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CLH Loses Badger Bid - Investors Underreact

|Includes:BADFF, Clean Harbors, Inc. (CLH)

Is anyone paying attention to this?  Badger shot down Clean Harbors CAD $20.50 per share buyout bid on Tuesday.  Badger probably realized that it could be sitting on a goldmine (oil sands), and a ~7.5% premium bid for the company was not in their best interest.  This is a company that was expected to add ~$140 million in annual revenues and ~$40 million in annual EBITDA to a company that earned $1731 million in revenues and $315 million in EBITDA in 2010.

By those numbers, not that big of a miss, right?  Wrong.  Badger was a key piece to the build-out of its Canadian Oil Sands play, and had a 5000+ strong customer base with plentiful cross-selling opportunities for U.S. customers.  The company also had a very impressive 29% EBITDA margin compared to CLH's five-year average EBITDA margin of 15.4%.  Let's review CLH's careful construction of its position in Canada:

  • 2008: Acquired Eveready - a Canadian-based company that provides industrial/energy-related services to oil, gas, and manufacturing industries.  Eveready provides lodging for workers in the oil sands regions - unique play on oil growth.  The deal was valued at $56 million in cash plus $118 million in CLH stock, and the assumption of $235 million in net debt.  Status: Complete
  • 2011: Badger Daylighting Purchase.  Badger is North America's largest provider of hydrovac services, which are used for safe digging in the utility and petroleum industries.  The deal was valued around CAD $247 million - all cash. Status: Rejected
  • 2011: Peak Energy Services Acquisition.  Peak provides drilling/production equipment and services to oil and natural gas customers in the U.S. and Canada.  The deal is valued at ~$196 million - with CLH paying $161 million in cash and the assumption of $35 million in net debt.  Status: Pending Approval
The Badger rejection was not just a kink in the chain of building out their Industrial and Energy services segments , as management implied in their recent press release.  Badger was the acquisition CLH needed - with solid margin potential and a widespread customer base - to take the company away from its incredibly cyclical business model and add growth to its Industrial and Exploration Services segments.  CLH may look for further acquisitions in the oil sands regions, but its going to have to offer more than a 7.5% premium for companies with strong oil exposure.

With its recent acquisitive behavior, Clean Harbor's thought it was playing a game of chess, but with Badger off the table, the company is looking like the loser in a game of kindergarten dominoes - or perhaps worse - Jenga.  With this loss, I expect EBITDA to be at the low end of management's 2011 guidance, maybe even treading below the $262 million low-end estimate and revenues reflecting lower esimates as well.  Revising estimates may not be necessary, however, considering that management's 2011 guidance excluded Badger revenues/synergies.  Alas, still a loss for a company that probably saw some uptick in share price from investors that assumed this deal would go through.
Stocks: CLH, BADFF