill.”

“Overall, the solid waste companies are doing well. The one area within the industry which has been adversely affected over the past couple of years due to the downturn in the commercial construction industry is firms handling construction and demolition (C&D) waste.”

On Recycling:

“Recycling provides opportunities for private equity investors. For example, a former client of mine was Evergreen Oil in California which re-recycles used motor oil. Motor oil does not get worn out but gets dirty and can be recycled into virgin oil. Evergreen Oil was acquired last year by Clean Harbors, the biggest public hazardous waste company in the U.S.”

“Another one of my former clients was Liberty Tire. The firm focused on recycling used tires into rubber products such as playground surfaces. When they were my client they were principally operating only in North Carolina. We raised capital for them from a private equity firm and today Liberty Tire, according to its website, handles approximately one third of all used ties in the U.S. Before firms like Liberty Tire were able to make recycling tires profitable, the disposal of used tires had become a major problem. Whole tires cannot be disposed of in landfills which is why many used tires were illegally disposed of by leaving them on the side of a road or in the woods.”

“Recycling presents a number of opportunities for financial buyers since there are a number of smaller family-owned companies that operate recycling facilities. There will be consolidation of a number of these companies as more financial investors move into this space.”

On Hazardous and Industrial Waste:

“An area that I am particularly interested in today as an investment opportunity is the hazardous and industrial waste sector which includes handling of all types of hazardous waste but does not include radioactive waste or medical waste. The hazardous sector includes everything from the transportation of drums containing various chemical/industrial materials, emergency response (e.g. an overturned truck with hazardous materials on a highway), the collection, treatment and disposal of hazardous and industrial materials, vactor/vacuum truck services, lab pack services, tank cleaning, the treatment of hazardous soils, etc.”

“There has been a lot of interest in this space. One of my former clients, DuraTherm, treated soils that were contaminated by petroleum products typically at refineries in Texas where the company was located. We sold DuraTherm to two financial buyers and since then the company has been acquired by Clean Harbors.”

“The hazardous waste M&A area will be quite active in 2014 . I know of three privately owned hazardous waste companies with revenues between approximately $100 million and $350 million that are either on the market for sale today or will be shortly. Private equity firms have owned two of these companies for more than 5 years and are looking for an exit. I believe that there is still a lot of opportunity for growth in this sector.”

“One of the most significant advantages of investing in a hazardous waste company is the very high barriers to entry in this industry. Getting new permits to treat hazardous waste is very expensive and can take 5 years or longer to obtain and in certain parts of the country (e.g., the northeast and California) are almost impossible to obtain. For example, in New Jersey, Pennsylvania and Massachusetts I do not believe there have been any permits issued in the past 15 years for what are called RCRA Part B licensed hazardous waste treatment, storage and disposal (“TSD”) facilities. In addition to treating hazardous waste, a company may have to dispose of the waste at a permitted hazardous waste landfill (there are only about 13 in the whole country) or a hazardous waste incinerator and then send to its customer a certificate of destruction. The amount of paperwork is significant and makes the hazardous waste industry very different from the solid waste industry.”