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Private Equity Strategies

Dealmaker Q&A: Safety-Kleen Turnaround Leads to Big IPO Filing, Then Successful Acquisition

Tuesday, January 22, 2013

By: Bailey McCann, Private Equity Strategies

In December, Highland Capital Management and several other firms including JP Morgan, and Contrarian Capital announced the acquisition of Richardson, Texas based Safety-Kleen Inc. by Boston-based Clean Harbor Inc.‚  Clean Harbors purchased Safety-Kleen in an all-cash transaction valued at approximately $1.25bn, financed through the combination of $289m of existing cash, $370m in net proceeds from its recently completed follow-on offering of common stock and $591m in net proceeds from its recently completed Senior Notes offering.

Safety-Kleen filed for a dual track IPO or acquisition after being turned over to its four largest shareholders following bankruptcy. Since then, Highland Capital Management which owned 39.3% of the company, and had two board seats, worked with the management team to turnaround the company, and make it profitable before taking it to market.‚  At the time of the IPO filing, in addition to Highland˘â‚¬â„˘s 39.3%, Contrarian Capital Management, owned 18.3%; J.P. Morgan Chase, owned14.7%; and GSC Acquisitions Holdings, owned 9.2%.

"The thought process all along was to do a dual track IPO or acquisition plan, as some shareholders wanted more liquidity. There were also some questions around the stability of the IPO market after Facebook as well," explains Patrick Boyce, Partner, and Head of Private Equity at Highland in an interview with Private Equity Strategies.

When the group filed for its IPO earlier this year, they sought to raise some $400m, one of the biggest filings at that time according to a report in the Wall Street Journal.‚  Safety-Kleen filed for a $428m IPO in 2008, then valuing the company at up to $934.5m, according to filings, but pulled it due to the financial crisis. The company is believed to have achieved several million dollars in cash savings this year, and went into the dual-track process financially sound, which likely made it more attractive to suitors. Credit Suisse and Morgan Stanley were underwriters on the 2012 IPO.

Boyce explains that when Highland worked to turn around the company, they moved quickly to implement new management systems and refine business processes. "In a turnaround having a sense of urgency is critical," he says. "The first thing we worked on was to help get the board restructured from 16 members to 7. At the beginning it was like herding cats.

"The second part was bringing in talent management to turn over the whole management team, finding Bob Craycraft was critical to the success of that."
Highland trained the staff at Safety-Kleen on Lean Six Sigma, establishing new systems and processes.‚  Highland also helped management understand which customers and products were profitable, and which were actually causing a drag on the bottom line.‚  They also moved much of the decision making power away from headquarters, and into local stores with local managers. This allowed Safety-Kleen to be more responsive to the customers, and issues unique to each store, increasing profitability.

According to Boyce, Highland utilizes Lean and its derivatives like Lean Healthcare, or Lean Six Sigma in many of its turnaround stories. They also use it in-house within the private equity group.‚  "We find that Lean adds a significant amount of value quickly," he says.

The other firms like JP Morgan and Contrarian also played a role in the turnaround.‚  Sources familiar with Contrarian say that they got involved with Safety-Kleen in 2002, and joined the board in 2005, playing an active part in these successful changes.‚  Contrarian saw a 24.4% return net of fees on the deal in 2012.

For its part, Highland was also pleased with the deal. "This is exactly the kind of transaction Highland looks for. We˘â‚¬â„˘d been investing in Safety-Kleen since 1997, following it through the bank debt, and purchased company equity through our private equity fund in 2009," Boyce said.

In a statement on the acquisition, Alan S. McKim, Chairman and Chief Executive Officer of Clean Harbor said, "the acquisition of Safety-Kleen aligns perfectly with our strategy of expanding our environmental services business in North America."‚  The company expects that they will be able to capitalize on the growing demand for recycled products such as refined oil, and achieve synergy through cross-selling opportunities.

Clean Harbors purchased a division of Safety-Kleen in 2002, and previously indicated interest in buying the company.

According to Clean Harbors, based on the current operating and anticipated future performance of Safety-Kleen, the firm expects the acquisition will be immediately accretive, excluding one-time fees and acquisition-related expenses. For 2012, Safety-Kleen expects revenues of approximately $1.35bn. For 2013, Clean Harbors expects that on a combined basis with Safety-Kleen, it will have revenues in the range of $3.72bn to $3.77 bn.‚  Safety-Kleen will keep its brand and administrative offices, which are located in Plano, Texas.

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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