Clean Harbors - Acquisition Of Safety-Kleen Makes Perfect Sense

| About: Clean Harbors, (CLH)

Clean Harbors (CLH) announced on Monday that it will acquire Safety-Kleen, a refiner and recycler of used oil in North America, in an all-cash transaction valuing the firm at $1.25 billion. As equity markets were closed as a result of Sandy, shareholders did not have the chance to react on the deal yet.

The Deal

Clean Harbors announced that it will acquire Safety-Kleen, a privately-held re-refiner and recycler of used oil in North America. The company also provides cleaning and environmental services.

Clean Harbors will purchase the company in an all-cash transaction for a total consideration of $1.25 billion. Safety-Kleen collects some 200 million gallons of used oil per annum. Hazardous and non-hazardous waste volumes managed by the company totaled 680,000 55 gallon drums.

CEO and Chairman Alan S. McKim commented on the deal, "This acquisition is a landmark achievement for Clean Harbors that we believe will build significant long-term value for our shareholders. Safety-Kleen is a recognized leader in the environmental services field with a corporate heritage that dates back nearly 50 years with a strong service culture. The addition of its entire organization aligns perfectly with our acquisition strategy of expanding our Environmental Services business in North America. Safety-Kleen is the largest collector of waste from the small quantity generator market and the leader in re-fining used in North America."

For its annual year of 2011, Safety-Kleen generated revenues of $1.3 billion. The firm reported an adjusted EBITDA of $161 million for the year. The company employs 4,200 workers across 200 different locations in North America.

Based on the deal value, Clean Harbors values Safety-Kleen at roughly 1.0 times annual revenues and 8 times adjusted EBITDA. Financing has already been arranged, Clean Harbors has already received a financing commitment from Goldman Sachs.

The acquisition is subject to approval from US and Canadian regulators and to customary closing conditions. The transaction is expected to be completed before the end of the year.


Clean Harbors will announce its third quarter results next week Wednesday, on the 7th of November.

In August, Clean Harbors reported its second quarter results. The company ended the quarter with $306 million in cash, equivalents and marketable securities. The company operates with $534 million in short and long term debt, and lease obligations. As such, the company operates with roughly $228 million in net debt.

For the first six months of 2012, Clean Harbors generated revenues of $1.10 billion. The company reported a net income of $55.4 million, or $1.04 per diluted share.

For the full year of 2012, the company is on track to generate revenues of $2.20-$2.25 billion. The company could earn $120 million, or roughly $2.25 per share.

The market currently values Clean Harbors at $2.6 billion. This values the firm at 1.2 times annual revenues and 21-22 times annual earnings. This excludes the contribution from Safety-Kleen.

Clean Harbors currently pays no dividend.

Investment Thesis

Year to date, shares of Clean Harbors fell some 22%. Shares traded in the mid-sixties and gradually fell to lows of $47 in October. On Friday before the announcement of the deal, shares traded hands at $49.44 per share.

Over the past five years, shares have risen some 60%. Shares rose from $20 in the beginning of 2009, and gradually moved up to highs of $70 in the beginning of 2012. Shares have fallen some 30% over the past half year. Between 2008 and 2012, Clean Harbors more than doubled annual revenues from $1.03 billion in 2008, to an estimated $2.20-$2.25 billion this year. Net income doubled from $57.5 million in 2008 to an estimated $120 million this year.

Two years ago, privately-held Safety-Kleen already rejected a bid from Clean Harbors. Today's deal gives Clean Harbors more exposure to the market for the recycling of used motor oil. Both companies are no strangers to each other, a decade ago Clean Harbors bought Safety-Kleen's chemical service business. By acquiring Safety-Kleen, the company will acquire an oil refinery in Indiana with a capacity to process 120 million gallons of used oil.

Clean Harbors paid $24.50 a share for the privately held company, up from the $13 offer which the company made two years ago. The deal values the firm at 8 times Safety-Kleen's annual EBITDA. The valuation seems fair given Clean Harbor's own valuation of 6.5 times annual EBITDA, and the potential for synergies.

Pro-forma, the company is on track to report annual revenues of $3.5 billion. Combined EBITDA comes in at $575 million per annum. The company has sufficient capacity to acquire the company without issuing new shares. Clean Harbors could operate with $1.5 billion in net debt, and still report annual EBITDA of $600 million, including a conservative assumption of synergies.

I think that the acquisition makes perfect strategic sense in the long term. The company has sufficient capacity to boost leverage and increase earnings per share in the medium to long term, generating good returns for shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.