Swisher Hygiene May Go Down the Toilet Again

| About: Swisher Hygiene, (SWSH)

Swisher Hygiene (Nasdaq: SWSH) may have polished its act since going public again, as suggested by the sweeping gains in its stock price, but it nevertheless remains a bleeding sanitation company with a pile of dirt attached to its name.

Shunned like trash before its rescue by Wayne Huizenga and Steven Berrard, longtime business partners credited with building the giant Blockbuster chain during its pre-bankruptcy glory days, Swisher has managed to repackage itself as a future powerhouse – worth more than $1 billion – in the mundane sanitation business.

The pair paid less than $20 million for the original Swisher, records indicate, a company sullied at the time by past fraud allegations and a criminal conviction that sent its namesake founder to jail. The duo operated Swisher as a private company for about five years, records show, then took it public again last November through a reverse merger with a Canadian shell caked with some muddy baggage of its own.

They tried to dress Swisher up with acquisitions in the meantime, corporate filings show, but their familiar “roll-up” strategy failed to deliver consistent revenue gains – let alone actual profits – along the way.

Nevertheless, Swisher saw its market value swell to almost $1.7 billion last month following a breathless rally that had more than doubled its share price since the beginning of the year. While its market value has since fallen to $1.3 billion, following a recent slide in its stock from $11.43 to $8.77 a share, Swisher still commands a rich premium – trading at 19.6 times sales in a sector where the dominant player trades for just two times sales instead -- that looks downright gigantic based on traditional measurement tools.

Swisher faces the threat of massive dilution, too, which could expand its share count from 148.5 million to almost 260 million (or by 75%) over the course of the next year. The company also carries some less obvious weight, research suggests, with the potential to hammer its stock long before that time.

Consider the following alarms, sounded in just some of the disturbing news reports uncovered by TheStreetSweeper during its review of Swisher and those with relevant ties to the company:

Huizenga, the most celebrated (if arguably least involved) member of Swisher’s new leadership team, originally made a name for himself by building Waste Management (NYSE: WM) into a gigantic garbage-collection chain. Waste Management cooked its books to sustain the illusion of powerful growth after Huizenga left, with the U.S. Securities and Exchange Commission later accusing the company of orchestrating “one of the most egregious accounting frauds” it had ever seen. Huizenga’s fellow cofounder at Waste Management wound up shouldering much of the blame, coming under fire by one of the company’s own directors, who reportedly proclaimed: “The son-of-a-b ought to be in prison.” (Sources: The Houston Chronicle, USA Today, The Wall Street Journal (pdf files)

Patrick Swisher, the original founder of the company, ignited a big accounting scandal of his own. Swisher allegedly broke so many rules, in fact, that the company’s independent auditing firm spent five pages documenting its concerns when abruptly resigning from its post.

Swisher himself later went to prison for evading taxes on profits from secret offshore stock sales, selling the company to Huizenga and Berrard – while retaining an important role at the firm – shortly after his release. “He’s the brain trust behind this,” Berrard explained at the time. “We want to continue to utilize his expertise and his knowledge to take this business to the next level.” (Sources: Entrepreneur, The Charlotte Business Journal, Federal Bureau of Prisons)

Hugh Cooper, the CFO of Swisher, previously filled the same post at young Fuzion Technologies before it filed for bankruptcy. He resigned ahead of that disaster, which reportedly prompted an FBI probe of Fuzion insiders suspected of looting the company. “The company raised between $50 (million) and $55 million,” a confidential source stated after the bankruptcy, “and the Feds are hot on the trail.” (Source: The South Florida Business Journal)

Michael Serruya, the founding CEO of CoolBrands before its reverse merger with Swisher (and now a director and major shareholder at Swisher itself), brought some dirt to the company as well. Serruya and his family have reported ties to a notorious Canadian stock promoter accused of fleecing so many investors that he was “barred from entering the United States, from working in the giant U.S. securities industry for five years and from holding a controlling interest in a public company anywhere in the world.”

CoolBrands itself suffered from a sullied reputation, too, ranking “dead last” for corporate governance practices – on a list of more than 200 Canadian companies – during its final years of operation as a failed yogurt chain before becoming the corporate shell that would allow Swisher to go public again. (Sources: The National Post (pdf), The Globe and Mail)

Despite everything, however, Swisher has managed to recycle itself as a shiny, new winner and enjoy the equivalent of superstar treatment in the stock market.

“This is one of the most distorted situations we have ever seen,” the Value Investors Club wrote in a bearish report on Swisher after the stock broke past the $10 mark last month. “We believe Swisher is worth no more than $2.00 per share in an optimistic case … More realistically, it is probably worth $0.00 to $1.00” instead.

The same research analyst has made bearish calls on a string of others stocks in recent years, all of them down – two by more than 80% -- since his original reports. He felt that Swisher stood out even among that crowd, however, declaring it “one of the most compelling short opportunities” he had ever encountered throughout his successful stock-picking career.

Swisher declined to answer questions for this story.

Miracle Grow

Swisher investors appear to be banking on an outright miracle from Huizenga and Berrard, The Wall Street Journal recently observed (pdf), whose celebrated records look rather uneven at best.

As noted above, Huizenga is perhaps best known for building Waste Management into a powerful empire before fraud forever tainted the company’s name. He then joined forces with Berrard to create a new giant at Blockbuster, records show, which also faltered (and ultimately filed for bankruptcy) after he left the scene. Although the pair followed up with a lasting winner in AutoNation (NYSE: AN), news records (pdf) show, that company staged an impressive comeback only after replacing Berrard and putting a proven industry veteran in charge.

Meanwhile, the Miami Herald reported years ago, Huizenga and Berrard launched an outright disaster – doomed floral chain Gerald Stevens – along the way. Through his venture-capital firm, past news coverage shows, Berrard backed several other ill-fated companies as well.

Huizenga clearly knows how to build industry giants that flourish with his help, history suggests, but tend to suffer with his partners calling the shots instead. While Huizenga has assumed the post of non-executive chairman at Swisher, records show, he has indicated that he will play only a limited role at the company and rely on Berrard – the actual CEO of the North Carolina-based firm – to deliver his own homerun for a change.

“I’m living in Fort Lauderdale, and Swisher is in Charlotte,” Huizenga pointed out in a Bloomberg article published a few months before Swisher went public again. “Sure, I’m involved more than before. But I’m in a different city, so how involved can you be?”

Under the leadership of Berrard, news records show, Swisher has employed the same worn-out growth strategy that worked temporary wonders at Blockbuster – but failed completely at Gerald Stevens – in an effort to build the company into a major sanitation chain. Swisher spent huge sums chasing that growth as a private company (borrowing more than $20 million from a firm affiliated with Huizenga), corporate filings show, but actually saw its revenue decline in the years leading up to its return to the public market. While a big spike in acquisitions finally boosted its sales in 2010, records show, that growth came at a high price – with both losses and short-term debts exploding – that overshadowed those modest revenue gains.

By executing a reverse merger with CoolBrands, corporate filings show, Swisher gained access to a corporate shell with a big bank account and a publicly traded stock that could supply even more valuable currency. On the day the two companies announced their merger plans last August, news coverage reveals, Swisher – feeling suddenly flush – was already gearing up for a big shopping spree.

“You go to a guy and say: ‘Do you want to sell?’” Huizenga told Bloomberg at the time. “If they think they can be a part of something that’s going to grow – you give them some cash and some stock – they’ll say, ‘Yes.’

“They want the stock,” he continued, “because they’ll think: ‘Oh boy. You guys are going to grow this business, and I’m going to watch my stock grow!’”

Compulsive Shopper

The stock took off even before that deal closed, the National Post observed (pdf), jumping to almost $2 on the original announcement and then soaring toward $5 a share in the two months that followed. Once Swisher officially went public in November, records show, the company promptly began to spend its newfound cash and pledge big chunks of its increasingly valuable shares.

Swisher issued a $5 million convertible note as partial payment for an acquisition that same month, records show, and a similar $3.9 million convertible note for another acquisition the month after that. Those notes – convertible into stock priced below $4 a share – mature this June, filings show, when the lockup period on some 32.84 million shares of restricted stock (issued to acquisition targets and private investors) officially expires.

Earlier this year, records show, Swisher purchased Choice Environmental – a company with slim (and shrinking) profits, limited cash resources and sizable debt obligations – in a deal valued at almost $100 million that ranks as its largest on record by far. Swisher covered the vast majority of that acquisition with stock, filings show, issuing 8.3 million shares (plus another 900,000 warrants) to Choice itself and an even higher 12 million shares to investors who supplied funds to pay down Choice’s hefty $40.9 debt load.

Thanks to that deal, records show, Swisher finally scored a long-elusive spike in sales that pushed its “pro forma” revenue above the $100 million mark. Even with that higher revenue figure, however, Swisher still boasts a rich valuation that stands out from the crowd.

Swisher trades at 12 times that pro forma sales total, records show, while industry giant Ecolab (NYSE: ECL) trades at just two times its own sales instead. Otherwise, Swisher seems completely outclassed when compared to its towering peer. It takes a year to generate the kind of sales that Ecolab can produce in a week (or less), records indicate, and posts losses as opposed to double-digit profit gains.

By now, some feel, Swisher looks like a compulsive buyer – grabbing even the youngest of companies – in its heady push for growth. In recent months, they note, Swisher has actually purchased at least two companies that (based on their incorporation documents) appear to be less than one year old.

This January, records show, Swisher bought an outfit known as En-Viro Solutions for $1 million in cash and a chunk of stock now worth more than $3 million. At the time, records show, Swisher portrayed En-Viro as a proven five-year-old company and even appointed its founder, Michael Lezon, to serve as a corporate sales manager. However, records indicate, En-Viro was actually incorporated by Lezon less than two months before selling itself to Swisher in that multimillion-dollar deal.

Last month, records suggest, Swisher followed up by inking a similar (if smaller) deal for another company that – based on its own incorporation documents – was barely nine months old at the time.

Meanwhile, records indicate, Swisher’s new Choice subsidiary has already executed a potentially troubling buyout deal of its own. In its first acquisition since being acquired itself, records show, Choice arranged to buy a Florida firm called Lawson Sanitation for up to $5.5 million in cash and almost 1 million shares of stock. Lawson Sanitation operates in the same Miami neighborhood as another company known as Dade Waste Haulers (located just two blocks away), records show, which in turn lists Lawson Founder John Lawson Jr. and Choice Vice President Nick Cascisone among its four insiders (pdf). (A third insider at Dade Waste Haulers, Carlo Piccinonna, appears to be among a crowd arrested years ago in a reported crackdown on local garbage collectors suspected of illegal government bribes.)

Choice and Lawson never hinted at any conflicts when joining forces with each other, records show, with the latter’s founder actually coming across as a tough negotiator instead.

“When Choice first approached me, the company was not for sale,” Lawson declared in the Swisher press release officially announcing the deal. “That said, I looked at my options, the timing in the marketplace and the opportunity at hand – including the ability to be part of a dynamic group with the growth plans and prospects it presented – and I decided to join the team.”

That “timing in the marketplace” looked downright perfect a few weeks later, when Swisher hit an all-time high of $11.43 a share that temporarily placed a $16.85 million price tag on that apparent (if undisclosed) related-party deal.

Odor Eater

As indicated above (and documented in more detail below), Swisher has relied on a broken company merged with a tainted shell – now led by a CEO with a history of past failures – to create an unlikely stock-market star. That recipe has worked sweet wonders so far, despite the apparent use of so many spoiled ingredients.

Take the original Swisher International, just for starters. That Swisher enjoyed its own glory days, Entrepreneur noted years ago, escaping from the penny-stock arena (pdf) to become an impressive Nasdaq gainer – peaking around $13 a share -- before its dramatic collapse. The year after the stock hit its all-time high, Entrepreneur revealed, Swisher lost its outside auditor, its Nasdaq listing and its previously reported (but fabricated) earnings. The SEC later sanctioned both Swisher and its founder, news records (pdf) show, who ultimately pleaded guilty to criminal charges and wound up sentenced to 30 months in prison as punishment for his crimes.

“Morally challenged corporate executives who fail in their duty to provide truthful and transparent accounting information to shareholders and those considering investing in the company will be prosecuted,” U.S. Attorney Bob Conrad declared in an Associated Press story (pdf) covering the development. “The first principles of free markets – transparency and trust – will be zealously protected.”

Swisher was released from prison in September of 2004, inmate records show, and managed to sell his big stake in the company to Huizenga and Berrard just a couple of months later. He pocketed more than $8 million on that deal, The Charlotte Business Journal reported, walking away from another $1.5 million in forgiven debts to the company as well. He also secured a lucrative consulting contract with Swisher, the newspaper revealed, even though the company’s new owners clearly knew about his criminal background.

(Swisher was actually still on “supervised release” at the time he sold his stake in the company, court records indicate, although he managed to terminate that program early – by satisfying court-ordered restitution payments in full – right after banking his millions.)

Swisher’s original consulting contract lasted for two years, the business journal reported, his non-compete agreement for five. He registered the trademark for a new hygiene franchise known as Enviro-Master Services in September of 2009 -- exactly five years and 10 days after his release from prison – and officially registered the name in July of 2010, records show, indicating that he had finally severed his lingering ties to Swisher by that time.

Meanwhile, The Deal magazine later revealed, Swisher Hygiene regularly fielded persistent calls from CoolBrands pitching the idea of a reverse merger throughout that same timeframe. Like the original Swisher, past news coverage shows (pdf), CoolBrands had taken investors on a wild ride – with even more dramatic swings – that ultimately ended in disaster.

In the case of CoolBrands, The National Post indicated (pdf), the founder simply forged close ties with a suspected (if particularly infamous) con artist instead of engaging in outright fraud himself. Serruya sat on the board of a dubious company spawned by Canadian stock promoter Jack Banks, the newspaper revealed in mid-2002, with Serruya’s father later bailing his “good friend” Banks out of jail – satisfying a $5 million bond with funds pledged from a $12 million family trust – after Banks was arrested for alleged stock fraud.

“Jack (Banks) has built … a stock-market house, using an ever-changing array of companies that he and associates controlled,” The National Post explained. “One after another, the companies’ stock prices soared briefly, only to thud back to earth, by which time Mr. Banks and his associates had moved on, leaving behind a trail of debt, lawsuits and angry investors across the United States and Canada.”

CoolBrands itself sparked regular controversies of its own, The Globe and Mail revealed in a big investigative report (which read like an obituary of the company) a few years ago. The stock repeatedly swung from double-digit highs to sub-$1 lows, the newspaper noted, with company insiders – including Serruya and his brother – sparking outrage after quietly cashing in a combined $43.6 million near one of those peaks along the way. CoolBrands finally hit freefall mode after tripping a debt covenant in 2006, the newspaper added, when Serruya stepped in to rescue the company in exchange for 5.5 million cheap warrants – priced at just 50 cents apiece -- before going on to liquidate most of the chain’s assets and create a cash-rich corporate shell.

“If CoolBrands rises for a third time in its history, and the share price takes off, shareholders rights advocates might still complain about Michael Serruya’s 5.5 million warrants,” The Globe and Mail stated back then. But “it’s a problem Serruya would probably welcome” at this point.

Cash Register

Serruya held onto those cheap warrants through last fall’s reverse merger, corporate filings indicate, executed by a firm – known as Broadband Capital Management (BCM) – that has taken a string of companies public through similar “backdoor” deals.

Broadband initially catered to the so-called “Chinese reverse-merger” crowd, records show, a shady arena now tainted by suspicious bookkeeping and allegations of outright fraud. The firm actually broke into the business as the lead underwriter for Great Wall Acquisition, records show, a company – now known as ChinaCast Education (Nasdaq: OTCPK:CAST) -- that has since attracted scrutiny for a maze of bizarre financial deals.

Broadband also managed a private placement ahead of a reverse merger for Jamba (Nasdaq: JMBA), records show, with Berrard supplying the “blank-check” shell for that 2006 deal and becoming chairman of the board – where Serruya serves as a director – of the newly public smoothie chain. Jamba has since fallen from $7 to $2.50 a share, records show, its stock long pressured by fears of possible bankruptcy.

As indicated earlier, Berrard helped launch other companies that have met with that dismal fate (pdf) already. Together with two other Swisher executives, records show, Berrard runs a venture capital firm that has backed a crowd of risky companies – such as the disastrous Gerald Stevens floral chain – over the course of the past dozen years. Embraced by growth-hungry investors like those now attracted to Swisher, records indicate (pdf), Gerald Stevens fetched more than $45 a share just a year before the company went bankrupt and rendered its stock worthless.

With a 15% stake in Gerald Stevens, the Miami Herald reported (pdf), Berrard’s investment firm (New River Capital Partners) actually ranked as the biggest loser of all. Berrard now owns a similar stake in Swisher, records show, which looks incredibly valuable (pdf) right now. Like Huizenga, records show, Berrard controls 15.4% -- or 25 million shares – of Swisher’s stock, worth more than $220 million at today’s lofty prices. But Huizenga and Berrard must hold onto that stock for a while, corporate filings show, while others get a chance to dump mountains of shares first.

Serruya appears to be among the lucky crowd at the front of that line, corporate records indicate, with he and his brother free to cash in all of those cheap warrants left over from the CoolBrands deal – and set to expire in November – once the company’s recent registration statement becomes effective (which could happen at any time). Choice and other companies issued stock in buyout deals can begin selling this June, records show, when the lockup restrictions on more than 30 million shares officially ends. Huizenga and Berrard must sit on the sidelines throughout that potential selling spree, records show, waiting until next spring to part with a single share.

By the time those restrictions finally expire, some predict, Swisher could fetch a mere fraction of its current price.

“This is not a particularly great business,” the Value Investors Club emphasized last month. “There is no clear business logic or synergy to buying small, local bathroom cleaners in our view …

“As this stock gets more investor attention and people realize what is really going on here,” the report concluded, “it will likely end up in the toilet well before Huizenga and Berrard can dump their shares.”

Disclosure: Prior to the publication of this article, TheStreetSweeper (through its members) has effected a “short sale” of 67,000 shares of the stock of SWSH beginning on April 11, 2011, at an average price of $8.9175 a share, with the intent of profiting from decreases in the price of the stock. TheStreetSweeper may choose to adjust the size of this investment – increasing, decreasing or covering its short position in the stock – and will fully disclose the details of those trades if and when they occur. As a matter of policy, Melissa Davis – the editor of this website and the author of this story – will never take a financial position (short or long) in any of the stocks that she covers.

Updates: TheStreetSweeper has increased its original short position in SWSH. It has now sold a total of 77,000 shares of SWSH short at an average price of $8.884 a share. It covered 43,526 shares, under a forced buy-in, at $8.40 a share. Going forward, TheStreetSweeper may further adjust the size of its investment in SWSH -- increasing, decreasing or covering its short position in the stock -- and will fully disclose the details of such trades as they occur.

Additional update (June 1 11): For the record, TheStreetSweeper wishes to make clear that it uncovered no evidence showing (or even suggesting) that the current officers and directors of Swisher have engaged in any illegal or improper activities at any time prior to or during the leadership of the company.