M&A Activity in 2020 Overshadowed by Covid-19

Vol. XXXIII, Numbers 3/4 2020 M&A in the Environmental Industry 2020 Environmental Business International Inc.

Inside EBJ: Environmental Industry M&A in 2020-2021 M&A ACTIVITY IN Merger & Acquisition the Environmental Industry takes a back seat to coronavirus 2020 OVERSHADOWED response, but analysts concur that activity is unlikely to be much shaken given an BY COVID-19 CRISIS expected recovery; Data on key indicators, M&A activity and valuations...... 1-11 AEC Advisors expects M&A activity to continue after COVID-19 lull; Colliers major- hen the world came crashing down, ity stake for Maser is a case study in Real Estate and C&E partnership; Divestitures in the economy was on a record run W season as firms seek better fits and focus on core markets...... 12 of growth. When the world came crashing down, the stock market was at record highs. Morrissey Goodale sees AEC M&A reach new heights in 2019; 2020 outlook..... 20 When the world came crashing down un- 2020 Environmental Group sees buyer interest in water & infrastructure; Expects a employment was at record lows. When V-shaped recovery; COVID-19 a force majeure event so values may not suffer...... 22 the world came crashing down, consumer confidence and consumer spending were at ROG + Partners expects to see one or two quarters of ‘non-recurring’ under perfor- record highs. When the world came crash- mance will re-set the M&A market in architecture & engineering...... 25 ing down, construction activity was at near Houlihan Lokey’s environmental services practice benefits from steady growth, cycle record highs. resistance and non-discretionary nature of the environmental industry...... 27 When the world came crashing down, Matheson Advisors shares its expertise in middle market valuations and M&A; Notes the global machinery and supply chains of the rapid shift to a ‘buyers market’ in 2020; Perspective on ESOPs...... 29 manufacturing were whirring away with EFCG clients looking ahead to ownership transition, growth and M&A...... 36 little to concern them despite having been shaken at its foundation by trade disputes Brown Gibbons Lang & Company sees tailwinds into 2020 but COVID-19 and oil from the top—with globalization itself & gas lead to a ‘different’ year in Environmental & Industrial Services M&A...... 39 under siege from social unrest from labor, BMO Capital Markets weighs the balance between IPO and sale for its larger clients; protectionists and greens. When the world Welcomes the arrival of new generation of private buyers into the market...... 42 came crashing down, power use had pla- Sandberg Consultants stresses the importance of management preparation and inte- teaued at a record high, as had the growth gration planning to success in M&A for mid-sized and smaller companies...... 44 of energy productivity or economic output per unit of power or energy consumed. US Ecology tops $1 billion in revenue with NRC deal; Safety & decontamination services well suited to COVID-19 world and post-COVID business environment...... 46 When the world came crashing down, government spending was at a record high RSK keeps up a brisk M&A pace to rank as #3 firm in the UK; Grows on the conti- and the federal deficit was at a record high. nent with M&A in Germany and Italy...... 49 When the world came crashing down, NV5 adds nine companies and $200 million in record M&A year in 2019...... 51 state and municipal governments were SLR continues ambitious growth strategy with more M&A; Passes $200 million and mostly flush with cash—anticipating a $60 million in USA revenues with New England acquisition of MMI...... 53 steady stream of tax receipts, and feeling pretty good about their financial situation LaBella Associates M&A adds contracting in NY and environmental in PA; Seeds and the list of infrastructure projects they new waste & recycling practice...... 56 were planning to undertake. Barr Engineering completes 5 acquisitions in last 5 years after 4 in its first 45 years; When the world came crashing down, Strengthens its natural resource focus on power, mining, fuels and water...... 58 the price of crude oil prices had settled Farallon Consulting relies on strong corporate culture & ‘The Farallon Way’ to initi- into a relative new normal near $50 a ate M&A; Completes its first acquisition in 2019...... 61 barrel for much of 2019, but was already Clairvest completes sixth investment in solid waste & recycling: C&E next?; Pritzker showing signs of starting to crack from Private Capital puts Valicor on fast forward; Dar Group a global A&E player from global production and supply imbalances the Middle East; Montrose keeps up the M&A pace with acquisition of CTEH and — or was it a burgeoning understanding support from investor partner GFI/Oaktree...... 63 and almost accepting of a growing portion of the global investment community that Solid waste industry consolidation continues with leaders old and new extending fossil fuels are on a slide to oblivion. market positions; Updates on Waste Management and GFL IPO...... 67 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

U.S. Unemployed by Industry: April 2019 vs. April 2020 (thousands)

EVERY SECTOR HIT 5000 BY UNEMPLOYMENT 4500 4000 he U.S. Bureau of Labor Statistics 19-Apr T(BLS) reported that total nonfarm 3500 payroll employment fell by 20.5 million 3000 20-Apr in April 2020, and the unemployment rate 2500 rose to 14.7%, with particularly heavy job losses in leisure and hospitality. The overall 2000 unemployment rate increased by 10.3 per- 1500 centage points from 4.4% in March, and the number of unemployed rose by 15.9 1000 million to 23.1 million in April. 500 BLS also reported the labor force par- 0 ticipation rate decreased by 2.5 percentage points over the month to 60.2%, the low- 19-Apr est rate since January 1973 (when it was Construc4on Financial 60%). Total employment fell by 22.4 mil- Manufacturing Informa4on lion to 133.4 million. The employment- Wholesale & Retail Transpo & U4li4es Ag./related Other services Government population ratio, at 51.3%, dropped by Prof & Biz services Ed & Health Services Leisure & hospitality 8.7 percentage points in April 2020, the lowest rate and largest over-the-month Source: Bureau of Labor Statistics, a unit of the United States Department of Labor decline in the history of the series dating Professional and business services back to January 1948. dustry for the near future looks to be on shed 2.2 million jobs in April. Sharp shaky ground, as economic uncertainty Employment falling by 20.5 million in losses occurred in temporary help services is causing public and private developers April, compares to a decline of 881,000 (-842,000) and in services to buildings to rethink their projects as debts mount. in March. April employment in leisure & and dwellings (-259,000). 975,000 con- On the architecture & engineering side, hospitality plummeted by 7.7 million, or struction workers lost their jobs in April, 85,200 jobs were lost in April. This also 47%, with most of the decrease occurred with specialty trade contractors bearing shouldn’t come as a surprise as firms enact in food services and drinking places (-5.5 the worst losses (691,000 jobs) and build- furloughs to keep their costs down while million); the arts, entertainment, and rec- ing construction lost 206,100. Unemploy- facing their own uncertainty as even civic reation industry (-1.3 million); and in hos- ment in construction was 16.6% in April and institutional projects, long thought of pitality (-839,000). (Note: Employment 2020, higher than the national average as safe harbors for architecture practices, figures differ from the ‘unemployed’ num- and up from 6.9% in March 2020. Con- have begun implementing project freezes. bers portrayed on the chart and the table.) struction analysts acknowledge their in- Employment declined by 2.5 mil- Environmental Business Journal ® (ISSN 0145-8611) is published by Environmental Business lion in education and health services. In International, Inc., 4452 Park Blvd., #306, San Diego, CA 92116. © 2020 Environmental health care, employment declined by 1.4 Business International, Inc. All rights reserved. This publication, or any part, may not be million, led by losses in offices of den- duplicated, reprinted, or republished without the written permission of the publisher. tists (-503,000), offices of physicians To order a subscription, call 619-295-7685 ext. 15 or visit us online at ebionline.org/ebj. (-243,000), and offices of other health care A corporate electronic subscription with internal reproduction license and access to data practitioners (-205,000). Employment also files starts at $1,250 and allows up to five registered users with rates increasing in five user declined in social assistance (-651,000), re- increments. Individual editions or discounted corporate subscriptions are available for firms flecting job losses in child day care services with under 100 employees. (-336,000) and individual and family services (-241,000). Employment in private Editor in Chief, Grant Ferrier Federal Analyst, Andrew Paterson education declined by 457,000. Govern- Research Manager, Laura Carranza Managing Editor, Lyn Thwaites Writers George Stubbs & Jim Hight Research Analyst, Anika Rohlfe ment employment dropped by 980,000 in

April. Employment in local government EDITORIAL ADVISORY BOARD was down by 801,000, in part reflecting Andrew Paterson, Chairman; James Strock, Founder, Serve to Lead; Steve school closures. Employment also declined Maxwell, TechKnowledgey Strategic Group; P.S. Reilly, President, NextGen Today; in state government education (-176,000). Dr. Edgar Berkey; Paul Zofnass, Environmental Financial Consulting Group

2 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

U.S. Unemployed by Industry: April 2019 vs. April 2020 vironmental industry, and what companies

2019 2020 2019 2020 can do if they are pursuing strategies on Sector or Industry Unemployed Unemployed Unemploy- Unemploy- either side, and how companies can as- (thousands) (thousands) ment Rate ment Rate sure they retain the value that they either Total 5,387 22,504 3.3% 14.4% ascribe to themselves—or believed they Mining, quarry, oil & gas extraction 17 77 2.4% 10.2% represented before the world ground to a halt—let's assess the factors listed above. Construction 439 1,531 4.7% 16.6% Manufacturing: Durable goods 265 1,416 2.6% 15.1% First the economy, and while May 2020 Manufacturing: Nondurable goods 218 576 3.6% 10.2% brought out first quarter statistics indicating contraction in many economies, sec- Wholesale and retail trade 829 3,223 4.3% 17.1% tors and companies, it mostly just reflected Transportation and utilities 255 989 3.4% 13.5% the hit that really just made its effect felt Information 87 279 3.5% 11.0% in force in March. So second quarter eco- Financial activities 210 545 2.1% 5.4% nomic and business performance statistics Professional and business services 611 1,697 3.5% 9.8% will be nothing short of a total bloodbath — that is for sectors not deemed essential Education and health services 512 2,552 2.1% 10.9% or “on the sugar-high of burning off back- Leisure and hospitality 647 4,860 4.5% 39.3% log” as many environmental consultants Other services 164 1,421 2.5% 23.0% have been in Q2 2020 said Dave Gockel, Agriculture and related private 121 163 7.3% 9.6% CEO of Langan Engineering & Envi- Government workers 347 2,017 1.6% 9.4% ronmental on the AEC Advisors webcast. But however bad the contraction of the Self-employed & unpaid family 208 886 2.2% 9.7% GDP in Q2, and the comparison of 2020 Source: Bureau of Labor Statistics, to the 2nd quarter of 2019, it will not be When the world came crashing down, again. And business and leisure travel may unexpected. And it may even be shock- global population was at a record high. return with a vengeance, but conceivably ing enough to stimulate even more activ- When the world came crashing down could fall to a smaller equilibrium of air- ity from the smallest entrepreneur to the ,global emissions of greenhouse gasses were lines, gates and passenger miles traveled. biggest government agency: Infrastructure at record highs. And when the world came funding anyone? Much more certain is the growing sen- crashing down, merger & acquisition ac- timent that remote, off-site, or work-at- Thestock market is another worrisome tivity in the environmental industry was at home situations are much more feasible, situation and seems even more cloaked in a record high. manageable and productive on a larger mystery as to what mechanisms are really But the world really didn't come crash- scale, and that people will be less likely to driving its quarterly cycles and daily fluc- ing down. It just felt like it. What the commute and commit to jobs requiring the tuations. The sways are enough to confirm world really did was grind to a halt. So let's 9 to 5 presence in an office—nor will com- the creeping influence of ‘machine trad- start all over. When the world ground to a panies structure their workforce around ing’, presumably fueled by increasingly in- halt the economy was… No I don't think this once sacred paradigm. This will have fluential algorithm-evolving artificial intel- we need to go through that again. an understandable impact on commercial ligence robots, compared to old fashioned real estate values on one hand, and occu- human analysis and gut feel of investors You get the picture. The world has pancy costs for lease-holders on the other. and investment management profession- changed and the world looks to a reset. A recent survey conducted by AEC Advi- als. And we have certainly witnessed some But when can that reset really start, what sors and summarized on a May 8 webcast interesting fluctuations in 2020. But we've will the reset look like, and what forces will showed that the expectation amongst the also come to realize that perhaps the stock shape it? Economists characterizing the AEC professional services community was market has little bearing on, or that much next six months as a V-shaped recovery or that prior to the crisis the median level connection to, the economy in the grip of the next 12 months as a U-shaped recovery of work-at-home employees was 5%, and the coronavirus crisis. is a bit simplistic — as is calling it a reset at the expectation is that after the crisis that all. Theorists projecting a total restructur- Unemployment is perhaps the largest will move to 25%. This constitutes a truly ing of the global economy, however, is a and most concerning social issue as the monumental shift, but still is only half of bit dramatic. But those saying things will U.S. unemployment rate jumped to 14.7% the 50% figure anticipated by a number of go back to normal may be a bit naive, al- in April 2020, the highest level since the companies even after the ‘all clear’ has been though it would be a shame to never feel Great Depression. TheBureau of Labor given. That is some kind of ‘new normal’. the collective human energy of sold-out Statistics said 20.5 million people abrupt- sports events, rock concerts and the buzz But before we get to the matter at hand ly lost their jobs, wiping out a decade of of a crowded restaurant in the same way of merger & acquisition activity in the en- employment gains in a single month, and Strategic Information for a Changing Industry 3 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 roughly double what the nation experi- ‘non-essential’ service sectors in the econo- Likewise, manufacturing industries, enced during the entire financial crisis my as summer approaches will surely keep their economic prospects and the trajec- from 2007 to 2009. The food service, re- discretionary consumer spending largely tories of their investments have significant tail, hospitality, transportation and enter- on hold. But speaking in the self-interest pertinence to the environmental com- tainment sectors were vastly impacted, and of the environmental industry, these most panies that service them. Like in energy are all largely over-represented by lower impacted service sectors and their perfor- policy discussions of the past, the current middle-income populations that are more mance have relatively little direct bearing sensitivities regarding economic isolation, likely to live pay check to pay check. Call- on the short-term prospects of project trade flows, supply chain integrity and ing timeout on mortgages, rents, evictions, work for environmental companies. security have stimulated more broadly utility bills, water & power shut offs, and encompassing discussion about manufac- construction activity on taxes and insurance premiums helps, More pertinent is turing self sufficiency — and therefore the but does little to start getting people back and the pipeline of planning, permitting, protectionist, yet arguably more sustain- to work with meaningful occupation and design, and construction management that able, ‘reshoring’ of manufacturing capacity. consistent paychecks—or packed into goes into the current inventory of proj- But uncertain demand has also postponed their favorite restaurant or sports arena. ects—but also the backlog of projects on much or all of the investment horizon for the horizon. So while construction activity manufacturers, with the obvious exception This leads to the next point aboutcon - statistics have been encouragingly positive of medical and personal protection prod- sumer confidence and consumer spending into 2020—and back logs were at record ucts — and All-American essentials like —and the always under-emphasized and highs for many—the short-term impact hand sanitizer, toilet paper, ground beef often unmentioned issue of mental health. across different sectors and their project and e-commerce infrastructure. Consumer confidence is unmistakably re- activity and infrastructure investments, lated to current income and expectations and any postponements or delays and the Power use and power generation are of short-term future income — and will be ‘essential’ nature of what they are deliver- also intriguing factors. The shuttering of a crucial issue for Election 2020. Little cer- ing to the economy has significant perti- commercial establishments will certainly tainty in the staged return of public gath- nence to environmental companies, as well reduce overall power consumption, but to erings, sports and the above mentioned as their owners and investors. what extent these facilities have been man-

Comparison of Annual Growth in GDP and Carbon Dioxlide Emissions: Global 8%

0% 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 -2%

-4% World GDP World CO2

-6%

-8% Comparison of Annual Growth in GDP and Carbon Dioxlide Emissions: USA 8%

6% USA GDP USA CO2

0% 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 -2%

-4%

-6%

-8% Sources: Adapted by EBI from International Monetary Fund IMF World Development Indicators database and BP Statistical Review of World Energy in June 2019; Figures for 2019-2021 are added by EBi from a censensus of forecasts aggregated by EBI in May 2020

4 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

aged for zero or minimal power remains Annual Electricity Net Generation, Electric Power Sector (Billion to be seen as cogent analysis of economy- wide power consumption statistics emerge. Kilowatthours): 1949-2019 (U.S. Energy Information Administra- 4000 tion weekly power demand statistics on the chart show a 9-13% drop compared with expected demand in April.) Investment in 3000 new power generation and transmission & distribution assets, regardless of region

or energy source, will almost certainly be 2000 delayed. And the lack of demand for traditional fuel sources and the corresponding drop in prices will also create some inter- 1000 esting dynamics in electricity. This effect will pale in comparison to the dynamics in transportation and liquid fuels, however, as crude oil and gasoline prices and sup- 0 1949 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009 2015 ply gluts in both, each will have a multi- dimensional impact on energy, social and Monthly Electricity Net Generation, Electric Power Sector

environmental policy. 450 (Billion Kilowatthours): 1949-2019 This leads us to the oil & gas sector, price collapses and the earth-shocking news of the negative value of crude oil fu- tures in April. Impacts are already monu- 300 mental on a global economic and socio- political context, and they have filtered down to production and supply issues in North America and other continents from 150 the biggest downstream refineries and storage terminals, to the smallest upstream oil & gas fields, to the now likely largely

extinct wildcat prospector. (Prospecting 0 for rare earths anyone?) The restructuring

of the fossil fuel industry is a larger issue Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 than just COVID-19 and its pertinence Source: U.S. Energy Information Administration; April 2020 Monthly Energy Review to merger and acquisition activity in the

Power Use Down 9-13% nergy Information Administration Ereports that March 2020 shutdowns and changes to normal routines related to COVID-19 mitigation efforts have caused daily weekday electricity demand in the central region of the United States to decrease by 9%–13% in March and April compared with expected demand, after accounting for seasonal temperature changes. This decrease is similar to declines seen in New York. Other areas of the country, such as Florida, have not experienced significant changes, which may partly be caused by regional differences in how much electricity each end-use sector consumes and the varying effects of CO- VID-19 mitigation efforts on the sectors. Strategic Information for a Changing Industry 5 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 environmental industry, so whereas it does to be seen on the macro scale of the 7.8 Darwinian effect of the heavy concentra- not deserve to be dismissed, we will reserve billion people on Earth. While we are on tion of populations in urban settings, but more appropriate treatment for the EBJ the subject, it is hard not to provide a sta- let us not lapse further into social com- Industry Outlook edition coming next for tistical update from the Grim Reaper. In mentary. Suffice it to say concentrated our intrepid EBJ readers. early May 2020 the global death toll from populations are here to stay, and virtually COVID-19 passed 250,000 or 0.003% of all analysis indicates human concentra- And perhaps looming larger than the the global population. This represents one tion and mass urbanization will contin- global energy economy is the U.S. federal death out of every 31,200 people. But put ue, however, with the long term impact government and the Trump Administra- another way to represent just 0.1% of the of the year 2020 and the virus unlikely to tion—either on its last legs and clinging total global population, another 7.55 mil- upend that trajectory. to power or aligning spinable statistics to lion fatalities would have to occur. assure a four-year renewal. Few have ar- But as many in the ‘Small is Beautiful’ gued with the ‘printing of cash’ and the By comparison, global annual death crowd from the 70s are waxing poetic on issuance of economic rescue and stimulus statistics put car crashes at causing 1.3 mil- social media during stay-at-home orders, packages or brought up the long-term ef- lion fatalities a year (although 20-30 mil- embracing a simple domestic life has had fect on the federal budget and our nation's lion are seriously injured), suicides number not only a beneficial impact on their men- financial stability. And while the coronavi- about 800,000, 4 million people die from tal state and family connections, but has rus response will undoubtedly be an issue contaminated water, 9 million from mal- also had a dramatic collective impact on central to the campaign, the federal budget nutrition, 10 million from cancer and 18 air quality and greenhouse gas emissions. won’t go unmentioned, but is unlikely to million from cardiovascular diseases. And Surely we realize this impact on pollution be a major topic of debate given the needs these from a total of about 60 million that is fleeting, and the possible mental health represented on both sides of the aisle. die each year, leaving not too much room impact is limited to a pretty narrow slice for ‘old age’ or ‘natural causes’. The latter of the enlightened population. Many And last but not least of the issues that two disease states are frequently associ- more are ‘going crazy’ being cooped up can't escape comment for now before we ated with end-of-life conditions, that we with occasionally irritating family mem- get to the subject at hand, are the social are well aware makes those afflicted more bers or housemates, or are economically issues of human population and the im- susceptible to succumbing to COVID-19. impaired by lack of work in the service pact of human activity on the atmosphere economy and itching to get back to work manifested in climate change and daily or Some would argue that the spread of a enough to wave banners or join armed seasonal weather cycles. Climate change is highly communicable virus is a natural or marches on state capital plazas. now more frequently discussed in the separate policy and outcome contexts of Miti- gation versus Adaptation & Resilience. WHO Global Number of Deaths by Cause in 2016 (millions) Mitigation challenges are most frequently measured in annual greenhouse gas emissions and debated in future emission scenarios most frequently tied to the energy source mix. Adaptation & resilience scenarios are increasingly debated in the corresponding incremental future effects of those emissions on the frequency and intensity of storms, major seasonal or cyclical weather variations, sea level rise, human habitation, agricultural production, biodiversity and a handful of other significant issues likely to have been shoved further into the background along with many other issues in 2020. While global overpopulation was much derided in the 1970s, and was a much more debated social issue then, it has hardly been front-and-center as an issue in the 2000s. And not to be callous about human life in sensitive times, but the coronavirus will hardly make a dent in global population figures, although this remains

6 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

In the annual statistics on global green- Changes in Energy Intensity and Productivity: 1980-2011 house gas emissions, the year 2020 will almost surely show a hitch much as the global GDP will in 2020, and the GDP did in the years 2008 and 2009. But just a hitch on the curve in the global emission statistics it will be if all other factors are taken into account, and a mere blip it will be on the horizon of accumulated CO2 in the atmosphere. The charts on page 4 plot growth in GDP and CO2 emissions in the USA and globally since 1966 with a composite forecast for 2021. The dips in 2008-2009 are quite apparent, as is the separation of economic growth from emissions growth generally increasing, although not dramatically so, in the last decade. A wave of productivity gains through the 70s largely fed by technology, followed by a wave of energy efficiency investments and retirement of inefficient assets into the 2010s, followed by a wave of clean energy still breaking today has kept GDP growth rates pretty consistently above CO2 emissions growth rates over the last 50 years. To sustain and even accelerate this separation may require accelerating the previ- Source: The Case for Energy Productivity: It's Not Just Semantics; by Patrick Bean published in 2014 by King ously mentioned obsolescence of the fossil Abdullah Petroleum Petroleum Studies and Research Center. Notes: Policymakers are increasingly using fuel industry in the 2020s, something that indicators such as energy efficiency, intensity, and productivity to address the interrelated issues of economic is unlikely to come easy to the political es- development, energy security and environmental sustainability. But Bean aruges energy productivity has tablishment—and the interests that sustain important advantages: It has a more positive connotation, is more intuitive, and portrays grander ambition. From a behavioral economics perspective, these traits can help frame policies that yield more meaningful them. Carbon taxes pretty much remain improvements. The mathematical representation of energy intensity makes comparisons of relative change off the table, and any ‘climate-change-lite’ across time and countries more difficult because of the ‘energy intensity illusion’ — the metric appears to proposal is hardly worth the time today, converge towards a mean. Energy productivity’s mathematical representation, on the other hand, avoids this illusion, providing additional insight and making it a more directly relevant measure of a country’s economy, but reports of the effect of COVID-19 on energy and environmental performance. climate change, or at least emissions, will continue. The impacts of the novel coronavirus can hardly be expected to be a transformational issue in the evolution of climate change policy, but again this is a larger issue for another day. Worth tracking, however, is the trajectory of energy intensity and energy productivity, and forecasts of those increasingly important metrics for the future. While energy intensity has declined dramatically over the last 40 years, and energy productivity has increased almost equally dramatically over the same time period, as researcher Partick Bean says the two indicators are more than just ‘reciprocals of each other’ reflecting the potential of the latter in social policy (see graph and notes).

Strategic Information for a Changing Industry 7 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

U.S. Environmental Engineering & Consulting M&A Deal Count by Quarter 30

0 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 Q1 Sources: Adapted by EBI from M&A tracking database provided by Brown Gibbons Lang & Company (BGL, Cleveland)

U.S. EIA looks at energy productivity from a slightly different perspective show- U.S. A/E/C and EEC M&A Deal Count by Quarter ing the decline in growth of electricity use 100 plotted against the more gradual decline in economic growth. Here again the only 80 point where economic growth dipped below electricity use growth in modern times 60 was during recessions, but that things pretty much ‘returned to normal’ afterwards. BGL EE&C 40 Energy productivity metrics and human ROG AEC productivity metrics will both be increasingly important key indicators for govern- 20 ment, industry and commercial enterprises going forward. 0 So where were we? Yes the matter at 18 Q1 18 Q2 18 Q3 18 Q4 19 Q1 19 Q2 19 Q3 19 Q4 20 Q1 Sources: Adapted by EBI from M&A tracking databases provided by Brown Gibbons Lang & Company and hand is M&A activity in the environmen- ROG + Partners tal industry and the financial prospects for owners and investors in environmental companies as we look ahead to the recov- U.S. A/E/C and AE M&A Deal Count by Year: 2011-2019 ery of 2020 and 2021. First the consensus is that markets will recover which over- 350 all is not a surprise, but the sequence in EFCG 300 which they do may bring some surprises, Morrissey Goodale and dictate how companies and invest- 250 ment portfolios position themselves. But the dominos of the economic and market 200 downfall are still being assessed, and again are the subject of scenario planning in the 150 next edition of EBJ, along with environmental industry segment and client sector 100 forecasts reset to the end of 2022. 50 So where does that leave owners and investors of environmental service compa- 0 nies in mid-2020? Certainly, as most of the 2011 2012 2013 2014 2015 2016 2017 2018 2019 experts who have contributed generously Sources: Adapted by EBI from M&A tracking by Morrissey Goodale and Environmental Financial Consult- ing Group; The Morrissey Goodale database uses a broader defintion of architecture engineering (AE) and to our collective perspective in this edition includes international deals and smaller transactions not included in summary analysis from EFCG. of EBJ indicate, we are in an ‘M&A lull’ 8 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

or an outright timeout until some mea- Primary Market Segment of AEC Selling Companies by Year sure of stability or equilibrium emerges to enable enough confidence in financial 100%

forecasts to validate return on investment 90% Telecommunications models. Deals that were in progress into March 2020 in some cases proceeded, but 80% Environment/Haz Waste

in more cases at earlier stages were halted 70% Transpostation or pretty much eliminated until more clarity about client demand and financial sta- 60% Oil & Gas/Industrial bility emerge. In other cases, deals or talks 50% Wastewater collapsed as a result of broadening gaps in expectations of value and willingness to 40% Water Supply pay for that value that is often the crux of 30% Power whether or not a deal closes anyway—but has been exaggerated by the COVID-19 20% Manufacturing timeout. 10% Building So while we are in timeout, it is not 0% surprising that deal experts recommend 2015 2016 2017 2018 2019 that companies get their house in order, Sources: Adapted by EBI from Morrissey Goodale annual and quarterly infographics 100 and investors and owners see to their debt obligations, and that both carefully manage their cash flow—all at the same time 80 row range of 5 to Median Revenues of AE Selling Companies ensuring the leadership sustains the morale 7 between 1998 and productivity of their workforce. The and late 2003. 4 60 possibility of distressed assets coming on The dotcom mar- BGL EE&C the market does indeed provide a window ket crash of 2000 3 40 for opportunistic strategies, but most as- ROG AEC tipped the ratio sert this kind of activity has not been, and from a steady likely will not be too widespread. 20 7.0 down to five 2 quarters at about So looking at pertinent environmental 5.0 — lower by 0 industry M&A statistics we focus primar- almost 30%. The 18 Q1 18 Q2 18 Q3 18 Q4 19 Q1 19 Q2 19 Q3 19 Q4 20 Q1 ily on activity and valuations. Valuations 1 index advanced ultimately boil down to what a buyer is for 18 quarters willing to pay and subjective matters can from 2003, and 0 come into play, but the ultimate price is stayed above 12.0 2016 2017 2018 2019 2020 Q1 predominantly governed by a multiple of until the global Sources: Adapted by EBI from Morrissey Goodale quarterly infographics earnings. Enterprise value as a multiple of economic crisis EBITDA is by far the most prevalent met- of 2008-2009, where it dropped from over ric and this multiple varies considerably by Transaction activity data shows a simi- 12.0 to just above 4.0 in three quarters. size of company as illustrated on the AEC lar path of growth over time with hitches Over the 11 quarters prior to the 2008 cri- Advisor charts on page 13, with small during recession, but paints a slightly dif- sis the index averaged about 13, compared companies at or below a value of 5-times ferent picture relating to size and sector. to the 19 quarters after the crisis when the earnings and the largest companies above First, when comparing the transaction ac- index average to about 7 — or a fall of 10. The large company end of the scale tivity data of the contributors to EBJ pre- about 45%. PE ratios took off again for a ebbs and flows with public company com- sented here, it is important to distinguish sustained run of growth from the end of parables and this price/earnings or PE ra- both the breadth of the sector definition 2013 to the end of 2019 from 7.0 to 15.0. tio has varied considerably over time, with used by be firm doing the analysis, the size The 10-year average at the end of 2019 was understandable dips during recessions and threshold to constitute being counted and 9.0, when the index at a record 15.0 in late accompanying stock market swoons. the geographic spread. 2019. And if we believe the pattern from The chart at the bottom of page 41 the last two recessions then it seems logical The annual deal count data presented portrays the more than 20-year quarterly to assume that the index would fall 30 to on page 8 are both ostensibly the archi- history the EFCG Index as the most rig- 40%, and reset back around 8 or 9 times tecture & engineering segment but the orously tracked PE index sine the 1990s. earnings this time at the top of the scale, Morrissey Goodale data includes interna- Here the PE ratio traded in a fairly nar- with a familiar downward cascade by size. tional and smaller transactions. The EFCG

Strategic Information for a Changing Industry 9 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Census Data on Shares of Companies of 500+ in Environmental Services and all Professional Services NAICS NAICS Description Number Establish- Employ- Em- Payroll % Of % Of Em- % Of Code Of Firms ments ment ployees ($1000s) Firms ployment Payroll 54 Professional Scientific & Technical 802,476 831,607 5,182,179 <500 375940235 99.6% 58.9% 52.2% 54 Professional Scientific & Technical 3,269 71,927 3,617,714 500+ 344358613 0.4% 41.1% 47.8% 5411 Legal Services 174,438 181,764 938,177 <500 74620778 99.9% 82.5% 72.4% 5411 Legal Services 260 3,550 199,303 500+ 28456753 0.1% 17.5% 27.6% 5412 Accounting 112,763 116,661 677,747 <500 32168964 99.5% 55.0% 48.1% 5412 Accounting 547 16,340 555,583 500+ 34731536 0.5% 45.0% 51.9% 5413 Architectural Engineering 91,483 98,724 842,653 <500 64113111 99.2% 58.9% 53.6% 5413 Architectural Engineering 724 12,323 589,027 500+ 55530569 0.8% 41.1% 46.4% 5416 Management Scientific & Technical 159,931 162,853 739,796 <500 55027817 99.5% 60.4% 54.4% 5416 Management Scientific & Technical 811 8,198 485,147 500+ 46090088 0.5% 39.6% 45.6% 54162 Environmental Consulting Services 8,228 9,101 63,221 <500 4043683 99.2% 79.5% 76.4% 54162 Environmental Consulting Services 70 843 16,262 500+ 1252398 0.8% 20.5% 23.6% 562 Waste Management & Remediation 17,766 18,877 216,913 <500 10631159 99.0% 55.3% 47.5% 562 Waste Management & Remediation 179 5,764 175,561 500+ 11744126 1.0% 44.7% 52.5% 562111 Solid Waste Collection 6,552 6,841 83,762 <500 3881619 99.2% 44.5% 36.1% 562111 Solid Waste Collection 54 3,126 104,666 500+ 6883385 0.8% 55.5% 63.9% 562112 Hazardous Waste Collection 315 358 5,102 <500 295971 96.6% 52.6% 49.7% 562112 Hazardous Waste Collection 11 267 4,602 500+ 300025 3.4% 47.4% 50.3% 562910 Remediation Services 3,612 3,968 58,775 <500 3210904 98.1% 77.5% 71.1% 562910 Remediation Services 69 545 17,104 500+ 1307861 1.9% 22.5% 28.9% Source: EBJ analysis of U.S. Census Bureau data; 2016 County Business Patterns report curve on this chart matches the curve on Most & Least Consolidated Categories in Environmental page 38 that weighs transaction size with Services and all Professional Services activity, but here the deal count lines di- 50% Remediation verge, illustrating less activity at the top of 47% the market, and increasing acquisitions at the smaller end of the market and inter- Hazardous Waste 64% 56% nationally. The declining activity of larger acquirers is explained on the EFCG chart 52% Solid Waste on page 38 as mostly related to integra- 45% tion, but fewer deals of scale at the top end Environmental 24% could be a contributor. Consulting 20% So just how consolidated is the envi- All MS&T 46% ronmental industry, and more specifically 40% how consolidated are the key environ- 46% A&E mental services segments, and how do 41% they compare with peer service sectors in 52% other industries? EBJ has spent a consider- Accounting 45% able amount of time over the last 30 years tracking the consolidation of the environ- Legal 28% mental industry, and we keep finding that 18% consolidation continues at a fairly rapid All Professional 48% pace, but that overall these key segments Services 41% remain relatively fragmented and still provide the opportunity for more con- 0% 10% 20% 30% 40% 50% 60% 70% solidation. This feature, along with fairly % of Payroll in Companies >500 People consistent growth, recession resistance and % of Employees in Companies >500 People diversity of client sectors makes environ- Source: EBJ analysis of U.S. Census Bureau data; 2016 County Business Patterns report

10 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Distribution of U.S. Environmental Consulting & Engineering Firms in 2018

Gross Env’l Net Env’l 2018 Envl C&E Revs Firms Average % of Mkt % of Gross C&E Revs C&E Revs Growth Big >1 bil 4 9,018 2,255 7,485 23% 24% 1% Large>100-999 mil 50 14,947 299 12,914 40% 40% 6% Mid 20-100 mil 159 6,468 41 5,789 18% 17% 5% S 10-20 mil 150 2,027 14 1,905 6% 5% 3% S 5-10 mil 212 1,415 7 1,358 4% 4% 6% S 1-5 785 1,793 2 1,721 5% 5% 4% S 0.2-1 mil 2,085 959 0 942 3% 3% 5% S <200k 4,525 511 0 502 2% 1% 3% Total 7,970 37,137 5 32,616 100% 100% 4.3% Source: Environmental Business Journal’s annual model of the U.S. environmental consulting & engineering industry. mental services all the more inter- Share of Top Companies in U.S. Environmental C&E Industry 2000-2019 esting to private equity investors 100% that have been a more recent factor 86% 86% 90% 83% 84% 82% in accelerating or at least sustaining 80% 82% 81% 81% 81% 81% 81% the pace of M&A. 80% 75% 70% 66% 78% 78% Solid waste is arguably the most 70% 62% 64% 75% 76% 75% 60% 73% 74% 73% 73% 73% 73% 73% mature of environmental industry 56% 56% 68% 60% 63% segments and recent developments 61% 61% 58% 59% 60% 59% 56% 57% 58% 58% 57% 57% and EBJ’s universe model of the in- 50% 56% 56% 55% 56% 53% 53% 53% dustry are included on pages 67-69 49% 50% 40% 48% 47% 44% 45% of this review, but the case of con- 43% 41% 41% 39% 40% 39% 38% 38% 38% 36% 38% 37% 37% sulting & engineering offers per- 30% 34% 33% 31% 32% 32% haps the most intriguing example. 30% 29% 30% 27% 26% 27% 28% 27% 26% 27% 28% 27% 27% First EBJ takes painstaking effort 20% 26% 26% 22% 21% 21% 22% 22% 23% 19% 19% to separate out environmental rev- 10% enues in broader based engineering Top 5 C&E Top 10 C&E Top 30 C&E Top 100 C&E Top 200 C&E companies, and the history of that 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 annual analysis in terms of consoli- Source: Environmental Business International, Inc. Annual research on the C&E industry by EBI and EBJ in surveys, inter- dation is summarized on the share views and compliations of secondary data and company data. chart at the right. Here the collective share of the top companies increased companies coded 54162 on the NAICS ers. This likely reflects the more special- steadily from 2000-2010, but leveled off system account for less than half the $34 ized nature of the work, the more regional and even declined in the 2010s as hits to billion environmental C&E market, even and sectoral aspects of expertise based on federal programs and the oil & gas indus- with generously assuming they generate regulations or technology — and of course try were larger factors impacting industry on average $200,000 in annual net rev- the allure of more opportunities for ac- leaders than any real slowdown in M&A. enue per employee, so that half the busi- quisition of companies, but perhaps more In fact M&A was required for the top firms ness in mixed in other categories. Second, importantly share in defined niches. Com- not to lose more share. The ‘Distribution’ the graphic illustrates that environmen- paring these indicators for waste manage- chart above shows that top 54 C&E firms tal consulting is the least consolidated as ment and remediation highlights again a still represent only 63% of the market, and measured by share of firms of above 500 relative fragmentation, but also the capital that even in a good year that was 2019, the employees, with the exception of law firms assets required for these other core envi- largest companies still under-performed that tend to have more than their share of ronmental services. the market in terms of growth. ‘lone wolf’ practices. Third, compared to Regardless of the evolution of markets More interesting is comparing envi- their peers in A&E and MS&T to use the and client demand out of the COVID-19 ronmental consulting to other profes- census groupings, environmental consult- crisis, it is clear that another decade of sional services firms based solely on U.S. ing shows the employment share of the M&A activity awaits the environmental Census Bureau data. First, realize that all 500+ companies at half of that of the oth- industry. 

Strategic Information for a Changing Industry 11 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

the AEC industry. At this point, there have been dozens of very successful “exits” by AEC ADVISORS EXPECT M&A ACTIVITY TO private equity sponsors in the AEC indus- CONTINUE AFTER COVID LULL; DEALS IN try, so there are many more success than failure stories. The following are a few at- PROCESS PROCEED AND SOME OPPORTUNITIES tributes that seem to be driving this high EMERGE FOR ‘WHITE KNIGHT’ BUYERS level of interest from private equity investors: AEC Advisors is a corporate finance and M&A advisory firm for owners, executives and boards of Architecture, Engineering & Consulting (“AEC”) firms. Throughout their careers, - Strong private equity fundraising the four principals have completed over 150 M&A transactions in the AEC industry and have environment: Again, prior to COVID-19, advised over 500 AEC firms on corporate finance issues, which besides M&A advice include: private equity investors were sitting on re- analysis of a firm’s strategic alternatives for growth, internal ownership transitions and stock cord amounts of “dry powder” / capital valuations (ESOP and non-ESOP), KPI benchmarking, capitalization modelling, and rais- that they need to invest and put to work; ing private equity capital. Andrej Avelini is a co-founder and President of AEC Advisors. Mr. - Continued very low interest rates Avelini has spent over two decades serving clients in the AEC industry, providing corporate and easy debt financing: While interest finance and mergers & acquisitions advice. rates appear likely to remain very low, giv- EBJ: Could you provide some com- able publicly traded strategic buyers, who en the Federal Reserve’s actions in response ments on A/E/C industry trends related tend to be most active in M&A, to make to COVID-19, we are not sure what the to the following: acquisitions on a financially accretive basis impact will be on private equity investors (i.e. they can buy companies for a lower ability to access substantial debt financing. M&A ACTIVITY multiple of earnings than their own com- However, over the last few years, the combination of low interest rates and easy debt Prior to COVID-19, M&A activity panies are valued at, which is “accretive” financing has enabled private equity inves- over the last couple years has been at a / increases earnings per share and stock tors to pay market valuations and compete post-great recession peak. It is still too ear- prices). with strategic buyers who can rely on syn- ly to tell how COVID-19 will ultimately 2) Inability of large AEC firms to ergies to rationalize higher valuation. impact M&A activity and valuations. Thus grow organically: While AEC Advisors’ far, we have found that most deals that al- 2019 KPI Survey suggested that the $1 - Strong long-term AEC industry out- ready had a signed Letter of Intent (LOI) in billion+ revenue firms were finally starting look: the AEC industry offers a popular place are moving forward towards closing, to grow organically after zero-to-negative investment thesis given the increasing in- but a number of deals in the pre-LOI stage growth the last few years, their current frastructure and environmental challenges have been put on hold, as (a) most buy- organic growth rates are still substantially facing the world; ers are very focused on trying to manage lower than those of small and midsized - Fragmented AEC industry makeup their own firms through this crisis; (b) it AEC firms. Because many of these $1 bil- and valuation arbitrage: this allows pri- is nearly impossible to arrange face-to-face lion+ revenue firms are publicly traded, meetings, which are important for both vate equity investors to make a number they have significant investor pressure to of smaller “add-on” acquisitions to their sides to be able to evaluate the cultural fit; grow in order to maintain their high valu- and (c) a lot of buyers and investors want larger “platform” at lower multiples of ations, and therefore are relying heavily on earnings than what they acquired the to see how things play out before making acquisitions to achieve that growth. further commitments, although we have platform for and hope to sell it for. Ad- seen some opportunistic buyers continue 3) Increasing private equity interest ditionally, many of the smaller “add-on” to look for acquisition candidates, and it in the AEC space: Over the last four years, acquisitions are smaller than what many is likely that some firms will need a larger, roughly one-third of all M&A transactions of the larger buyers in the industry tend better capitalized partner to help them involved either a private equity sponsor in- to focus on (i.e. large buyers tend to want through this crisis. We are working on a vesting in a new AEC platform or a private larger acquisitions to “move the needle”); transaction right now, where our client equity-backed AEC business. Historically, therefore, mid-sized private equity-backed needs a “white knight” buyer as they are we have found that AEC firms have been buyers are competing with smaller or mid- running out of cash. With that being said, somewhat apprehensive towards private size employee-owned firms who tend to be prior to COVID-19, we believe the very equity after hearing “horror stories” about much more conservative on valuation. high level of M&A activity was driven by: companies that have failed under private - Because of COVID-19 crisis, some equity ownership. However, private equity 1) 10-year high public market stock debt-laden AEC Firms owned by private investors who understand the AEC indus- equity might be forced to sell: valuations: Again, prior to COVID-19, While too try and “what it means” to manage and early to tell, we suspect that some private public markets valuations were near a post- grow a professional services “people” busi- great-recession high. These valuations en- equity owned AEC firms might not make ness, are playing a more significant role in it through the crisis, given their high lever-

12 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 age (debt), and might seek a buyer. This M&A Valuation Multiple Arbitrage based on Size could create some unique buying opportunities for well-capitalized buyers (“white knights”) who also have the fortitude to buy in an uncertain environment. Con- versely, we’d expect to see some new private equity firms coming into the industry to be the white knight. 4) Mid-Sized Employee-Owned Buy- ers: While publicly traded and private equity backed firms tend to make the larger, headline grabbing acquisitions, there are plenty of mid-sized employee-owned firms that are active in M&A. While they generally focus on smaller acquisitions, they find that niche firms can still provide significant strategic value. In fact, according to our M&A database, ~1/3 of all acquisitions over the last four years were completed by employee-owned firms (the balance was split between private equity investors / private equity backed firms and publicly traded firms). While mid-sized employee owned firms may struggle to compete on price, they can offer continued employee- ownership and a less bureaucratic environ- Source: AEC Advisors. September 2019. There is a strong correlation between multiple of EBITDA and ment, which tends to be attractive to many revenue size of the target. Larger firms garner a higher multiple of earnings than smaller firms, all else being sellers. equal. But, all else is not equal: services, locations, growth history and outlook, consistency in profit margin, and management team age, experience and business acumen have the biggest impact.

Private Equity vs. Strategic Buyer Valuation Multiples

Source: AEC Advisors. September 2019. Private equity and strategic buyers appear to be valuing AEC firms at similar valuations. Typically, Strategic buyers pay more because they can use synergies (both cost and revenue) to rationalize higher valuations. But, private equity buyers are taking advantage of low cost of debt to use financial leverage to level the valuations playing field and be competitive.

Strategic Information for a Changing Industry 13 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

STOCK VALUATIONS/APPRAISALS In our view, the COVID-19 induced COLLIERS MAJORITY STAKE FOR MASER: A CASE economic uncertainty has made it very difficult to value any business, including STUDY IN REAL ESTATE AND C&E PARTNERSHIP privately held AEC firms. Since we are still EBJ asked AEC Advisors co-founder Andrej Colliers’ Strategic Investor Model early in the crisis, most firms simply do not Avelini about recent interesting case stud- Despite being a large, publicly traded know how much their business will be im- ies in M&A in the environmental industry. company, Colliers takes a decentralized pacted in 2020 and beyond. Therefore, we Follwing is AEC’s analysis of two notewro- approach to management. Colliers’ M&A are working with a number of our roughly thy recent transactions: Colliers acquiring a approach is to partner with management 30 internal stock valuation clients to either majority stake in Maser Consulting and Ar- teams and allow them to operate their delay the valuations until there is more cer- durra’s continued activity with its purchase of businesses semi-autonomously and retain tainly around the impact of COVID-19, Texas firm LNV. or implement an “uncertainty discount” to significant equity stakes, rather than sub- reflect the future impact of COVID-19. Colliers International intends to lever- suming them into a hierarchical structure. age its real estate prowess and relationships, Colliers believes this approach is particu- With that being said, we have generally global footprint, and capital to accelerate larly well suited for professional services observed that more employee-owned firms Maser’s growth and become a leading pro- firms, like Maser, since it’s critical to en- are moving towards higher or market- vider of AEC services around the world. sure that the key assets, which are people, based internal valuations and away from We believe this transaction highlights the remain engaged and incentivized. For this more conservation valuations (e.g. book continued attractiveness of the AEC in- reason, we tend to think of Colliers as a value) in order to disincentivize a sale and dustry to both private equity and strategic strategic investor rather than a strategic make acquisitions more affordable. At the investors, like Colliers, who are drawn to buyer; however, Colliers differs from tra- same time, firms need to be careful that its strong and steady growth prospects due ditional private equity sponsors because internal valuations aren’t too high, as that to the increasing infrastructure and envi- it provides many of the synergistic cross- can make internal ownership transition ronmental challenges facing much of the selling opportunities that strategic buyers too expensive and make it difficult to -si world. typically provide. multaneously invest in growth, i.e. if a lot of capital flows towards ownership transi- What is a Real Estate Services Firm’s Colliers’ strategic investor model is sim- tion vs. growth initiatives. Interest in the AEC Industry? ilar to the approach used by Warren Buf- fet’s Berkshire Hathaway, or in the AEC Although it is widely known for its com- OWNERSHIP TRANSITIONS Industry, Dar Group, a ~$2.5 billion rev- mercial real estate brokerage services, Col- enue, Middle-East based, engineering con- This remains a perennial challenge for liers is more broadly a public investment glomerate that owns majority stakes in a employee-owned AEC firms, and in our platform for low-risk, service-based busi- number of high profile engineering firms, view, is the number one reason why firms nesses for physical assets, including project decide to sell. While there are many factors mostly of the A&E variety, such as T.Y. management, property management, and Lin, Perkins + Will, Ross & Baruzzini, that go into successful internal ownership investment management. Through Maser, Integral Group, Landrum & Brown and transition, some of the keys include: (a) Colliers believes the addition of engineer- Currie & Brown (see page 66). strong financial performance (ideally top ing services will enable it to broaden the quartile but at least above median profit suite of services it provides to its commer- Opportunity for Maser to Differentiate margin), which provides capital for the cial real estate clients, increase its presence Itself firm to repurchase shares, or provide large in the attractive public infrastructure mar- Maser was founded 36 years ago by bonuses to enable employees to buy the ket, and serve as a new growth area. stock directly; (b) an internal stock valu- Richard Maser, growing to ~1,000 peo- ation which balances the desire of the sell- Other major commercial real estate ser- ple today, primarily via strong organic ing / retiring shareholders to maximize the vices firms such as CBRE, JLL, Cushman growth. Management was very focused on value of the shares, and the company’s abil- Wakefield, etc. also provide project man- maintaining this strong growth in order ity to make accretive acquisition, with the agement services, but do not provide sig- to provide opportunities for its staff and desire of the new shareholders to buy-in at nificant engineering services (CBRE made attractive returns for its employee share- an “affordable” price; and (c) focus, atten- a bit of a splash in 2017 when it acquired holders. However, Maser was aware that it tion and a continuously updated Capital Heery, a $100-million PM/CM [project can become more difficult for AEC firms Flow Plan: modelling ownership transition management/contruction management] to maintain strong and consistent organic to ensure the company can afford it with- firm, from the UK-based contractor Bal- growth as they become larger and more out taking on too much debt – successful four Beatty). Therefore, Colliers’ partner- diversified. And without access to outside internal ownership transitions don’t “just ship with Maser’s engineering talents will capital, it is difficult for most employee- happen.”  differentiate from its competitors. owned firms, like Maser, to supplement organic growth with acquisitive growth, 14 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 particularly since they need to use a signif- plans to help Maser grow into a leading ership transition financing burden to Col- icant portion of their earnings to finance global firm, there should be even greater liers, Maser will be able to reinvest all its ownership transition. Compounding this leadership roles for Maser’s management earnings in growth, rather than using a issue for Maser was the planned sell-down team in the coming years. significant portion of its earnings to buy of a significant percentage of its shares by back shares. - Continued Employee Ownership: its founder, Richard Maser. Nevertheless, Maser, like many employee-owned firms, - Growth Capital and M&A Exper- Maser was not “for sale” and management believes employee ownership is an impor- tise: Colliers can provide additional capi- felt confident in its ability to continue to tant incentivization tool that enables it to tal to help Maser finance acquisitions, thrive as an independent, employee-owned recruit and retain top talent. Thus, Maser and its M&A team, which has completed firm, and therefore did not entertain the had no interest in an ownership transition over 100 acquisitions, will provide criti- myriad inquiries that it received from stra- where the opportunity for continued own- cal M&A support. While we tend to fo- tegic buyers and private equity sponsors. ership would no longer exist. By partner- cus more on the capital that is needed for However, Maser’s management felt that ing with Colliers, Maser’s shareholders will acquisitions, as that is often a gating issue Colliers’ model was unique, and decided continue to own a substantial portion of for employee-owned firms, it takes a lot of to engage in one-on-one discussions (no the business, and Maser will continue to practice and mistakes to become an expert sell-side “process” or “auction”), leading able to offer ownership opportunities to its at not only making acquisitions, but prop- to the pending transaction. Ultimately, key employees. erly integrating them and achieving the il- Maser felt that Colliers would provide an lusive synergies. - Stress-Free Ownership Transition: If opportunity for continued autonomy and Maser’s key staff reach a point where they - Permanent Capital / Perpetual Part- employee ownership, but at the same time, do not have the appetite or ability to buy nership: While private equity firms can eliminate the ownership transition chal- out the existing employee shareholders, provide continued autonomy, continued lenge and enable it to accelerate its growth. Colliers will purchase those shares directly ownership opportunities, liquidity at fair Specifically, management felt Colliers of- from the shareholders. In essence, Colliers market value, growth capital, and M&A fered: provides an ownership transition safety expertise, they do not offer permanent - Autonomy & Leadership: Because net, removing the anxiety that plagues capital, like Colliers, as they typically look Colliers does not provide AEC services, many of Maser’s employee-owned peers to sell their equity stake to another private Maser will serve as its AEC platform, and who are constantly worried that they may equity investor or a strategic buyer in 3-5 Maser’s management will continue to not be able to meet requests to buy back years, because they ultimately need to pro- “run” the firm and be responsible for day- shares from retiring / departing employee vide liquidity to their investors. As a result, to-day operations. Moreover, since Colliers shareholders. Finally, by shifting the own- management doesn’t have full “control”

M&A Post-Cost Synergy Valuations

Source: AEC Advisors. September 2019. Expected cost synergies are significant (~25% of earnings), particularly for larger acquisitions where there is more potential for redundancies/overlap.

Strategic Information for a Changing Industry 15 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 over where it will end up working (while - No Leverage: Since Colliers has its Perspective on Debt & Private management’s input is important, the pri- own well-capitalized balance sheet, it does Equity Deals vate equity sponsor typically has the final not leverage its acquired companies with EBJ: We see quite a few companies say on who the next partner will be) and debt, unlike most traditional private eq- of significant size that are backed by the repetitive sales processes can distract uity investors. This was important to Ma- private equity but many are laden with from running the business. (However, we ser, as it felt that, long-term, high leverage debt brought on by their private equity are seeing private equity sponsors focus would increase the probability that some- partnership. How does that affect the on longer-term investment horizons, and thing “bad” would happen, particularly in company’s ability to go to the next level family office investors, who typically have a recessionary environment. of private equity transaction on one hold periods of 10+ years, are becoming - Cross-Selling Opportunities: Like hand, and how does it impact the com- increasingly popular choices for manage- a traditional strategic buyer, Colliers can pany’s ability to generate net profit after ment teams to partner with. For example, provide cross-selling opportunities to Ma- interest and debt payments in order to STV, a ~$500 million revenue, NYC- ser, which should help accelerate growth. continue paying the kind of bonus that headquartered, transportation engineering In particular, Colliers can look to lever- the staff maybe used to given levels of firm, recently decided to partner with a age Maser’s services with its commercial operating profit? family office (Tom Pritzker) {Editor’s note: real estate clients, and help Maser expand See box for a brief summar of Pritzker fam- Avelini: There is no question in my geographically (Colliers has offices in 69 ily’s involvement in the environmental in- mind that some private equity owned AEC countries). dustry.] firms, especially the ones that transacted more recently and so have the most debt, Ardurra Acquires LNV, A Water/Wastewater and Transportation will find themselves not being able to ser- Engineering Consulting Firm Based In Corpus Christi, Texas vice their debt. As of late April 2020, our COVID-19 impact survey suggests about rdurra is majority-owned by New York-based private equity sponsor, RTC Part- a 10% reduction in revenue vs. budget the Aners, and like many private equity-owned firms, has relied on a combination of median firm is expecting for 2020—an both organic growth but especially acquisitions to fuel its rapid growth. As we have unprecedented situation in our industry, observed over the last 5-10 years, private equity investors have become increasingly so I doubt that the PE’s modelling their focused on the AEC industry, and are not only competing aggressively for larger investment planned for that. So, some PE “platform” acquisitions (i.e. $50 million revenue+ firms, like Ardurra), but are also sponsored AEC firms will need to find a competing very aggressively for add-on acquisitions for those platforms (i.e. smaller ‘white knight’ if they aren’t able to service firms like LNV). In fact, for deals larger than 10 people, private equity investors / pri- their debt. The good news is that there are vate equity owned firms now account for about 1/3 of acquisitions in the AEC space, plenty of well-capitalized buyers ready to according to our proprietary valuation metrics database of ~200 M&A transactions take advantage. completed over the last four years. EBJ: And with today’s COVID time LNV will provide Ardurra access to a large and attractive geography in Texas, out, are debt holders willing to extend where it previously had little presence, and strengthen Ardurra’s water / wastewater terms or Give some latitude to their pri- practice. At the moment, Texas, California, Florida and the Southeast are generally vate equity partners or the companies the most sought-after geographies in the M&A market, and water / wastewater and that they sponsor? transportation are generally the most sought-after markets, so LNV was pursued aggressively by a number of potential partners, but Ardurra stood out for a few reasons: Avelini: Not sure how flexible the debt holders will be in these highly leveraged - Platform Opportunity: LNV will serve as Ardurra’s Texas platform, and its loans—I doubt a ton of flexibility. On the management team will retain significant autonomy and leadership opportunities. As other hand, professional services firms are we mentioned in our Colliers / Maser analysis, platform opportunities tend to be much more valuable as on-going concern extremely attractive to most sellers. enterprises (i.e. no hard assets to divest eas- - Growth Culture: LNV was excited about joining Ardurra’s people-focused, ily) so don’t think pushing an AEC firm growth culture, which could provide ample opportunities for LNV’s leaders to ex- into bankruptcy does much for senior pand the business and pursue goals that would have been difficult to achieve without lenders, not to mention the subordinated a partner like Ardurra. ones. And, not sure recap from one PE to another works, if the value of the company - Ownership: While LNV’s shareholders sold the majority of their shares in the is below the amount of debt it has. So, that transaction, they rolled over a significant equity stake. Management felt that equity leaves pretty much only a strategic buyer ownership could help align interests and promote cross-selling opportunities across solution.  the entire company and provide further upside for its shareholders via a potential “2nd bite of the apple” at the next liquidity event. ¤

16 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

$20 billion in revenue, AECOM is argu- valuation (~13x EBITDA) that was signifi- ably the largest, most diversified AEC cantly higher than Jacobs’ valuation prior DIVESTITURES IN firm in the world. However, AECOM’s to the announcement of the sale (~11x SEASON AS FIRMS SEEK recent organic growth and profit margins EBITDA). Post divestiture (and pre-CO- have lagged those of its peers, and it has VID-19), Jacobs was trading at 13x – 15x BETTER FITS & FOCUS struggled to retain top staff, particularly EBITDA, which was similar to the mul- ON CORE MARKETS after its acquisition of URS. As a result, it tiples that other less cyclical AEC firms are has been valued at lower multiples of earn- trading at. Andrej Avelini, co-founder and President of ings than most of its publicly traded peers. - GHD divests its Forensics Business AEC Advisors. Faced with increasing investor scrutiny, in to NV5: GHD, a ~$1.5 billion revenue, June of this year, AECOM announced that igh level of divestiture activ- employee-owned infrastructure and envi- it was considering spinning off its ~$3 bility is consistent with the current ronmental firm headquartered in Australia, lion revenue management services business M&A workload at AEC Advis- recently announced the sale of its southeast Hros, which includes advising a number (US Federal Government business), which US forensics engineering business to NV5, would then trade as a separate public com- of firms who are considering divesting a publicly traded, ~$600 million revenue pany. AECOM believed that this would non-core businesses that are performing AEC firm headquartered in Florida. AEC lead to two more focused, higher per- well but may fit better with another firm. Advisors initiated the transaction and ad- forming businesses with enhanced appeal While there are myriad reasons why these vised GHD. This divestiture illustrates to investors. However, AECOM instead divestitures take place, we would like to how acquisitions can lead to business units decided to sell this business to two private highlight a few that we believe are driving that may not align with a firm’s broader equity firms (Lindsay Goldberg and First the recent uptick in activity: strategy. As a bit of history, in 2014, GHD American Securities), likely because they merged with Conestoga Rovers and As- FOCUS ON CORE MARKETS TO offered to pay a substantially higher mul- sociates (CRA), a ~$300 million revenue, IMPROVE PERFORMANCE AND tiple of earnings for this business (~11.5x Canadian environmental consulting firm UNLOCK SHAREHOLDER VALUE EBITDA) than what AECOM could (the principals of AEC Advisors worked achieve in a more uncertain IPO process As the large AEC firms continue to on the transaction and advised CRA be- for this business unit. grow and diversify, often through acquisi- fore founding AEC Advisors). Prior to the tions, they have found it difficult to pro- - Jacobs divests its Energy, Chemicals merger with GHD, CRA had acquired a vide differentiated services in all markets, & Resources Business to Worley: While forensics consulting business as part of its operate efficiently and retain top talent – Jacobs has traditionally been strong in acquisition of HSA in 2013, but forensics the name of the game in our industry. As a the energy/petrochemicals business, over was not a great fit for CRA, and even less result, they, on average, are growing more time it developed leading infrastructure of a fit for GHD. Therefore, GHD felt it slowly (organically) and are less profitable & buildings and US Federal Government was in the best interest of GHD and its than their smaller and midsized peers, who businesses. With the acquisition of CH2M forensics staff to divest the business to a tend to be more focused on a couple key in 2018, Jacobs further strengthened these firm that was more focused on forensics, niches where they have a competitive ad- businesses, and soon decided to exit its enabling GHD to reinvest the proceeds in vantage. ~$4 billion revenue energy, chemicals & its core infrastructure and environmental resources business. Management believed businesses, and its forensics employees to By divesting non-core businesses and this would result in a more focused, more have greater professional growth opportu- focusing on their primary markets, large profitable and less volatile firm that would nities. firms hope to marry the advantages of scale ultimately receive a higher valuation by and specialization, which should theoreti- A TOOL TO REVERSE THE INTE- public markets investors. Management cally result in improved financial perfor- GRATION OF DESIGN AND CON- further believed that while the major- mance. Finally, investors tend to place a STRUCTION SERVICES ity of Jacobs’ revenue was generated by premium on businesses that have a simple its less volatile buildings & infrastructure and compelling value proposition. When A variation on the theme of specializa- and government businesses, Jacobs was businesses become too complex, it can be tion involves the splitting up of design and valued closer to the lower multiples that difficult for investors to understand and construction services. While many believe more volatile energy focused firms trade at ascribe value to each of the business units, that full vertical integration is inevitable rather than the higher multiples that less and the value of the parts could be worth since clients naturally prefer that one con- volatile infrastructure, buildings and gov- more than the current value of the enter- tractor take responsibility for the entire ernment focused firms trade at. Since Wor- prise. Below are a few notable examples: project (i.e. one stop shop), a number of ley is an energy/resources focused firm, firms have found that it can be difficult - AECOM divests its Management Jacobs’ energy, chemicals and resources to successfully integrate design and con- Services Business to Lindsay Goldberg business aligned with its core service of- struction services in light of the different & First American Securities: At nearly ferings, which helped Worley rationalize a cultures and risk profiles. Moreover, engi-

Strategic Information for a Changing Industry 17 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 neering firms that become involved with might view Stantec’s overall risk profile kers/advisors into the AEC space. CBRE, construction services are likely to be valued given its ownership of a construction busi- Colliers, JLL and Cushman Wakefield all at lower multiples of earnings by inves- ness (similar to how Jacobs was “penalized” now have substantial PM/CM practices tors, even if the construction services are for its exposure to the energy markets). and are considering further expanding into only a small part of their total revenues, engineering design services. - Balfour Beatty divests Parsons given the perceived risks associated with Brinckerhoff toWSP: In 2014, Balfour - Leidos divests its EPC Subsidiary construction (i.e. the low-risk design/con- Beatty, a UK-based contractor, sold Par- to Haskell: As Leidos evolved into a gov- sulting model can be tainted by a drop of sons Brinckerhoff, a ~$2 billion revenue ernment services IT/consulting firm, Lei- construction risk). Below are a few notable transportation engineering firm, to WSP. dos decided to divest its EPC business to examples: Balfour Beatty had previously acquired Haskell, a design-build expert, and re- - Stantec divests MWH Constructors Parsons Brinckerhoff with the goal of pro- deploy the capital in to its growing core to Oaktree Capital: In 2016, Stantec, viding full-service design-build delivery, business (the principals of AEC Advisors a ~$2.5 billion revenue design/consult- but ultimately struggled to integrate the worked on this transaction and advised ing firm, acquired MWH, a ~$1.5 billion two firms and achieve the expected syn- Leidos before founding AEC Advisors). revenue water/wastewater player with de- ergies. At the same time, Balfour Beatty Leidos felt that this business did not pro- sign, construction and technology services. was under financial pressure, and the sale vide much synergy with the rest of its Stantec soon decided that the construction to Parsons Brinckerhoff to WSP at ~11x portfolio and was not fully appreciated by risk-profile did not align with its goal of EBITDA provided much-needed capital. public markets investors. providing low-risk design/consulting ser- - Balfour Beatty divests Heery to FINDING NEW HOMES FOR TECH- vices, and therefore decided to sell MWH CBRE: In 2017, Balfour Beatty complet- NOLOGY BUSINESSES Constructors and redeploy the proceeds ed the divestiture of its design/consulting towards its core service offerings. Further- The other variation on the theme of practice by selling Heery, a ~$75 million more, even though MWH Constructors specialization involves technology. While revenue PM/CM business that was pre- only generated a small portion of Stantec’s technology is becoming increasingly im- viously part of Parsons Brinckerhoff, to total revenue, Stantec was also somewhat portant for AEC firms, technology busi- CBRE. This transaction also highlights the concerned about how the public markets nesses are quite different from traditional entrance of the corporate real estate bro-

AEC Advisors List of Prominent AEC Industry Divestitures: 2014-2020

18 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

AEC businesses (i.e. professional services), ey & Aldrich decided that a partner with a firms “need” to sell, so even when they as they tend to require significant upfront global footprint, greater scale, and access “explore their strategic alternatives,” there investment, sell value-added rather than to more capital would be better suited to is no guarantee that they will sell or bring time, are more scalable, and offer a com- helping ECT2 continue its exponential on an investor. On the other hand, when a pletely different proposition to investors. growth. firm decides at the corporate level to divest Therefore, fully capturing the potential a business unit, it is extremely likely that - Stantec divests Innovyze to EQT: value of a technology business requires a the unit will be sold, which makes a buyer/ When Stantec acquired MWH in 2016, management team with a different skillet investor more willing to expend time and it also acquired MWH’s smart water infra- than that of a typical AEC firm manage- energy competing for it. structure modeling and simulation busi- ment team, as well as substantial time and ness known as Innovyze. While Innovyze’s - Many divestitures involve business capital. ~$30 million of revenue was ~2% of units of significant scale: Most AEC As a result, several AEC firms have de- MWH’s ~$1.5 billion of revenue, Stantec firms that are “for sale” are small firms cided to divest attractive technology busi- was able to sell Innovyze to EQT, a Euro- whose founding partners are nearing re- nesses, as (a) they felt that another part- pean investment firm, for $270 million, or tirement and looking for liquidity. While ner with more technology experience and ~1/3 of the purchase price for all of MWH many of these firms are strong niche play- greater access to capital could be a better (~$790 million). While Stantec thought ers and can be attractive acquisition can- long-term owner for the technology busi- Innovyze was a great asset, it could not ful- didates for mid-sized and larger firms, the nesses, and (b) they would be better off ly capture its value within Stantec because largest strategic buyers (typically publicly reinvesting the proceeds in their core busi- Stantec was valued at a multiple of its traded) and major private equity investors nesses and/or returning it to their share- earnings, while high-growth, high margin tend to be more focused on acquiring busi- holders. technology businesses, like Innovyze, can nesses of greater scale that can have a more be valued at multiples of their revenue. So, substantial strategic and financial impact. Finally, because the business models of for Stantec, the value of its individual busi- technology businesses and AEC businesses Because many of the recent businesses ness units was ultimately greater than the are different, it is difficult to value an AEC that have been divested have been quite perceived value (at the time) of the whole firm with an embedded technology busi- large, they were perceived to be high value enterprise. ness. In many cases, the technology busi- targets. The most notable examples in- ness may not generate a substantial por- - Geosyntec divests OptiRTC to Mis- clude: Jacobs’ sale of its ~$4 billion revenue tion of the firm’s revenues or earnings, but sion Point Partners & Renewal Funds: Chemicals, Energy and Resources business if the technology solutions could be ap- In 2014, Geosyntec, a ~$300 million to Worley; AECOM’s pending sale of its plied more broadly (perhaps with the help revenue high-end environmental consult- $3 billion revenue Management Services of a partner), the scale and potential value ing firm, divested OptiRTC, an internally Business to private equity firms Lindsay of the technology business could be worth developed technology business focused on Goldberg and First American Securities; multiples higher than the relative revenue smart solutions for stormwater manage- and Balfour Beatty’s sale of $2 billion+ / earnings it might currently provide to its ment. Similar to Haley & Aldrich’s deci- revenue Parsons Brinckerhoff in 2014. As AEC firm parent. In fact, some technology sion to divest ECT2, Geosyntec felt that consolidation in the industry continues businesses can be valued at multiples of it ultimately would not be able to provide the examples of, and opportunities for, revenues rather than multiples of earnings, the support that OpitRTC needed to get divestiture M&A will also contunie to sur- like AEC firms! Below are a few notable to the next level and also preferred to con- face for buyers and sellers.  examples: tinue focusing on its core services.

- Haley & Aldrich divests ECT2 to STRONG DEMAND DRIVEN BY While Innovyze’s $30 million Montrose Environmental: In September EBULLIENT M&A MARKET AND 2019, Haley & Aldrich, a ~$200 million INCREASING PRIVATE EQUITY of revenue was 2% of MWH’s revenue environmental and geotechni- INTEREST $1.5 billion, Stantec was able cal firm, announced that it had sold its While there is a high level of broader ECT2 (Emerging Compounds Treatment to sell it to EQT, a European demand for acquisitions (as we discussed Technologies) business, which provides earlier in our comments about M&A ac- investment firm, for $270 technology solutions to mitigate the im- tivity on pages 1-3), there are a couple pact of emerging contaminants in air and million, or 1/3 of the purchase additional factors that make divestitures water (and boasts significant experience particularly attractive: price for all of MWH. in PFAS), to Montrose Environmental, a high-growth environmental services firm - Divestitures are more likely to re- backed by Oaktree Capital (private equity sult in a transaction than typical sale sponsor). Since ECT2 had grown very rap- exploration processes: In general, very idly and developed a global presence, Hal- few independent, employee-owned AEC

Strategic Information for a Changing Industry 19 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

firms continue to have significant amounts of cash that they want to deploy for longer- AEC INDUSTRY M&A REACHES NEW term growth – and a recessionary environ- HEIGHTS IN 2019 AND INTO 2020: Q1 2020 IN ment provides them with a great opportunity to “buy low, sell high”. Indeed we see REVIEW AND OUTLOOK FOR THE YEAR private equity buyers continuing – and in by Mick Morrissey, Managing Principal Morrissey Goodale, a specialized management con- some cases increasing – their outreach to sulting and research firm serving the architecture, engineering and environmental consulting potential acquisition targets. industries with strategic business planning, M&A advisory, marketing & business develoment, In general, we see less appetite on the executive search & humnan resources, leadership development and business valuations. part of buyers for “nice to have” deals but a continued focus and commitment on M&A Report for Q1 2020 followed by California and New York (7 the part of buyers to get “must have” deals Deal-making started 2020 at a record- each), and Florida and Illinois (6 each). done – sooner rather than later. However, breaking pace. January and February saw for some buyers, the definition of “must • ENR Top 500: The top 500 firms a 25% increase in deal announcements have” has changed over the past 30 days. in the US continued to consolidate during over the same period in 2019. Then COV- Q1 – with almost half of all deals involving Based on past experience, we do expect ID-19 hit. Deal announcements in March an ENR 500 buyer or seller. valuations overall to see some challenges in fell 50%. The first quarter of 2020 ended Q2 and throughout the year. However, ex- flat compared with 2019. • Smaller firms: Reflecting the demo- cept for certain sectors such as hospitality, graphics of the A/E industry – 40% of all Some of the notable highlights and entertainment, and workplace, our clients domestic deals in Q1 involved a seller with trends from Q1 include: have not reported a significant slowdown 10 or less employees. (yet). In fact, many clients are reporting an • Record-setting Q1 deal activity: increase in backlog and wins – particularly There were 93 A/E deals announced in M&A Outlook for Q2 and 2020 in certain Federal markets and the Health- the US in Q1 – matching the record set in The COVID-19 crisis will definitely care sector. But at this early stage of the 2019. However, we expect the pace to cool slow deal making in Q2. The pandemic recession, the full implication of this pub- off in Q2 as buyers and sellers navigate the provides a very practical impediment in lic health crisis on the industry and sector- difficulties of completing a deal during that social distancing makes physical due specific valuations remains unclear. . these turbulent times. diligence hard, if not impossible – thus • Private equity continued to reshape extending the deal-closing time line for 2019 AEC Year in Review M&A the AE industry. Over one in five deals in mergers that are currently in the works. Commentary Q1 were either an acquisition by a private Bigger picture, many would-be buyers As the United States economy contin- equity-backed operating firm or a recapi- tend to step back from acquisitions until ued to roll in a record-long expansion as talization by a private equity group. This is they see the market return to “normal” the calendar turned to 2020, investment in in keeping with the levels seen in 2019. A conditions. There is precedent for this re- the engineering and environmental sectors great example of this type of deal was the action. During the 2008/2009 recession, has also reached new peaks in 2019. Mor- January acquisition of bridge engineering industry M&A declined 25% as buyers rissey Goodale tracked 307 M&A transac- expert CME Associates (Mansfield, CT) put deal-making on hold. Nevertheless, we tions in the U.S. in FY 2019, up 3.4% over by private-equity backed CHA Consult- expect to see less of decline in this reces- 2018, which was also a record year. ing (Albany, NY). sion for two reasons: Prior to the COVID-19 outbreak and • Publicly traded buyers remain stra- The 2008/2009 recession had “no end economic shutdown, MG stated in its tegic: The big publicly traded buyers ac- in sight” whereas this downturn is closely 2019 review: “With the economy continu- counted for just 7.5% of domestic deals in tied to the public health crisis. As the virus ing to expand, the Morrissey Goodale out- Q1 – in line with 7.1% for 2019. Most of abates, we will see deal making return to look for 2020 is an increase of 10% in deal these acquisitions involved technology and normal course levels – very likely in Q3. activity” with the following observations systems firms. on 2019 and key trends. Headed into 2008/2009, better than • Robust inter-state deal making. Al- one quarter of all deals were being done More smaller firms entered the market most two-thirds of domestic deals took by publicly traded firms that were required in 2019: 2019 saw good news for smaller place across state lines, which is in line to step back from M&A activity. Headed firms. The median size of sellers declined with the pattern seen in 2019 and indica- into this recession, 20% of deals were be- to $3.5 million in revenues. This contin- tive of an expanding industry. ing driven by private equity firms that ues a trend that we have tracked over the past five years and is a direct link to the • Destination Texas. Texas saw the continue to demonstrate an appetite to tight labor market. More and more buyers most activity in Q1 with 10 firm sales, acquire, even in a recession. Private equity 20 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 are “acquiring” talent through the acquisi- U.S. and International AEC M&A Deal Count: Q1 2016-2020 tion of smaller firms. We expect this trend to accelerate in 2020 as owners of smaller 120 firms realize that an acquisition is a viable 26 27 exit strategy. 100 International 31 M&A Headline Grabbers: The ENR USA 80 500 saw a frothy brew of strategic acquisitions and recapitalizations by private eq- 30 uity in 2019. Some of the big names in- 60 23 volved included: 93 93 40 83 • AECOM (ENR #2) agreed to sell its management services division to private 52 49 20 equity firms Lindsay Goldberg and Ameri- can Securities 0 • STV Group (ENR #32) announced 2016 2017 2018 2019 2020 its recapitalization by The Pritzker Orga- Sources: Adapted by EBI from Morrissey Goodale nization • EN Engineering (ENR #74) part- However, this was down from the 44 deals nered with private equity firm Kohlberg & tracked in 2018. Texas, the next hottest Company state, saw 32 deals, while Florida set a re- • Pond & Company (ENR #107) cord with 23 transactions. New York and partnered with DC Capital Partners Colorado trailed behind with 18 and 16 deals, respectively. Watch for Texas to over- cology & Environment • E (ENR take California in terms of deal activity in #141 – 2018) joined WSP (ENR #8) 2020. The long-term outlook for the state, • PRIME AE Group (ENR #221) combined with the massive investments partnered with private investment firm being made in infrastructure will drive NewHold Enterprises more than 50 deals in the state this year. • BCC Engineering (ENR #267) Most Acquisitions Being Used To partnered with private investment firm Grow Geographically: In 2019, inter- Trivest Partners state deal activity (defined as a firm headquartered in one state acquiring a firm • NOVA Engineering and Environ- headquartered in another) accounted for mental (ENR #318) joined Watkins Asso- almost two-thirds of all transactions indi- ciates Industries cating continued appetite among buyers • WHPacific (ENR #470) joined for using M&A as a means of geographic NV5 (ENR #34) expansion. If 2020 plays out like we expect it to we could see close to 70% inter-state The Rise of Private Equity: Private eq- transactions this year.  uity deals accounted for more than one in every four deals across the globe in 2019, or 25.6%. The 114 transactions recorded represents an increase of 41% over the pri- or year. We anticipate that the involvement Reflecting the demographics of private equity in the industry will accel- of the A/E industry – 40% erate this year – with new players entering the market via recapitalizations of ENR of all domestic deals in Q1 500 firms, and those with existing posi- involved a seller with 10 or tions growing them through acquisition. less employees. The Hottest States For Deals: Califor- nia remained the hottest state for M&A activity in 2019, with a total of 34 deals.

Strategic Information for a Changing Industry 21 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

In fact, companies coming off a strong 2019 performance and who show a posi- M&A UPDATE: COVID-19 AS A FORCE tive year end recovery could see their valu- MAJEURE EVENT? CONSIDERATIONS FOR ations increase, since they would be viewed by buyers as a lower risk and higher invest- M&A STRATEGIES AND VALUATIONS ment value. Al Spiers, Founder and CEO of 2020 Environmental Group. Earnouts in M&A deals could be treated similarly. If a company was acquired last he global COVID-19 pandemic has a backlog and recovery by the end of the year and had an earnout for the 2020 year, disrupted the business of environ- year. In this case, for companies who are T the sellers could make the case that a CO- mental and engineering consulting and is considering selling in 2020 they may not VID related decline in revenues and EBIT- causing buyers and sellers to reassess M&A see their valuations negatively impacted DA is a force majeure event and under the timing and strategies. COVID-19 could by COVID, and instead have any dip in Sales and Purchase Agreement a “Material also prove to be an unexpected catalyst financials treated as a one-time non-recur- Adverse Change (MAC)” that was outside of M&A activity, further driving industry ring revenue normalization or EBITDA of the control of the sellers. In this case, consolidation, buyers looking for deals, adjustment. and sellers deciding now is the time to get their equity off the table. Example Financial Performance and Outlook under COVID As first reported by 2020 Environmen- 35 (revenues in $ millions) tal Group in March, most environmental companies are considered an “essential 30 business” under COVID-19 and are reporting their Backlog as secure. But with 25 the home-work restrictions and some project delays, many are expecting a 10-15% 20 decline in revenues in Q2, only to rebound by Q4. This is consistent with an April 17, 15 2020 Wall Street Journal article reporting “Many analysts are now betting on a so- 10 called V-shaped recovery—a sharp slowdown and then a quick economic recovery. 5 Goldman Sachs Group Inc. economists expect the economy to significantly con- 0 tract in the first and second quarters before Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021 Q3-2021 rebounding later in the year. Analysts are also looking past this year’s earnings expec- Source: 2020 Environmental Group, April 2020., representing an “example” Company A tations and forecasting profit growth in the The chart above represents an “example” Company A revenues chart who had (a) first and second quarters of next year.” strong upward financial performance for the last two years, including into Q1 of 2020, and then got hit with project slowdown/shutdowns in Q2 and Q3 due entirely to CO- We took a closer look at M&A under VID, but also is “expected” rebound as soon as workers can get back into the office or these uncertain times, and found some field, with strong financial improvement by Q4 and Q1 2021. interesting insights, including COVID as a force majeure event for valuations and Shown in the chart is the so-called “V dip” in revenues from the COVID Force other M&A considerations. Majeure event that we see happening to many companies, buyers and sellers alike. The premise of the accompanying article is that if a company was doing well before CO- COVID’s impact on M&A timing, and VID, got impacted by the COVID global event, but then rebounded by year end, their for companies selling or buying in this year, financial trend and company valuation should be “normalized” over the 3-year period, raises some interesting considerations, and which is depicted by the red dotted trend line. In other words, normalization levels out one is whether any short-term temporary the V-dip, and companies do not see a major hit to their valuations. decline in revenues due to COVID was a force majeure event (event beyond the Alternatively if a Company B had a rocky up and down financial performance in reasonable control of the affected party, the last two years, and was already on a decline before COVID, and/or finds them- and the affected party’s ability to perform). selves in a declining market like Oil & Gas, and then also got hit by COVID, they Particularly if a company’s financials were will probably not be able to justify normalizing their performance, or if they do the on a strong positive performance trend normalized trend line is probably going “downward” vs Company A on he chart. over the last couple of years, and can show

22 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 the same V-shaped financial dip could be normalized and adjusted for the purposes 2020 ENVIRONMENTAL GROUP SEES BUYER of calculating an earnout performance. INTEREST IN WATER & INFRASTRUCTURE; For companies planning on selling or buying in 2020, we suggest considering ANTICIPATES A V-SHAPED RECOVERY these factors: 2020 Environmental Group (2020) is a management consulting and M&A advisory Sellers should use this pause to pre- firm focused purely on the environmental and engineering consulting industry. Services include pare an M&A strategy. Make time your advising Owners, CEOs, and private equity investors on strategies for growth, financial perfor- ally, and with the current lull, this is a great mance, ownership transition, and buy- and sell-side M&A transactions. In the ten years since time for sellers to understand your value forming 2020, the company’s partners have advised over 75 environmental companies across proposition and prepare a go-to-market the U.S., Europe and Asia, including 30 M&A engagements. Al Spiers, Founder and CEO. He strategy to take advantage of new M&A advises on strategic growth for entering new markets, ownership transition, and M&As. Prior activity picking up by mid-year. to starting 2020, Al spent 35 years managing and building some of the largest environmental C&E firms in the world. Dan Spiers, Co-Founder and Managing Partner. He supports clients COVID may not have an impact on with the management and execution of buy- and sell-side M&A transactions, ncluding strategy, M&A valuations. Every company in our identification of buyers and sellers, and managing the sale process to successful close. industry will be impacted by COVID, buyers and sellers alike. How the company EBJ: How are current conditions such EBJ: Please provide comments on performs over the next 9 months will be as economy, market or sector forces trends involving these type of deals key to your market valuation. Keep good and regulatory affecting the success of within the environmental industry? records of any decline in revenues and transactions within the industry? Megadeals / Larger deals: Recent large profits due to COVID restrictions to sup- 2020: The COVID-19 pandemic has deals have been stress-induced, meaning port a valuation adjustment. And build a had an almost immediate impact on M&A acquired companies were under some form strong forecast showing how your com- activities, including buyers putting current of financial stress and/or declining share- pany will rebound in 2021. deals on hold and sellers concerned their holder value challenges, which resulted in Buy-side M&A deals in weak econo- valuations will decline after historic highs. an almost forced sale or acquisition. mies create shareholder value. History In 2020 Environmental Group’s recent Medium-size deals: Fewer true mid- shows that M&A buyers who take advan- Newsletters, we noted that COVID may size deals, mainly because of the number of tage of the economic environment can also prove to be an unexpected catalyst of mid-size ($50-250 million revenue) composition the business to exceed industry- M&A activity, driving further industry panies that have already been acquired, or average growth once the economy recov- consolidation, buyers looking for deals, who transitioned the original ownership to ers, creating real shareholder value. and sellers deciding now is the time to get their equity off the table. an ESOP and are now essentially off the Get expert advice on your M&A strat- market. egies and plans, including ways to protect In our Essential Business under CO- Smaller deals: Smaller size deals ($8- and maximize your company’s valuation. ¤ VID article, we noted that most companies are reporting their Backlog as secure, 25 million in revenues) is where the ac- but with the home-work restrictions and tion is. As discussed above, smaller size Larger companies who once some project delays, many are expecting companies are the majority of companies a 10-15% decline in revenues in Q2, fol- available to be acquired. This is now caus- shied away from small deals lowed by a quick recovery by year end (“V- ing larger companies who once shied away (“costs just as much to acquire shaped recovery”). In the following article from small deals (“costs just as much to on COVID as a Force Majeure Event, we acquire a small company as a large compa- a small company as a large examine considerations for any temporary ny”) to reconsider. Particularly for smaller company”) are reconsidering.... dip in revenues due to COVID restrictions deals where the company has a high level of expertise combined with deep regional Particularly for smaller deals as a one-time event and therefore should be normalized with any EBITDA decline knowledge and long-term client relation- where the company has high treated as an adjustment for the purposes ships that present natural barriers to entry. expertise, combined with deep of M&A valuations. We also note that EBJ: Data indicates that internal companies who were in strong financial regional knowledge and long- growth is substantially higher in small shape prior to COVID and can rebound and mid-sized firms. Do you find this to term client relationships with by year end could actually expect to see be true and what client sectors or client their M&A valuations increase, with buy- preferences are driving this? barriers to entry.. ers seeing them as resilient and a great investment opportunity. 2020: Yes, we have definitely seen more Strategic Information for a Changing Industry 23 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 small to small-mid size firms achieving Geographic expansion months off a buyer’s due diligence process higher growth rates, on average of 10-20% and significantly increase the chances of Particularly of interest to mid-size annual revenue growth in 2018-2019, a successful deal closing. If we could give companies who have an infrastructure to while most of the large ($250m+) firms one recommendation to sellers, it is to manage across new geographies. Also, Eu- achieving 0-5% organic growth. One rea- have a robust backlog report along with a ropean companies are looking to expand son is because smaller size firms are gen- detailed financial forecast for the next 12 into the U.S. Expansion of customer base erally closer to their clients within their months. This is the first thing buyers will in existing geographical markets - Yes, and regional markets. And in a tight labor mar- want to dig into. ket, small and mid-size firms have a culture when existing services can be cross-sold to and work environment that has become new a set of clients. EBJ: Can you provide information on the following deals in which you’ve more attractive to many recruits, particu- Other Opportunities larly after the consolidation of mega-large been involved? firms. Finally, small to mid-size firms can Adding new services that can command Environmental Partners Inc. (EPI) be just as competitive as the large firms higher billing rates. Digital technology so- acquired by TRC within their regional markets, particularly lutions is a good example. 2020 Environmental Group served as considering that over 75% of all environ- EBJ: What trends have you noticed the M&A advisors to EPI for the TRC mental contract value in the environmen- when it comes to valuations? What are transaction, with the deal closing Decem- tal market are less than $500,000, which is purchasing companies looking for and ber 30, 2019. a small firm’s sweet spot. what are they paying premium prices EBJ: What operational issues are these on? The large economic growth of Seattle companies struggling with most and and Portland currently makes the PNW 2020: Buyers are paying a premium how do you suggest they overcome one of the fastest growing markets in the (higher multiple) for sellers that have a them? country. TRC recognized this fact, but in history of above-average performance met- order to take advantage of the opportunity, rics, high growth rates and strong EBIT- 2020: One of the main operational is- realized they needed to bolster their pres- DA margins. Also, buyers will value a sues facing mid-size companies is how to ence in the region. achieve continued growth while keeping company higher if the services and clients overhead down and utilization up. Too are the perfect fit in their strategic growth Environmental Partners is a high per- often we see companies add infrastructure plan. forming environmental geosciences consulting firm based just outside of Seattle. and overhead to accommodate growth, EBJ: And what about M&A trends in EPI offered a full suite of geo-environmen- which is important for scaling up, but also various industry segments? add corporate inefficiencies that cut into tal services for private sector clients who billable time (too many internal meetings). 2020: In the last three years, sellers with needed to address a property from identi- For smaller size companies, their opera- a strong position in Infrastructure (mainly fication of contamination through site as- tional issues can be just the opposite… a Transportation) and Water, particularly in sessment, remediation, regulatory closure reluctance to invest in infrastructure to ac- California, have been the #1 demand for and on to litigation for cost recovery. After commodate growth. Obviously, a balanced M&A acquirers. Remediation has been a growing the firm for 25 years, EPI’s three approach is best. strong interest for companies that have a Principals recognized that they needed (1) market position in the large urban areas an external ownership exit strategy and (2) EBJ: Please comment on the following undergoing redevelopment, such as Seattle a path to give their employees future career M&A strategy drivers or Boston. Natural resources is of high in- opportunities on a larger playing field. terest for companies who have a position Technology & digital strategies The services, market sector and geo- along the Gulf Coast and Florida. From 2017 thru 2019, the pursuit of graphic synergies between TRC and EPI companies in the Infrastructure and Water EBJ: Have there been any changes in were an ideal match. M&A cycles? Could you provide some markets was the #1 M&A driver for buy- SoundEarth Strategies Acquisition of advice to speed up the M&A cycle? ers. Today, Digital Technologies is the new EHS-International #1, driven by client demand for increas- 2020: It would be much easier if we 2020 served as the M&A advisors to ingly high quality “data management solu- could just hang a “For Sale” sign with both SoundEarth and EHSI for this trans- tions” provided in real time. the listing price on the door of our sell- action, which closed in June 2019. This ers. It would certainly save a lot of time Expansion/diversification of services merger provided SoundEarth with a new weeding out the qualified buyers from the market capability in their already strong Still of high interest particularly when window shoppers. But honestly, one of the Seattle presence and provided EHSI’s own- the new acquired services can be cross-sold main ways to speed up an M&A process is ers with an excellent ownership transition to existing clients. for the sellers to be prepared and use ex- opportunity.  perienced M&A advisors. This can shave 24 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

stimulus-related construction will be positive tailwinds for an industry which was at ROG + PARTNERS EXPECTS TO SEE ONE OR peak levels as it entered March 2020. TWO QUARTERS OF ‘NON-RECURRING’ UNDER- As such, it is very challenging to project PERFORMANCE TO RESET THE M&A MARKET with any certainty how many transactions will ultimately consummate this year and Founded in 2010, ROG + Partners is a financial advisory firm serving the environmental next. I would not be surprised to see over- and engineering industry with offices in Boston, Washington, D.C. and Las Vegas. The firm all deal volume be 50% of last year’s peak provides advisory services in mergers & acquisitions, business valuations, ownership transi- but then to rally significantly in 2021 with tion planning, Employee Stock Ownership Plans (ESOP) and outsourced CFO and financial pent-up demand. Post-election results and projects. Steve Gido leads ROG + Partners’ merger and acquisition practice and has advised on policy could be a wild card factor too. a wide number of A/E/C transactions, representing both buyers and sellers of all sizes and dis- ciplines. Prior to forming Rusk O’Brien Gido + Partners, Gido led the merger and acquisition practice at ZweigWhite and worked as an investment banking professional at Deutsche Bank. I would not be surprised to see overall deal volume be 50% of EBJ: What do you think have been This extraordinary wave has joined to- some of the more important transac- gether some of the industry’s largest and last year’s peak... but then to tions in the Environmental Consulting iconic brands, created new global entities, rally significantly in 2021. and Engineering business over the last witnessed dozens of top ranked firms sell- 12 months or so and what do you think ing to strategic or financial buyers, and ful- they mean for the industry? filled the exit strategy needs for thousands EBJ: What are the most common chal- Gido: There has really been a dearth of small firm owners across the country. lenges that you’ve seen lately during integration execution? of large strategic buyer-led deals in our And, despite the COVID-19 out- space over the last 2 years. Most of the ac- break, the number of A/E and environ- Gido: Retaining anxious staff mem- tivity has been concentrated on relatively mental transactions was up 3.5% for the bers from the target firm is always the top small/niche and specialized or localized first quarter of 2020 compared to the first one. Up until recently, the industry was targets (less than 25 employees) as well as quarter of 2019. Transaction tracking by at peak capacity so disgruntled employees mid-sized firms (between 250-2,000 em- ROG+ Partners shows a record 98 trans- from target firms could easily leave and ployees) joining forces with private equity actions in A/E and Environmental Deals as find ample opportunities for employment firms for recapitalization and ownership we define them up from 91 and 88 in the elsewhere. Also, sellers who have to make transition alternatives. We see those trends last two Q1s. that shift from “owner/entrepreneur” to continuing. Today, sale processes currently fall into employee in a larger, formal organization Incidentally, I also think that the much two camps. The first is a “pencils down” can find it to be a tough professional and anticipated WSP-AECOM merger not ad- mindset from parties who need to give personal switch. vancing this month is a clear a sign of the complete attention to their organizations, EBJ: What would you think is the level uncertain times we live in due to COV- clients, and health & safety of their em- of interest of Private Equity firms in our ID-19 and executives avoiding these types ployees. The ball will “get picked back up” industry? of big risk events in the short-run. Public in due course. The second are groups that sector company valuations are simply too continue to advance discussions, albeit Gido: It’s still strong and every year we fluid and volatile, forecasting client needs with less intensity, and sensibly extending see a number of ENR 500 firms continue into 2021 is a big wild card, and attempt- milestones given limited visibility. to go the private equity route. It’s been the ing integration planning with so many at- most pronounced M&A trend over the home employees is just a hollow exercise. My sense is that engineering and en- last 10 years. Ten years ago, the notion of We’ll see if talks resume later this year with vironmental participants will ultimately A/E organizations partnering with private better visibility. have to look past depressed financial per- equity firms was rare and even scoffed at. formance for these 1-2 quarters as “non-re- Today, that couldn’t be further from the EBJ: What will be the pace of M&A curring” for valuation framework. Due dil- truth. With financial sponsors increas- activity in the environmental industry igence will be geared toward client/backlog ingly pursuing professional service firms for 2020 and 2021? resiliency and sector forecasts for 2021. and the desire to put cash to work for in- Gido: Taking a big step back, it’s been For instance, public sector and utilities vestors seeking higher yields, a new form a huge decade of industry consolidation. work will be seen as resilient while min- of industry marriage has unfolded. These The 2010s have produced over 2,500 ing, oil & gas and other cyclical industries “platform” investments are often aggres- transactions, and I believe fundamentally will continue to have depressed outlooks. sive purchasers of other boutique A/E and reshaping the A/E competitive landscape. Any type of national infrastructure bill or environmental companies (not to mention

Strategic Information for a Changing Industry 25 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 active hirers of executive and operational staff employment agreement needs, openly A/E and Environmental Deals: talent). I expect to see other prominent articulating benefit plan differences, pro- Quarterly 2018-YTD 2020 names go the private equity route in 2020. actively rolling out client communication and branding changes, and immediately Period Number of EBJ: What can you tell us about deal finding shared projects to work on to build Transactions success within the industry? collaboration and camaraderie. Q1 20 98 Gido: I don’t have any great statistics on EBJ: What trends do you see when it Q4 19 91 those but I think you have to go back and comes to appraisals? What are purchas- Q3 19 80 ask what the specific rationale of the buyer ing companies looking for and what are Q2 19 85 and seller was for entering discussions and they paying premium prices on? Q1 19 88 if after 6 months, 1 year and beyond it has met their financial, operational and per- Gido: Generally speaking, I am seeing Q4 18 81 sonal expectations. valuation multiples in the 4.0-6.0x EBIT- Q3 18 76 DA for firms which has been consistent Q2 18 67 My overall sense is that a frenetic de- for a number of years. Larger firms or ones cade of A/E acquisitions goes a long way to Q1 18 91 that are in a more fortified niche with spe- applying the learning curve of integrating cial synergies may command higher. De- Source: ROG + Partners, April 2020. Deals where tar- organizations of disparate cultures, pro- gets are engineering, environmental, architecture and/ pending on how long the pandemic lasts cesses, policies, and clients. In our view, or CM/PM firms. that might change, but if your belief that buyers have dramatically improved their this will be short-lived and that we’ll see post-merger integration planning and ex- a V shaped recovery like most Wall Street ecution by confronting thorny operational economist believe, then those ranges will and personnel challenges together. This still hold.  includes a critical understanding of key

ROG+Partners’ List of Selected 2019-2020 Private Equity Investments in A/E & Environmental Firms A/E or Environmental Firm Private Equity Sponsor AECOM Management Services American Securities and Lindsay Goldberg BCC Engineering Trivest Partners CodeGreen Solutions Victor Capital Partners Continental Mapping Consultants Bluestone Investment Partners CTLGroup Barco Investment Group Dynamix Engineering Bow River Capital EN Engineering Kohlberg & Company ExactaLand Surveyors Summit Park J.S. Held Kelso & Company Kirlin Design Build Bluie Wolf Equity Partners Landpoint Cotton Creek Capital Montrose Environmental Group Oaktree Capital Pond & Company DC Capital Partners Prime AE Group Newhold Enterprises Rimkus Consulting Group Century Equity Partners STV Group The Pritzker Organization

Source: ROG + Partners, April 2020 with some additions by EBJ

26 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

valuation and generated significant ROI upon exit. Wind Point had partnered with HOULIHAN LOKEY’S ENVIRONMENTAL the management team to build a premier SERVICES PRACTICE BENEFITS FROM STEADY business in the wastewater treatment sector, by consolidating the industry. They GROWTH, CYCLE RESISTANCE AND NON- added commercial and industry expertise DISCRETIONARY NATURE OF THE INDUSTRY to the Company to augment the market- leading operational and processing capa- Houlihan Lokey is a global investment firm with expertise in mergers and acquisitions, bilities Valicor had built throughout its capital markets, financial restructuring, and valuation. With more than 1,300 employees history. During Wind Point’s two-year around the world, the firm provides independent advice to clients and companies through all ownership period, Valicor’s revenue ap- stages of their development. Houlihan Lokey has built a dedicated Environmental Services proximately doubled and margins were in- practice that focuses on companies offering essential services that keep their customers environ- creased through a combination of organic mentally compliant, operating efficiently and safely. The practice has assisted clients through growth, four complementary acquisitions, more than 50 transactions over the past few years and continues to have a strong pipeline dem- and various operational initiatives. onstrated by completion of more than 20 transactions since the beginning of 2018. EBJ: Is there an increase in PE-to-PE Scott Sergeant has been with Houlihan Lokey for nearly 19 years and founded the firm’s En- deals? What is driving this? vironmental Services practice. Over that time period, Mr. Sergeant has executed approximately 100 M&A-related transactions, including a large number in the environmental industry. Houlihan Lokey: Over the past 10 years, financial sponsor/private equity in- Disha Mehta has 12 years of experience executing M&A and capital markets transactions, terest in the environmental services sector including more than six years of dedicated focus on the environmental services sector. has increased consistently. PE investors view environmental services companies as EBJ: How is the environmental services middle-market-focused advisor, we work sector different from other industries? a relatively safe investment with a steady with founder-owned companies, as well as growth opportunity. Cycle resistance and What are the key value drivers for such with financial sponsor-backed companies. companies? the nondiscretionary nature of services In the past five years, 10%–20% of M&A adds to the attractiveness for fund par- Houlihan Lokey: Due to the essential transactions have been for founder/family- ticipants. Market fragmentation in all the and nondiscretionary services provided, owned companies. The primary catalysts subsectors provides roll-up opportunities. the environmental services sector is con- for founders/families to pursue a sale are In the past 24 months, several private eq- sidered relatively recession resistant, and in succession, monetization of family wealth, uity exits that Houlihan Lokey has been some cases noncyclical to varying degrees. or diversification of assets. For private eq- involved in have generated attractive re- The sector provides services to various end uity, portfolio management within a fund turns due to the successful execution of a markets, affording diverse exposure to eco- for generating returns and fund life is the consolidation strategy. Examples include nomic cycles. The current situation with primary reason for a transaction. The tim- Clean Earth (Compass Diversified), COVID-19 is a testament to the sector’s ing of an exit, while typically within three Global Restoration (Delos Capital), Vali- resilience as it has been characterized as to five years, could be accelerated by out- cor (Wind Point), Denali Water (founder essential by the government and related sized performance and exceeding invest- and Firmament Group), Apex Companies agencies. In addition, the highly fragment- ment objectives or preemptive interest (Tailwind Capital), to name a few. ed nature of the sector makes it attractive from a buyer. EBJ: Can you provide information on for investors and capital providers to build EBJ: Can you provide examples of some of your deals? larger businesses of scale. Other key value successful transactions in which you drivers include predictability of revenue believe that the acquiring company was Denali Water Solutions (Denali) – stream, strong regulatory tailwinds and able to generate their expected value or Sellside Advisor barriers to entry, and the ability to gener- ROI? (please provide some reasoning Acquired by TPG Growth in January ate consistent free cash flow. behind it and explain what contributed 2020. EBJ: Of the recent deal flow, what per- to the success of the transaction) centage of deals are private or family- Denali is a market-leading provider of Houlihan Lokey: In July 2019, Houli- specialty waste, environmental recycling, owned businesses vs. private equity han Lokey assisted Wind Point Partners, owned? What are the key reasons for and disposal services in the United States, a Chicago-based private equity firm, mon- with a focus on wastewater residuals man- initiating a sellside transaction? Valicor Environ- etize its investment in agement. The company performs daily mental Services Houlihan Lokey: We have had an op- (Valicor or the “Compa- mission-critical organic waste collection, Pritzker portunity to work with high-quality com- ny”). The Company was sold to processing, recycling, and disposal for mu- Private Capital panies across the broader sector. Being a , after a hold period of just nicipal, industrial food processing, and two years. Wind Point received premium Strategic Information for a Changing Industry 27 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 downstream industrial customers. Hou- EBJ: How are technologies/digital Environmental Services strategies impacting M&A activity in lihan Lokey served as the sole advisor to Businesses related to disposal and man- our industry? Denali’s founder (Andy McNeill) and his agement of medical and hazardous mate- investors (Firmament Group) in order to Houlihan Lokey: Technological im- rials are seeing an increased demand for find the right partner to assist the com- provements and automation have helped services and are scrambling to meet needs. pany through the next stage of its growth. every subsector of the industry. Compa- Emergency response businesses and Interstate Waste Services (IWS) – nies across various sectors use technology industrial cleaning sectors are proving re- Financial Advisor to increase efficiency, ensure safety, -im silient as businesses and facilities focus on prove training, and provide better custom- Littlejohn & Co. made a strategic in- cleaning; in fact, many other environmen- er service. Digital strategies are also help- vestment in IWS, a combination of The tal services businesses are diverting working companies create marketing tools for Action Environmental Group and Apex force to these sectors to ensure utilization increased sales. In an M&A process, the Environmental Resources in January 2020. and provide employment to hourly work- use of reliable systems and technology pro- ers by servicing the large and growing de- IWS is the largest privately held, ver- vides better reports, helping buyers command for decontamination services. tically integrated provider of solid waste plete due diligence in an efficient manner. collection, transfer, recycling, and disposal All else being equal, companies that have Engineering Services services serving the greater New York City an integrated technology platform and a Broader engineering and contracting and Northern New Jersey markets. IWS consistent reporting system command pre- services companies have been affected to operates nearly 400 collection vehicles mium valuation. varying degree based on nature of job and throughout the five boroughs of New York EBJ: What impact will COVID-19 have type of client, with several private custom- City, Northern and Central New Jersey, in the environmental industry in the ers putting projects on hold while some and Orange and Rockland County, New long term (please describe in detail and state and federal projects progressing at a York; a network of 22 transfer and trans- provide reasoning behind it)? And how slower pace. load facilities; and a rail-served solid waste is it already affecting various segments landfill in Amsterdam, Ohio. of the environmental industry? EBJ: How are companies redirecting their strategies? Houlihan Lokey assisted Littlejohn & Houlihan Lokey: The U.S. Department Co. by leveraging its industry knowledge, of Homeland Security released a list of sec- Houlihan Lokey: Based on our conver- as well as a deep knowledge of the target’s tors published in Essential Critical Infra- sations with a large number of industry operations. structure Workforce, including solid waste players over the past several weeks as the Global Restoration Holdings (GRH) – management, water and wastewater sys- pandemic has developed, we have learned Sellside Advisor tems, emergency services, energy, and nu- that companies are continuously moni- clear waste. As such, most environmental toring the situation and adapting. Key Acquired by FirstService Corp services companies expect to continue op- strategies include (i) communicating with (NASDAQ:FSV) in June 2019 for an im- erations during the COVID-19 response employees and prioritizing their safety and plied enterprise value of $530 million. period. Although some companies are ex- well-being, (ii) assessing business priorities and establishing contingency plans where GRH is a leading integrated provider of periencing some disruption to their work possible, (iii) executing on cost reduction property restoration solutions, including due to shelter-in-place orders in several and cash preservation initiatives, (iv) ac- mitigation, restoration, and reconstruc- states, we believe that over the long term, tively communicating with customers and tion services to large blue-chip clients. The the sector will have performed relatively ensuring service continuity and that any company provides its services to large com- well. For the companies most impacted, issues are addressed, and (v) implement- mercial property owners/managers and we believe they would experience a faster ing other plans to come out of this crisis residential customers throughout North recovery than companies in other sectors. stronger.  America. Delos Capital had backed the founders of Interstate Restoration to ex- Waste Management pand the operations, including purchasing Waste collection and transportation For the companies most FirstOnSite which was a transformational is widely considered an essential service, acquisition that provided the business a resulting in continued employment for impacted, we believe they large presence in Canada. workers and delivery of such services; would experience a faster while residential waste volumes are expect- Houlihan Lokey served as sole advisor ed to remain consistent to higher, shelter- recovery than companies in to GRH and assisted in preparation and in-place mandates in large cities and popu- marketing to buyers that would be the other sectors. lations working from home has resulted right fit for the management team. in lower commercial waste volumes for a period of time. 28 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

With over $2.0 trillion in dry powder investment capital on the sidelines ready to MATHESON ADVISORS SHARES EXPERTISE IN invest alongside record low interest rates, MIDDLE MARKET VALUATIONS AND M&A; middle market environmental firms create a great opportunity to either serve as a SEES A RAPID SHIFT TO A ‘BUYERS MARKET’ platform or strategically become part of a Matheson Advisors is a boutique corporate finance advisory and investment banking firm sponsor-backed growth platform. focused on the AEC, Environmental Consulting, and Government Contracting space. Mathe- The most important development over son has 8-9 professionals operating out of our headquarters in McLean, Virginia and a Boston the last 60 days is the impact of the coro- office. Matheson Advisors has a large portfolio of business valuation clients ranging in size navirus from a national and global health from several million dollars in revenue to over ½-billion in revenue, so the firm is focused on perspective as well as an economic and the lower and mid portion of the middle market with a specialization in “main street” private financial impact perspective. The shut companies with employee ownership. Matheson services are focused on business valuations and down of American businesses is proving fairness opinions, capital strategy and ownership transition consulting, ESOPs, and buy-side itself to be the catalyst ending the hot and sell-side M&A representation. M&A market running from 2014-2019. Colvin Matheson, CFA, CM&AA is the Founder and a Managing Director with over 23 It was bound to happen. That period was years of a 35-year financial industry career serving the AEC market. Colvin holds Series 63 a “seller’s market”. We have now entered a and Series 79 registrations and is also a Registered Representative of McLean Securities, LLC “buyer’s market”. (member FINRA/SIPC) to better ensure that M&A transactions are conducted under appropri- Small-Size Deals: Matheson Advisors ate state blue sky and federal securities regulations. activity on the small deal size segment is driven by lower middle market “buy-side” nature of the industry with generally lower EBJ: Could you provide some com- clients making growth acquisitions of even middle market firms permeating the en- ments on the trends involving the fol- smaller firms that generally provide new vironmental consulting space coinciding lowing type of deals within the environ- geographic presence and service line diver- with the regional and local nature of most mental industry? sification. There are large numbers of these projects, there are simply hundreds more smaller AEC industry transactions, which Colvin Matheson: potential acquisition candidates in the often do not involve intermediaries. “Lower Middle Market” space and thus Megadeals / Larger Deals: Matheson Matheson Advisors is focused where the Advisors is not involved in the limited The biggest issue that we see with the action is: deals valued between $5 million number of infrequent “Mega-Deals” ex- small deal sizes below $5 million in value to $200 million. cept to the extent that we track them for is the valuation gap between buyer and seller expectations. Very small firm selling the analysis of deal/transaction multiples Deals in this space continue to be driv- owners/founders often have been strip- to then extrapolate middle market trans- en by a confluence of factors that include ping profits out of the firm, not reinvest- action multiple ranges. While definitions a seller’s need for leadership transition and ing to maintain an “adequately capitalized” may vary, the “Middle Market” is broadly succession; liquidity for long time own- firm, and “hear” from other advisors in the considered to encompass firms ranging ers; greater scale to pursue and win larger market that EBITDA multiples are in the from $10 million to $1 billion in annual projects needed to support a bigger orga- range of 7-9x. So, they do their own math revenue, with “Lower Middle Market” nization; access to talent; need for more without adjusting for what their firm’s nor- below $500 million and “Upper Middle sophisticated management and organiza- malized cash flow would actually look like Market” being $500 million to $1 billion. tional infrastructure; and access to greater and implant unreasonably high numbers There are 18 firms on the 2019 ENR 500 levels of growth capital. Design Firm list with design/consulting in their heads. In today’s market, selling and merging revenues over $1 billion–10 of those are To that, I like my colleague’s response with another entity is not an “end game” publicly-held. There are another 16 firms to a small (30-person) client last year: but part of the strategic growth plan moti- with revenues above $500 million. So, 16 “Well, if you want 8x, add a few hundred vated by unemotionally considering strate- firms out of the ENR-reported AEC mar- more people and then let’s talk.” What gic alternatives and how to most efficiently ket would be considered “Upper Middle small firm owners need to understand is and securely create opportunity for the Market” and the other 484 reporting firms that multiples reflect risk (as the inverse of firm. For those management teams with would be considered “Lower Middle Mar- a rate of return on investment) and smaller the entrepreneurial drive, leadership skill- ket” with the #500 firm reporting $25.7 size is perceived to involve more risk, so set, M&A experience, business model, and million in 2018 design/consulting reve- therefore, smaller firms will (usually) sell market opportunity, then either private nue. There are 1,000s of firms smaller than for lower multiples (generally speaking). equity or an independent sponsor such that. Small firms tend to have skinny organiza- as a family office investment firm able to tions and less investment in systems and Medium-Size Deals: Given the overall finance rapid growth could be an option.

Strategic Information for a Changing Industry 29 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 Select Publicly Traded A/E/C Companies financial reporting and are usually domi- Enterprise Value/EBITDA Multiples Select Publicly Traded A/E/C Companies nated by key-persons that are cashing out.

These all make smaller deals more of a psy- 16.0x Enterprise Value/EBITDA Multiples chological exercise than they need to be. If 14.0x small firm sellers would start early to establish valuation and deal structure expecta- 12.0x tions and prepare their firms for sale, they 10.0x will attain better valuations and terms. 8.0x

EBJ: Can you provide examples of the Multiple more successful transactions in which 6.0x you believe that the acquiring company 4.0x was able to generate their expected 2.0x value or ROI? 0.0x Matheson: Besides having to respect the confidential nature of transaction details, I do not have the stats on the post Lower Quartile to Median Median to Upper Quartile transaction ROI assessments that buyers Note:Source:Annual Matheson multiples are asFinancial of December Advisors 31 2020; Note: Annual multiples are as of December 31 have calculated on acquisitions they have made. And while we were able to secure www.mathesonadvisors.com 3 very favorable pricing and deal terms for © Matheson Financial Advisors 2020 multiples reached all-time highs in 2019, both the sale of RMC Water & Environ- ings multiple will be very hard to apply M&A multiples followed suit, and this in ment to Woodard & Curran in 2016 and and thus the more complicated discounted turn dragged internal valuation multiples Vali Cooper to TRC in 2018, I would re- future cash flow (DCF) method of valu- higher. However, the internal ownership fer you to the respective CEOs for that as- ation will be relied on. Given the lack of restrictions embedded in shareholders’ sessment (Doug McKeown at W&C and visibility that uncertain times produces, agreements generally reduces internal val- Chris Vincze at TRC). I believe that both this means evaluating multiple scenarios uations of non-marketable minority inter- these sellers hit or exceeded their forecasts, of what future earnings could look like in ests due to lack of liquidity from 5+ year which implies hitting the ROI hurdle rates order to arrive at deal values. Our guess is buy out terms. developed by the buyers. As important that when the M&A market picks back up as the financial ROI, however, is the en- With the recent Coronavirus market from the current pause, we will see buyers hanced market position and growth syner- downturn producing increased volatility arguing for discounts to reflect Covid-19 gies that these transactions promoted. and economic uncertainty, many compa- and sellers arguing this is a short-term phe- nies in the industry are coming off a strong nomenon. EBJ: Can you comment on industry first quarter 2020 and are still working off Ownership Transition Planning trends that you’ve encountered while funded project backlogs, so the real impact providing the following services? Transitioning ownership in privately held may not be felt until 3rd quarter 2020. professional services firms can take several Business Valuations Matheson Advi- But this will depend on client types and paths from outright selling the business to sors conducts some 80+ business valua- market focus with hospitality, travel, and a strategic buyer, to bringing on a financial tions annually, with half of those ESOPs. entertainment being immediately affected. partner such as private equity, to creating Generally, over the past few years, firm val- Companies are now forced to re-evaluate a financial partner such as an ESOP, or, as uations have increased as the strong econ- their forecasts for not only 2020, but also is often preferred, developing an internal omy since 2016 has augmented revenue 2021. market of next generation employees to growth and higher profits. On top of the Longer term, the impact on local and buy shares in order to remain an indepen- improved cash flow performance of firms, state infrastructure spending remains un- dent, employee owned company. multiples have increased as well, creating certain, pending a stimulus package, as an arbitrage effect. Supply and Demand Which path is right will vary firm by sales tax and gas tax receipts have plum- is critical for market pricing and we have firm and will ultimately hinge on the firm’s meted and with the economy on forced been in a world with a very large supply depth and quality of successor leadership government shutdown, income tax re- of available inexpensive capital and inves- and the firm’s financial capacity–combined ceipts will drop as well thereby creating tors with money to spend searching for with a very strong desire to remain inde- massive funding deficiencies. Because strong assets (i.e., target companies) that pendent. As we help firms make these de- value is something in front of you (not are in short supply (either due to their per- cisions it is a matter of following rabbits behind) the lack of visibility impacts valu- formance and balance sheets or their will- down holes and playing out the scenarios ations. As with the 2008-2009 financial ingness to sell). As public company trading and assessing the firm’s underlying capabil- crisis, we have entered a world where earn- ities and the risk appetite of selling leaders

30 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 and next gen buyers. There is a need to bal- acquiring shares and annually thereafter. M&A Advisory Services 2019 was an- ance the liquidity needs and risk appetite The favorable tax attributes they hold can other strong M&A year, though it seemed of sellers with the financial capacity and make them a very attractive vehicle for suc- a bit more tepid than the hot 2018. risk tolerance of buyers, which are both cessfully initiating management buyouts However, the coronavirus pandemic has significantly influenced by the financial as they typically occur at and can support brought a pause to the pace. Firms that performance, capital threshold and debt higher valuations than a traditional owner- are far along in the process are continuing capacity, and future outlook of the firm. ship transition. toward close for the most part. Some clos- Like any deal, the price will occur at the ings have been delayed as buyers and sellers ESOPs are not right for all firms and point all parties are equally unhappy, but assess the impact. Firms preparing to go to should be evaluated closely from the per- in our experience companies with profit- market have pulled back to assess the situ- spectives of financial capacity related to ability before discretionary expenses below ation, which seems to change weekly. Buy- debt service and financial leverage as well 10% will create very risky management ers have focused on adjusting to project, as cultural fit. Companies need to be pre- buy-out transactions–whether by direct staffing, and work at home policies. With- pared for the regulatory reviews by the stock sales or by ESOP. The low profit in this context, one must remember that Department of Labor and the IRS and firm will usually always only support a low the M&A Cycle generally lasts 10 years. managing the repurchase obligation can value. But psychology is a big part of ac- The strong seller years of 2013-2018 were become a real burden. We have found that complishing internal buyouts and a major extended due to tax reform and deregula- ESOP companies get into trouble when limiting factor today is the unknown of tion. The cyclical period of market uncer- they are valued inappropriately high ini- whether today’s younger generations (the tainty was absorbed by the extended seller tially for the benefit of the sellers and then market for shares) are even motivated by (strong) M&A market and we believe that later by creating a high repurchase burden stock ownership and investments in their the coronavirus has simply ushered in the as the company must support buybacks as employers. As a result, the transition strat- natural M&A down market–which is a employees leave the company and retire. egy for one firm is not likely to fit another Buyer’s market. firm and the assessment of behavioral in- Compound that with a presidential vestment psychology as well as financial, election year and the market was bound to risk and tax factors have to all be consid- The shut down of American take a pause in 2020. We suspect buyers ered carefully. businesses is the catalyst will pressure sellers for a discount to reflect With all the uncertainty about buyers ending the hot M&A market ... higher risks from coronavirus. Sellers will and their ability to finance a buy-out, it It was bound to happen. That push back arguing they have several years is no wonder that ESOPs are natural so- of strong financial performance and that a lutions to help transition ownership in a was a “seller’s market”.... We short term “black swan” event should not tax efficient manner. We are also seeing have now entered a “buyer’s penalize them. increased use of stock grants and stock Who is right? If value is all about fu- bonus plans supplementing employee pur- market”. ture results…and it is, then the only way chases in order to promote ownership and to close the gap will be to wait and see who absorb redeemed shares in order to keep is right or attach a conditional component shares outstanding so firms remain ad- Also, there are just instances where to the deal structure. But we all hate “earn equately capitalized and do not effectively a square peg was rammed into a round outs”. Will they re-emerge as deal consid- self-liquidate. hole in the first place and the ESOP was never a truly viable solution. Having said eration to close the gap? Most likely. But… Employee Stock Ownership Plans that, there is nothing that says it has to be we also think many professional services (ESOPs) The important thing to keep in permanent either and they can be a near firms may have to make a very hard deci- mind regarding ESOPs is that they are sim- term solution before being unraveled for sion this year about their future. ply ERISA-guided defined contribution a permanent, longer-term solution… like First, look at demographic and gen- retirement plans, similar to 401(k) plans, STV’s recent recapitalization with private erational psychology issues: it’s pretty that invest primarily in employer securi- equity from The Pritzker Organization, hard to build a case that today’s younger ties. It is the only retirement plan permit- or O’Brien & Gere’s sale to Ramboll, or generations will agree to the same owner- ted to use leverage (debt) to acquire shares. a plan termination and buy-out. As we sit ship transition commitments that current Employees are not stockholders, but rather here today in the uncertain market caused owners agreed to in the past. They are not plan participants in a trust that owns the by Covid-19, many ESOP transactions are sure they will stay at the same firm past a shares and that are controlled by a trustee, on hold until trustees and company own- couple years, so why make a long-term in- in most cases. Essentially, the ESOP acts ers have more visibility over what is in store vestment? as a stock bonus plan inside a retirement for the economy and the ESOP company plan wrapper. The stock is independently and proposed transactions can be evalu- Second, how many firms that are con- valued (or appraised) when the ESOP is ated with less uncertainty surrounding it. trolled, founded, or primarily owned by

Strategic Information for a Changing Industry 31 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Baby Boomers looking to retire, were EBJ: With more private equity interest looked at valuation multiples assigned to forced to delay their transitions after the and transactions, have you noticed a them compared to technology firms, we 2008-2009 financial collapse? Construc- measurable uptick in valuations? have seen more progressive firms look for tion did not come out of that until 2012 ways to enhance the level of innovation Matheson: Greater levels of private and then Sequestration stalled things in within their firms to develop not only equity, and now longer-term family of- 2013. Then put five years of financials unique tools to differentiate their services, fice money, into the market is a great al- together to prove how great your firm is but also potential technology products ternative for firms in the industry. Private to buyers. If you waited too long to sell… that could be sold separately into entirely equity represents a financial partner and you just got whacked by coronavirus! How new markets. We do believe these forward- historically PE firms were not quite as ea- many firm owners can wait another 5-8 thinking firms should be more valuable ger to match strategic acquirer valuations years? As a result, we think the supply of than peers that do not innovate and invest that could price in various revenue and sellers is likely to increase if they are in- in the dynamic future they compete in. A cost synergies to competitively drive valu- terested in liquidity from their investment. few of these firms have successfully spun ations. But, in more recent years, with so off new technologies with great financial So, M&A in 2020-2021 is not dead by much capital to deploy ($2 trillion in dry returns. Areas where we see the most at- any means…we just entered an expected powder), the competitive pressure to invest tempt at this innovation revolves around and natural next phase for a cycle playing committed capital, and a scarcity of good GIS and Asset Management. However, out over the past 40+ years. Which then assets, the private equity firms have been valuing these components can be tricky, makes you think about what the world of exceptional bidders able to provide a com- especially in the development and pre-rev- successful buyers will look like and who pelling alternative to sellers. For private enue start up stages. At the end of the day, sellers should align with? We think the equity-backed buyers, sellers can make a we think the valuation of these non-core answer, once again, boils down to strong strategic sale to a platform company with efforts will depend on the actual fund rais- balance sheets and strong capital posi- strong capital underlying the transaction. es themselves as firms move through seed tions. Those firms that spent the last 10 In our opinion, private capital attention rounds into Series A, Series B, etc. Each years strengthening their balance sheets, to our AEC market is a net good for the new round establishes a valuation for that optimizing their efficiency and margins, industry. For sellers, however, they need business… which may be distinct from the developing strong credit relationships will to understand the game. There are two core AEC and environmental consulting be the ones best able to opportunistically things private equity firms want to do: (1) business. It may even significantly outpace close deals in this environment. grow the platform’s revenue and earnings the consulting firm valuation, which raise EBJ: Daedalus Projects was acquired by as high and as fast as possible and (2) sell entirely different issues in a private, em- CHA Consulting last year and you were the firm at a higher multiple than the pur- ployee-owned model of ownership. involved in the transaction. Could you chase price multiple. That’s the arbitrage EBJ: How can companies find sources provide information about the deal? to secure superior returns. This means that of capital for new technology? professional service firms need to be com- Matheson: We have a policy of not fortable with the situation that they be- Matheson: Companies developing commenting out of school on transactions come a tradeable asset and it becomes very technologies are reaching out to experts and our client confidential work. I’m sure important for the investors to ensure the that have experience in assessing market that you can appreciate that. However, I management teams have skin in the game potential and commercializing products. have emailed Jim Stephenson, CEO at to encourage their active participation in Built-tech seed funds such as Shadow CHA, and he gave me a response that I can allowing this to happen. Fund and Borealis Ventures have proved to share with EBJ. be very adept at assisting consulting firms EBJ: Digital transformation is a hot From Jim Stephenson, CHA: With re- in navigating this new business path. We topic within the A/E/C industry. Can spect to the Daedalus acquisition, it is part also have clients utilizing the SAFE (Sim- you comment on how are technology of the Company’s growth strategy to expand ple Agreement for Future Equity) struc- and digital strategies impacting M&A Public and Private PM/CM services but also ture to raise funds. activity in our industry? expands our geographic footprint in MA/New EBJ: Is cybersecurity and related regula- England where we see great development op- Matheson: Adoption of technology has tions impacting the deal activity? portunities. DPI is a recognized leader in long been a defining characteristic in the Public/Municipal PM/CM services and Cost AEC market and the impact has been posi- Matheson: We see more buyers con- Estimating here in MA and we have been tive from a project delivery standpoint as sider cybersecurity in their due diligence. able to take that capability to support some of financial metrics have shown significant EBJ: What growth, financial and strate- our New York public agency work as well. So, productivity gains over the last 30 years, gic challenges are companies struggling both strategically and culturally it was a very especially reflected in the net revenue gen- with most and how do you suggest they good fit for the company and has grown in erated per employee. approach them? the short time they have been a part of CHA. As design and consulting firms have

32 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 Select Publicly Traded A/E/C Companies Matheson: Before the coronavirus, the Enterprise Value/Gross Revenue Multiples Select Publicly Traded A/E/C Companies biggest challenge facing companies into Enterprise Value/Gross Revenue Multiples Q1 2020 was finding talent to perform 1.8x the work they had booked and the work 1.6x in their pipelines. With 30 million added to the unemployment ranks, though over 1.4x ½ are from the food and beverage, hos- 1.2x pitality industries, the challenge now for 1.0x AEC firms is ensuring their systems enable 0.8x work to be done from home and determin- Multiple ing whether projects will continue. From 0.6x a financial perspective, as with any reces- 0.4x sionary environment, this is when balance 0.2x sheets matter. On September 15, 2008 we 0.0x advised firms then that cash was no longer king… it was god (small g out of respect). That is where we are now. Cash and cash- Lower Quartile to Median Median to Upper Quartile flow is what matters. Firms need to make Note:Source:Annual multiples Matheson are as Financialof December Advisors 31 2020; Note: Annual multiples are as of December 31 sure that their workforce matches the pro- Select Publicly Traded A/E/C Companies jected workflow and PMs have to stay on www.mathesonadvisors.com 5 top of clients and collections. Enterprise© Matheson Value/EBIT Financial Advisors 2020 Multiples Select Publicly Traded A/E/C Companies A recent M&A advisor town hall I joined this week polled over 200 advisors 24.0x Enterprise Value/EBIT Multiples on how long we thought this recession 22.0x 20.0x would last. 39% thought 6-12 months. 18.0x

49% said 12-24 months. 10% checked 16.0x the 24-36 month box. 3% said over 14.0x three years. Thus, 62% of middle market 12.0x

M&A advisors felt this would last over Multiple 10.0x 12 months! This will mean real challenges 8.0x for marginally performing companies in 6.0x commoditized markets with weak balance 4.0x sheets. What are their survival plans? 2.0x 0.0x EBJ: How will a downturn impact M&A activity in the environmental industry? Lower Quartile to Median Median to Upper Quartile

Note: Annual multiples are as of December 31 Matheson: We have gone from a robust Source: Matheson Financial Advisors 2020; Note: Annual multiples are as of December 31 M&A “seller’s market” with healthy valua- www.mathesonadvisors.com 1 tions and aggressive terms straight through © Matheson Financial Advisors 2020 the normal next phase “neutral market” future cash flow analyses to understand the suitor with the best cultural and busi- and into the M&A down market–charac- multiple scenarios that could occur with ness alignment to create opportunity for terized as a “buyer’s market”. Many buy- any given target. We think that the buyers their people. ers that are in process of closing deals have with strong balance sheets, cash surpluses taken a pause to reassess the situation and built over the good years just ended, and I am also including our quarterly analy- rationale for their transactions. New M&A access to capital will be able to acquire sis of public company valuations that pres- starts are likely to take longer as buyers as- some nice businesses at reduced valuations ents an interesting historical perspective of sess the impact that this economic shut- as a result of this economic turmoil. It re- multiples of EBIT, EBITDA and Revenue. down is having on target revenues and mains to be seen how many firms decide Compared to 12/31/19 peak multiples, as longer-term outlook. From a valuation that they cannot or will not ride through of 3/31/20 the median and upper quartile perspective, it will be very difficult to apply another cycle and therefore put themselves multiples of EBITDA are down 22% and standard multiples to earnings when the on the market. The sure thing that we do 23%, respectively. And this is after bounc- visibility of “normal” earnings is in ques- know is that a well-run M&A process not ing off the bottom in the middle of March. tion. Buyers will need to dig deeper in their only produces superior financial results for The lower quartile firm EBITDA multiples valuation tool boxes to develop discounted sellers, but it also allows them to choose are down 40%.  Strategic Information for a Changing Industry 33 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

In the event of an unsolicited offer a transaction trustee will most likely want CLEARING UP SOME MISCONCEPTIONS the company to put itself on the market ON ESOPs WITH COLVIN MATHESON and solicit bids in order to ensure that the ESOP gets the highest offer for its shares. Matheson Advisors is a boutique corporate finance advisory and investment banking firm At a minimum, without multiple bidders focused on the AEC, Environmental Consulting, and Government Contracting space. Mathe- determining market price, the trustee will son his focused on the lower and mid portion of the middle market with a specialization in engage an independent financial advisor “main street” private companies with employee ownership. Matheson services are focused on to provide a Fairness Opinion that the business valuations and fairness opinions, capital strategy and ownership transition consulting, purchase price represents adequate consid- ESOPs, and buy-side and sell-side M&A representation. Colvin Matheson, CFA, CM&AA is eration. The Trustee will want to show a the Founder and a Managing Director with over 23 years of a 35-year financial industry career record of negotiating as well given the need serving the AEC market. to show “process” and independence to the Dept. of Labor (DOL). EBJ: Is it harder to buy an ESOP com- What type of transaction is it? If it is The decision of whether to have the pany? Some companies and executives an Asset Sale of substantially all the firm’s seller company redeem ESOP shares just have said that an ESOP is a ‘protection assets, then Internal Revenue Code regula- ahead of the transaction or have the ESOP mechanism against being acquired’, tions call for the vote to be passed through participate in the transaction needs to be but you indicate that is not the case. to plan participants (i.e., the employees) determined. What factors determine whether or who vote their allocated shares. This can not an ESOP presents an obstacle to a greatly expand who has a say in the trans- No matter what, the presence of an potential buyer? action, create extra steps, delays, and create ESOP means extra due diligence and re- wild cards as employees might be casting taining experts that know ESOPs well… Matheson: Every situation is different. votes on employment concerns versus fi- not just M&A transactions. However, generally speaking it is more nancial matters. Communication issues complex (though certainly not impossible have to be managed closely. Companies with ESOPs may have sig- nor such an obstacle that you would avoid nificant Repurchase Obligations to finance the opportunity) to buy or sell an ESOP Asset deals are usually pursued by buy- as employees are retiring and their ESOP company because of the extra steps that an ers to control the assumption of liabilities, shares must be redeemed. The cost of fi- ESOP Trustee might require. so that will have to be closely watched with nancing this, while often done with pre- an ESOP retirement plan involved. The tax dollars, may not be feasible for a host It is important to keep in mind that an buyer will certainly want to make sure that of strategic reasons. Thus, selling could Employee Stock Ownership Plan (ESOP) the sellers follow all ESOP guidelines in a provide liquidity to the ESOP and thereby is an ERISA-regulated defined contribu- transaction. solve the repurchase obligation burden, tion plan (much like a 401(k) plan) in- while providing capital for future growth vested primarily in private company secu- If the transaction is a stock deal, then in a new platform business. rities. An ESOP Trust actually holds and the Trustee will vote the shares (unless the owns the shares (not the employees/plan ESOP Plan documents state otherwise) Bottom line is that ESOPs do add com- participants). The ESOP Trust is guided and therefore there is another entity at the plexities, but these can managed with the by an ESOP Trustee, which can be inter- table. And, regarding liabilities, the buyer right advisors and the right processes. nal or an external independent trustee. will have to be very careful about taking The ESOP Trustee’s sole responsibility is on the ESOP liabilities. Will the ESOP be EBJ: What about the recent STV to ensure that the plan participants are terminated concurrent with the transac- transaction as an example. What factors treated fairly from a financial point of tion? What about indemnifications that came into play? view and thus receive “adequate consider- the seller has made regarding the ESOP? Matheson: STV actually used the ation” or “fair market value”. Retirement In a stock sale, those agreements transfer ESOP as a management buyout tool in Plan means potential for Dept. of Labor to the buyer. 1999-2000 to take the company private. (DOL) review and so the “process” be- In the situation with an internal trustee Recall, STV used to be public. At that time comes very important as the ESOP Trust- (or ESOP Committee as fiduciary), the the law changed to permit S-Corp ESOPs. ee becomes another player at the deal table firm’s Board would most likely want to en- So basically, pre-tax dollars could be used (though a passive, but important, one in gage an independent “transaction trustee” to do the buy-back and with a tax exempt a minority ESOP). Beyond that and as- for any kind of a firm sale transaction to retirement plan as the owner… they paid suming it’s a sale of an ESOP company, a avoid conflicts of interest that internal no federal income tax for the last 20 years. couple things should be considered at the trustees may have if they are also direct I did Fairness Opinion for the company outset; shareholders and/or officers. board on this transaction.

34 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

ESOPs may not be right for all com- STV Group and The Pritzker Organization panies but they are excellent corporate n October 2019 STV Group Inc. and The Pritzker Organization LLC (TPO) finance “tools” for management buy-outs announced that the Tom Pritzker Family Business Interests advised by TPO agreed given the tax benefits. You have to keep I to recapitalize the ownership of STV. STV is a leading engineering, architectural, in mind, some companies want to remain program/construction management, planning, and environmental professional ser- independent while still providing found- vices firm, with corporate headquarters in New York and Douglassville,PA. Under ers a decent cash out price. What if own- the terms of the agreement, TPO purchased shares in STV owned by the company’s ers want to liquidate some of their stock Employee Stock Ownership Plan (ESOP) and continues to partner with current man- but not lose control until they are ready to agement to leverage STV’s existing strength to drive future growth. exit? The reduced discount for marketabil- ity and the tax benefits for everyone make Dominick Servedio, Executive Chairman of STV said: “In TPO, we have found it a very competitive alternative to selling not only an investor but a true partner that shares our values, respects our culture and the business (on an after tax basis). is committed to supporting STV’s future growth for the benefit of our company, our clients and our employees.” STV CEO Milo Riverso added that the “recapitalization Remember, it’s what you keep, not will not affect the structure of the company’s current management team nor the way what you get. Being able to use pre-tax it operates.” The recapitalization transaction was unanimously approved by STV’s dollars to pay off buy-out debt is a really Board of Directors and the ESOP Trustee, Greatbanc Trust Company. Houlihan valuable factor. Founders deferring capital Lokey Capital Inc. acted as financial advisor to STV. gains tax, and in some cases avoiding it, is also a great feature for estate planning. Founded more than 100 years ago, STV is a leader in providing architectural, engineering, planning, environmental, and construction management services for trans- I would not characterize an ESOP in portation systems, infrastructure, buildings, energy, and other facilities. The company any way as “protection against being ac- has worked on some of the nation’s most iconic projects, from structural design ser- quired”. Plenty of ESOP companies ulti- vices on the Thomas Jefferson Memorial in the 1940s to construction management mately sell and the employees (including services on the redevelopment of One World Trade Center. STV is ranked No. 32 in the management team) would receive pro- Engineering News-Record’s (ENR) Top 500 Design Firms and has offices throughout ceeds inside a tax free retirement account. the U.S. and in Canada. Established in 1912, the company employs approximately Buyers need to just be open to managing 2,300 people across 47 offices. EBJ’s environmental C&E database has 2018 revenues additional complexities and if the strategic at $520 million and environmental revenues at only about $30 million, ranking #164. rationale and fit for the deal is strong, the presence of the ESOP is simply another TPO is the merchant bank for the business interests of the Tom Pritzker family. shareholder to manage. As long as the The firm is focused on partnering with exceptional leaders to create value across a buyer is not trying to low ball the purchase wide range of industries. TPO looks for opportunities where it can create value for the price and rely on seller financing… thus PFBI and its partners and stakeholders over a long-term time horizon. TPO’s unique willing to pay market, then they should history over the last 60 years has led to work on approximately 200 transactions repre- not be overlooked.  senting about $30 billion of equity value. TPO is a separate entity to Pritzker Private Capital though the family does collaborate on some venutres (see wikipedia page for a family tree). PPC acquires North America-based middle-market companies that have ESOPs may not be right for enterprise values between $100 million and $750 million and EBITDA in excess of all companies but they are $15 million. Sectors of interest include manufactured products, services and healthcare—in the environmental industry PPC acqured remediation contractors Entact in excellent corporate finance 2015 and more recently Valicor Environmental Services (see page 66). In July 2018, “tools” for management buy- PPC held a final closing of PPC Fund II LP at its hard cap of $1.8 billion. PPC has offices in Chicago and Los Angeles outs given the tax benefits. The Pritzker family is an American family engaged in entrepreneurship and philan- thropy, and one of the wealthiest families in the United States of America (staying in the top 10 of Forbes magazine's "America's Richest Families" list, since the magazine began such listings in 1982). Its fortune initally arose largely through the founding Remember, it’s what you keep, and expansion of the Hyatt hotel corporation. Family members still largely own Hy- not what you get.... pre-tax att, and also owned the Marmon Group, a conglomerate of manufacturing, industri- dollars to pay off buy-out debt al service and water equipment companies (which was sold to Berkshire Hathaway in 2013). Significant Pritzker holdings have also included the Superior Bank of Chicago is a really valuable factor. (which collapsed in 2001), the TransUnion credit bureau, Braniff airlines, McCall's magazine (back when publishing was cool), and the Royal Caribbean cruise line.

Strategic Information for a Changing Industry 35 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

are they looking for and what type of assistance do they need? EFCG FINDS THEIR AEC CLIENTS LOOKING EFCG: Succession planning is neces- AT MULTIPLE STRATEGIC OPTIONS OF sary for many firms, especially those with OWNERSHIP TRANSITION, GROWTH AND M&A executives looking to retire. With rising valuations, it becomes more challenging TheEnvironmental Financial Consulting Group (EFCG, New York) advises the Archi- to buy out large shareholders as the cash tecture, Engineering, and Construction (A/E/C) industry. EFCG leverages its 30 years of pro- required to do so is material. The new prietary industry research and data to provide differentiated M&A advisory expertise, financial companies reaching out to us include and strategy consulting, and executive conferences. EFCG has advised on over 160 completed those looking to transition their business M&A transactions in the industry and their services include advisory on potential acquisitions, to a new owner, those who are in growth mergers or capital raises, acquisition searches, market creation for a merger or sale of a company, mode and want to understand where they post-merger integration, and more. The EFCG advisory group is known for its valuation and stand today, and those seeking capital now peer benchmarking work, and also has significantly increased capabilities to include post-merger to meet cash flow needs and seize growth integration, recession-planning, risk management strategy, and technology strategy. opportunities. Jessica Barclay, Managing Partner. Ms. Barclay leads the M&A practice, working with EBJ: Could you provide some com- clients on ownership transitions, recapitalizations, inorganic growth strategies, and preparing ments on trends involving various types firms for a sale. of deals such as divestitures/spinoffs, equity funded transactions, PE-to-PE Andreas Georgoulias, Director of Risk Management. Mr. Georgoulias is also one of the transactions, public-to-private trans- main points of contact for international clients. He brings more than 20 years of experience in actions, private equity exits, roll-up advising AEC firms, infrastructure owners and multilateral development banks and has been strategies, domestic vs international? engaged in projects across 15 countries. EFCG: Let’s touch on this at a high Daniel Sosnay, M&A Advisory. Mr. Sosnay specializes in financial modeling, primary re- level. For the serial acquirer, some deals search, and supporting EFCG clients with cash flow and other financial forecasting efforts. work better than others so there will be Marcus Quigley, Technology Practice Lead. Mr. Quigley advises executives on technology a need to spin-off assets that no longer fit portfolio development and planning, go-to-market strategy, product-service-market fit, and the core capabilities of a company. Since technology and business evolution planning. M&A is widely accepted in A/E/C, these opportunities will continue. If you are an EBJ: Can you provide an overview of There will most likely be companies investor who covets an asset in this space the state of the A/E/C Industry? that need to raise cash and that means but have lost multiple times at the bidding potentially divesting a business segment. EFCG: In 2019, the A/E/C industry table, now may be the time to bid and gain Willing/ready buyers with cash will likely was doing extremely well. Median profit- that asset. be able to acquire assets that wouldn’t have ability had doubled over the past 25 years, previously been available. We are currently We don’t see a trend in public-to-pri- and growth was trending up. M&A mul- working to analyze the multiple impact of vate transaction if valuations remain as tiples, which had plateaued at 2015 highs the Great Recession (’08-’09) on our in- high as they have. (Note: clearly this is for several years, rose again in 2019 to dustry and project the likely multiple im- rapidly evolving.) At EFCG, we create a create new all-time highs. 2020 was look- pact from this global pandemic. global report quarterly on over 20 publicly ing to bring another year of record prof- traded A/E/C companies. Analyzing the itability, growth, and M&A multiples to We believe the M&A market will results as of 12/31/2019, 10 of these firms our industry. Sellers were in high demand strongly rebound once the threat is largely were hovering at a 2-year high, making given robust acquisition plans from both cleared, because projects, while delayed, valuations pricey. industry strategics and financial sponsors, still need to be completed. We also contin- including many firms seeking to invest in ue to receive strong interest from financial Private equity will exit when they are the A/E/C industry for the first time. sponsors who have capital to deploy and ready and that could be driven by hold- are interested in investing in our industry ing period, cash-on-cash return or IRR. The market has materially changed, now. We will see whether COVID slows down though, since early March, 2020 with the that exit process. In a healthy deal environ- US spread of the novel coronavirus. Many EBJ: What’s been the flow of new ment, PE-to-PE transactions seem inevi- buyers are pausing talks with targets they companies coming to you to seek table with valuations increasing, and in a were underwriting, and many sellers are valuations? What type of companies healthy market, PE firms running an auc- on hold, waiting to see what the multiple have been looking for your expertise? tion process should bump up bids. impact will be due to COVID-19. Are they new growing firms, are they looking for ownership transitions, what

36 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Roll-up strategies are a great way to cre- process for more than 40 years now. The for new technologies. We are working with ate a platform investment, if acquiring one earliest major digital transformation out- our clients to implement these strategies. company doesn’t fit the required size for side of academic circles arrived with the We will share more once this deal activity a PE firm to transact. Outside of A/E/C advent of personal computing coupled is completed! examples, Insurance Services, another pro- with computer aided design tools and GIS EBJ: Is cybersecurity and related regula- fessional services industry, presents a good starting in the early 1980s. We saw those tions impacting the deal activity? example of what the execution of this strat- shifts take 15 years to move from early egy could look like. adoption to standard practice. EFCG: A/E/C firms are certainly investing more in cybersecurity now vs. five Lastly, we continue to see strong inter- We see similar uptake curves taking years ago, but this is not really impacting est from well-capitalized, highly successful shape for technologies like BIM, remote deal activity. international firms looking to break into sensing, ground based LIDAR, dynamic the US market. If they are willing to pay document delivery, and IoT among many EBJ: What growth, financial and strate- the premium that is generally required, others. Interestingly, although we often gic challenges are companies struggling they will be able to enter the market suc- hear that civil engineering is slow to adopt with most and how do you suggest they cessfully. new technologies, when you look at other approach them? non-consumer industries you see similar EBJ: With more private equity interest behavior and similar uptake periods. EFCG: Cash flow is one of the biggest and transactions, have you noticed a issues that many A/E/C firms are facing measurable uptick in valuations? One overlooked aspect of technology right now. We have developed a financial adoption in civil engineering is the long model and framework for firms to easily EFCG: We certainly see interest in the tail of change. Once the industry does shift identify and adjust short-term levers to A/E/C industry from private capital and to a new standard of practice or in a new manage cash flow. it is safe to say this has increased industry direction in earnest, further change away multiples. During our conversations with EBJ: How are A/E/C companies prepar- from these new approaches and tools takes private equity investors, we ask why they ing for the recession? What impacts in considerable time. This “stickiness” can be are interested in our space, and three com- the industry should we expect from the an asset where significant capital or train- mon reasons come up: recession? ing is required as the return on well tar- Low CapEx spend: A/E/C firms require geted investments pay dividends over long EFCG: Due to the massive impact of low capital expenditure to support their periods. the Coronavirus outbreak, the economy businesses compared to other industries, EBJ: How are technologies/digital is already in a recessionary period. We’ve which means more free cash flow. strategies impacting M&A activity in seen projects facing delays, postponements and cancellations due to late shipments of Fragmented Industry: Not only are our industry? components and other containment mea- there opportunities to grow inorganically, EFCG: Technology firms are valued sures. As such, A/E/C firms are focusing but firms in this industry are also comfort- at multiples of revenue, even if they have on reinforcing their cash flows, cutting able with growth by acquisition, facilitat- very low, or even negative EBITDA. As costs without hampering productivity, and ing PE firms’ strategy of growing through A/E/C firms begin/continue to build and avoiding accumulating debt and massive targeted M&A. buy technology strategies, this will begin layoffs in an increasingly uncertain eco- Recession resilient firms: A/E/C firms to drive M&A multiples higher. Our in- nomic environment. Notably, the nature have long-term contracts and projects that dustry is still grappling with how to value of the crisis hinders many options to miti- need to be completed eventually, even if technology firms, and we are seeing firms gate impacts such as diversification across they’re put on pause. Exposure to public execute a number of different strategies other locations or sectors, which makes sector work and non-discretionary projects when it comes to technology practices: things more difficult. also help to buoy revenue during a down- some firms are divesting their technology Yet, some firms were already better turn. businesses because they are so different from their core capabilities, while other prepared to address such crises when the EBJ: Digital transformation is a hot firms are creating tech firms within their Coronavirus outbreak escalated. Well- topic within the A/E/C industry. Can business, or buying tech firms to comple- managed firms that are more efficient and you comment on the rate of adoption of ment their business. Technology will be a productive, and take more calculated risks new technologies? How does it compare large driver of M&A over the next decade. have a wider set of tools available to miti- to other industries? gate the impact of the outbreak and other EBJ: How can companies find alterna- crises. On the other hand, the less efficient EFCG: This is a topic that EFCG has tive sources of capital for new technolo- firms with struggling financials and poor been closely analyzing and luckily there is gies? cash flows must implement more aggres- plenty of historical data on which we are sive cost cuts and are more likely to be EFCG: We have some very effective able to rely. The digital transformation of hardest hit and experience severe impacts. the A/E/C industry has been an ongoing strategies for how firms can source capital Strategic Information for a Changing Industry 37 III. Mergers & Acquisitions

This year CEOs reported that acquisitions were expected to continue strong in 2019, but are estimated to decrease slightly compared to 2018 (and 2019 projections noted in 2018). The current projection for 2020 is more conservative than what has typically been noted in the last few years, partially influenced by an uncertain economic and political environment. Overall, as Environmental Business Journal,displayed Volume XXXIII,in Figure Numbers 11, our 3/4, data 2020 shows that M&A activity has been declining over the last few years, which could mean that we are in the middle of an integration period, and a breakout year like 2017 could happen again soon. The extent of the impact EFCG Data on A/E/C M&A Activity in Acquired Revenue by Year on the A/E/C industry depends on how long the outbreak lasts, but will be massive, nonetheless. Overall, most sectors will be hit hard for the remainder of 2020 and firms are likely to experience significant revenue and profit shortfalls. Some sectors, such as transportation and general buildings, are already disproportion- ately affected. The scale of the impact also depends on the initiatives the federal government implements over the next weeks to assist Figure 3: Median and weighted average net revenue growth – actual, expected and projected values. Source: Environmental Financial Consulting Group. Notes: In late 2019 CEOs reported to EFCG that acquisitions were expected to the economy. For instance, a Source:continue strongEFCG in 2019, but are estimated to decrease slightly compared to 2018. The late 2019 projection for 2020 was more new infrastructure bill cov- Figureconservative 11: M&A than activity. what has Source:typically been EFCG noted in the last few years by EFCG surveys, partially influenced by an uncertain eco- ering new public works pro- Thenomic a/e/c and political industry environment. continues Overall, as displayed to grow in the and figure as above, displayed EFCG data inshows Figure that M&A 4, activityeven has during been declining recessions, the In termsover the of last the few sectorsyears, which that could were mean thatdiscussed we are in thethe middle most of anwith integration respect period, to andM&A, a breakout firms year showed like 2017 could grams would help the A/E/C medianhappen again growth soon. Note: does 2014 notmega-deals drop included below AECOM-URS, zero, making WSP-Parsons the Brinckerhoff, industry Ramboll-Environ particularly and HDR-ICA; attractive for industry get back on track particularinvestors.2017 mega-deals interest Notably, included in the Jacobs-CH2M, in “hottest” the last AECOM-Shimmick, sub-sectorsthree years, TRC-New within the Mountaintransportationa/e/c industryCapital, Wood and has Group-AMEC water/wastewater. seen the highest growth rates more quickly. Overall,since CEOsthe last stated downturn, that 75% but of M&A current transactions and projected were successful growth orrates marginally remain successful. far below As their the majority of M&A transactions are regarded as successful, M&A activity should not be EBJ: How will the down- respective pre-recession levels. turn impact the M&A expectedMedian to slow & down Weighted much more,Average if at Netall, in Revenue the foreseeable Growth future. – Historic Yet, it has & Expected to be activity? mentioned that over the last couple of years, CEOs have become more conservative about the

success of M&As as compared to some years ago. This could be explained by the various EFCG: This would depend on whether there is internal definitions different firms might be using on the success of M&A transactions. a business-cycle downturn (typical recession) or one M&A multiples still hold at highs, which is driven by a combination of structural and cyclical that would be financiallyfactors (see Figure 12). driven (such as “The Great Recession” in 2008). What we are seeing with CO- VID-19 is much more than a downturn and we feel is several big challenges in one crisis. It will certainly greatly slow down M&A with so much uncertainty in the marketplace. Well- © The Environmental Financial Consulting Group, LLC. 2020. All Rights Reserved. 14 capitalized strategic firms and financial sponsors are still acquiring and investing Source: Environmental Financial Consulting Group. Notes on the data as of 9/2019: The A/E/C industry continues to grow and as in firms, and we’re still clos- displayed in the figure above, even during recessions, the median growth does not drop below zero, making the industry particu- ing and progressing deals de- Figurelarly attractive 4: Median for investors. and Notably, weighted in the last average three years, net the revenueA/E/C industry growth has seen figures the highest – growth historic rates andsince theexpected. last Source: spite the uncertainty, so we EFCGdownturn, but current and projected growth rates remain far below their respective pre-recession levels. do not expect M&A to come to a complete standstill during this time.  © The Environmental Financial Consulting Group, LLC. 2020. All Rights Reserved. 5

38 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

and the acquisition of AIMS Companies by Sterling Investment Partners. These BROWN GIBBONS LANG & COMPANY SEES transactions highlight themes we will see TAILWINDS INTO 2020 BUT COVID-19 AND for decades; (i) vertical integration for environmental and waste sectors other than OIL & GAS LEAD TO A ‘DIFFERENT’ 2020 traditional municipal and commercial Brown Gibbons Lang & Company (BGL) is an independent investment bank and fi- waste, (ii) the importance of serving infra- nancial advisory firm focused on the global middle market. Founded in 1989, BGL advises structure and municipal markets, and (iii) private and public corporations and debt and equity sponsors on mergers and acquisitions, the recognition and growing interest from divestitures, capital markets, financial restructurings, valuations and opinions, real estate, and the private capital markets in the environ- other strategic matters. mental and infrastructure services market. Effram Kaplan is a Managing Director and member of BGL’s Executive Committee. He is EBJ: What are buyers looking for in head of BGL’s Business & Industrial Services Vertical and leads investment banking activities 2020? in the Environmental & Industrial Services Group. Effram’s investment banking career has EK: What has really changed regard- focused heavily on environmental and industrial services and as a result he has strong rela- ing near term investor interest given the tionships throughout the environmental industry and a well-established understanding of the current pandemic is a heightened demand particular strengths and challenges facing many sub-sectors. Clients primarily include private for: (i) consistency, (ii) cash flow, and (iii) and public companies as well as debt and equity sponsors. Prior to joining BGL, Effram was a visibility into financial performance over member of the investment banking team at KeyBanc Capital Markets and held management the next few quarters. These are critical in consulting positions at Arthur Andersen and Cap Gemini. Effram has a BS from Miami Uni- todays markets. Growth and human capi- versity and an MBA from The University of Chicago Graduate School of Business. tal have always been the most frequent, EBJ: BGL conducts a significant market are being impacted, simply due to preeminent drivers of value, along with re- amount of advisory work in the envi- a forced slowdown in manufacturing and turn on invested capital, and will always be ronmental industry, especially related distribution. While this is a relatively short some of the most important factors when to waste, recycling and industrial ser- term issue, the question remains, when will assessing opportunities. Yet, given the vices. How is business? we return to “normal”. The energy market current unprecedented environment, pre- faces another layer of complexity. Beyond dictability of cash flow, price / rate stabil- EK: 2019 was an incredibly strong Covid, there exists long term challenges, ity, and an ability to forecast, with strong year for the Environmental & Industrial which are emanating from structural pro- conviction, over the next 18 months, have Services (EIS) industry and one that fol- duction and storage capacity issues and vaulted to the top of the totem pole. lowed several years of impressive company heightened geopolitical risks. EBJ: How are current conditions affect- performance and strong M&A and capital ing the success of transactions? markets activity. BGL’s EIS vertical expe- Significant opportunity remains today, and over the coming decades, to invest rienced a similar trend to that of the EIS EK: Basic transaction execution has in and consolidate the marketplace, espe- industry, completing a record number become a more pressing risk factor. Given cially within industrial and energy waste, of transactions. The capital markets have travel restrictions and remote work envi- resource recovery, liquid waste and special been paying close attention to the indus- ronments, diligence experts and counter- waste. Opportunities remain in the resi- try, given the tailwinds of regulation, the parties have less opportunity to interact. dential and commercial marketplaces, yet fragmented nature of the industry and cor- Virtual meetings bridge some of the gap, are exceedingly difficult to find and are responding benefits of consolidation, and yet there is no replacement for in-person highly sought after. BGL is fortunate to impressive greater-than-GDP growth rates meetings. Face-to-face interaction matters. have the industry expertise and product within key subsectors. This leads to hold patterns, or slowdowns, knowledge to solve the challenges com- until certain steps that require in-person With that said, 2020 will be different. pany’s are facing as they navigate today’s interaction can take place. As we see fed- Company performance within the EIS market today, and prepare for emerging in eral and state restrictions lifted, I would sector, as well as M&A, equity and debt tomorrow’s market. expect this to be less of an issue, albeit market trafficking within the industry, are gradually. experiencing varied levels of change, driv- EBJ: What have been the most significant deals over the past couple of years? en by Covid and the price and structural From an M&A and capital markets issues within oil and gas. The residential EK: The deals I would highlight in the perspective, strategic investors are very refuse market is one of the most resilient broad environmental and industrial servic- well positioned. The long term, synergistic markets, worldwide. Consistency and pre- es space would be US Ecology’s acquisi- nature of these deals are indicative of the dictability, hallmarks of ‘resi refuse’, reign tion of NRC, the acquisition of Valicor by never ending appetite for strategic inves- supreme in today’s marketplace. Volumes Pritzker, the acquisition of TAS Environ- tors to invest, regardless of shorter term in the Commercial and Industrial (“C&I”) mental by Blue Point Capital Partners market conditions. The current market Strategic Information for a Changing Industry 39 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 presents more challenges BG&L Data on Aggregate Transactions in Environmental Services by Quarter for financial investors. 75 Equity capital markets are challenged by lack of clarity and poor visibility and 60 are thus more conservative in their view on “value” or 45 simply choosing to sit on the sidelines. Contrary to recent rhetoric, we see the 30 debt markets continuing to show resolve, and are 15

open for business, albeit a Number of Transac;ons bit more conservative than six months ago. Steps that - have evolved since ”The Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20 Great Recession” of 2008- 2009, such as increased Solid Waste Special Waste EE&C Metals/E-Recycling capital reserve require- Source: Brown Gibbons Lang & Co.: Solid Waste, Special Waste, Metals & E-Recycling, Environmental Engineering & Consulting ments and the growth of non-traditional private EBJ: What drives M&A strategy in the partner-oriented capital, active board par- lending sources, have worked, providing a environmental industry? ticipation, and usually a more aggressive properly functioning debt capital market- path to growth. Companies of significant EK: It depends on who is investing. place. Challenges still exist, although they scale, size and sophistication may be bet- Strategic investors have a different set of are more present themselves more clearly ter suited for the IPO market. Yet, the criteria than both equity and debt capital at the upper end of the market where debt maturity of the PE market has made it of- investors. For example, strategic inves- multiples and syndication risk are of the ten times difficult to rationalize an IPO. tors within route-based or waste-oriented more aggressive variety. Benefits such as control, speed of strate- businesses seek route consolidation and gic decision making, sophisticated board EBJ: What types of companies have waste volume internalization synergies structures, and accountable compensation been seeking BGL’s expertise? that financial buyers cannot provide. The structures for management teams have capital markets tend to be more aggressive been maturing in the private capital mar- EK: BGL works with various types of business builders, active partners to take kets and made it an attractive outlet for businesses in various stages of their life- advantage of growth, and shorter term capital compared to the IPO market.  cycle; we essentially advise firms on capital oriented in partnership duration. Both and financial strategy, coming in the form segments of investors (strategic and capi- 75 of mergers and acquisitions and growth tal markets) suit valuable purposes. They Environmental Services capital (both equity and debt). What does 75 just each have different forces driving value Transactions: Q1 2020 that mean? It means should shareholders and investment rationale. There are other 60 and management teams have an interest 60 factors that drive interest in the broad EIS in improving their business, growing their sector that present well to both the strate- business, or generating liquidity, and need 45 45 gic and capital markets; Investment plat- 17% to access the capital markets, we lead that form to drive consolidation, management effort. That may come in the form of -ac talent, geography, and technology lead 30 the 33% cessing efficient capital, partner capital, 30 list of criteria that place high on the list. acquiring or merging with a transforma- 15 tional asset or business, or simply monetiz- EBJ: What’s your perspective on the 43% 15 Number of Transac;ons ing the equity built over time via a sale. IPO market and its impact on deals? 7% Number of Transac;ons - EK: Over the course of last 20 years, the

Our EIS team advises throughout the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 - IPO market has tailed off, approximating environmental and industrial services mar- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011 Q3 Q4 Q1 Q2 2012 Q3 Q4 Q1 Q2 2013 Q3 Q4 Q1 Q2 2014 Q3 Q4 Q1 Q2 2015 Q3 Q4 Q1 2016 2017 2018 2019 20 a 50% drop in new issuances. The benefi- ketplace, whether it be in traditional engi- 2010 2011 2012 2013 2014 2015 Solid Waste 2016 2017 Special Waste 2018 2019 EE&C 20 Metals/E-Recycling ciary of this is the private deal marketplace, neering, consulting or solid waste markets, Solid Waste Special Waste EE&C Metals/E-Recycling or more evolving markets such as renew- or otherwise known as private equity. Yes, ables, liquid waste, or energy and indus- cost of equity capital in the public market Source: Brown Gibbons Lang & Company (BGL); Includes: Solid Waste, Special Waste, Metals & E- trial waste. is less than that of the private equity mar- Recycling, and Engineering & Consulting (EE&C) ket. Yet, the private equity market provides

40 Strategic Information for a Changing Industry Public Trading Comparables Index Market Performance

Long-term Market Performance: Last 10 Years Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

500%Public Trading Comparables: Environmental Services Indicies Performance Last 10 Years

450%

S&P 500 Index 400%

WM Waste Management Index +281% 350%

Environmental Services Index 300%

Engineering Services Index 250% S&P +148%

200%

150%

HW 100% Enterprise Value-to-EBITDA At All-Time Highs +5% ES -3% 50% The median Enterprise Value / EBITDA for the EFCG Index rose to 15.0x as of September 30, 2010 2019,2011 which is 201272% above2013 its 20-year2014 average 2015of 8.7x, and2016 just passed2017 2008 and2018 reached 2019all-time 2020

Note: highs.Multiples Because and financial of statistics these calculated high valuations, as of 4/30/2020. we Source: expect CapitalIQ that; Wastethe publicly-traded Management Index includes: companies CWST, GFL, will RSG, WCN, WM (1) Environmentalcontinue Services to be Indexaggressive (or HW for in Hazardous their acquisition Waste) includes: strategies CLH, CVA, HSC,(i.e. HCCI,be willing SRCL, ECOL, to pay VEOEY higher multiples of (2) Engineering Services Index includes: ACM, CDD, FLR, HIL, J, KBR, NVEE, RPS, SNC, STN, TTEK, WLDN, WG, WOR, WSP earnings). Source: Houlihan Lokey derived from CapitalIQ data

EFCG A/E/C Index Price Earnings Ratio: Aggregate Value / EBITDA (Through 9/30/2019)

EFCG, 9/2019:Figure Enterprise 9: EFCG A/E/C Value-to-EBITDA Index Price-Earnings At All-Time Ratio. Source: Highs EFCG in Late 2019

The median Enterprise Value / EBITDA for the EFCG Index rose to 15.0x as of September 30, 2019, which is 72% above its 20- year average of 8.7x, and just passed 2008 and reached all-time highs. Because of these high valuations, we expect that the publicly- traded companies will continue to be aggressive in their acquisition strategies (i.e. be willing to pay higher multiples of earnings).

Strategic Information for a Changing Industry 41

cyclicality, have high barriers to entry, generate attractive free cash flow driven by BMO CAPITAL MARKETS WEIGHS THE BALANCE low capital expenditure requirements, and BETWEEN IPO AND SALE FOR LARGER CLIENTS; grow at attractive organic rates with the ability to scale through further M&A. As WELCOMES THE ARRIVAL OF NEW GENERATION a result, environmental services companies OF PRIVATE BUYERS INTO THE MARKET often perform better than other industrial companies through recessionary periods. BMO Capital Markets is a full-service financial services provider offering corporate, -in Over the past few years we’ve seen compa- stitutional, and government clients access to a complete range of products and services. These nies and equity funds that have historically include equity and debt underwriting, corporate lending and project financing, merger and not considered investing within the envi- acquisitions advisory services, securitization, treasury management, market risk management, ronmental industry begin to see the sector debt and equity research, and institutional sales and trading. With approximately 2,800 profes- as an attractive opportunity to generate sionals in 33 locations around the world, including 19 offices in North America, BMO Capital returns given the expectation of a down- Markets works proactively with clients to provide innovative and integrated financial solutions. cycle. BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), which is one of the largest diversified financial services providers in North America with US$665 bil- For example, over the past few years, lion total assets and over 45,000 employees. the management team of Harsco Corpo- ration has been taking steps to reshape its Shabari Nayak, Managing Director and Head of Environmental & Industrial Services. portfolio, moving towards a single invest- Ms. Nayak joined the firm in 2016 and has over 16 years of investment banking experience ment thesis that is focused on providing working with public and private environmental services clients providing M&A advisory and environmental solutions for industrial capital raise services. customers. They’ve made several strategic acquisitions to accelerate this transforma- EBJ: What does BMO’s M&A business creation. In addition, assets under man- tion, starting with the acquisition of Clean look like? agement of large private equity funds has Earth, for which we acted as Harsco’s fi- increased to record levels, many small and Nayak: BMO’s M&A practice offers a nancial advisor. Clean Earth provided mid-cap funds with buy and build strate- full range of advice to large cap and middle Harsco with a diverse industrial customer gies have been founded, and there has been market public, private equity-backed and base along with recurring and long-term greater depth and breadth of potential fi- privately-owned companies. With more customer relationships, a resilient busi- nancial acquirors, including family offices, than 100 M&A professionals globally, ness model, and a platform from which SPACs, infrastructure funds and Canadian BMO has advised on over 500 transac- to grow organically and via M&A in the pension funds. Each of these additional tions representing more than $400 billion sector. Harsco has seen success in integrat- classes of capital have become important of value over the last decade, with a focus ing Clean Earth into its broader business, buyers in the environmental services sec- on delivering expert strategic and techni- delivering on cross-sell opportunities, ex- tor, with many funds of this nature hav- cal advice that is highly aligned with deep ecuting on continued acquisitions, and ing engaged in recent sale processes. For industry insights and connectivity. continues to make progress on its strategic instance, The Pritzker Organization fam- goal to become a diversified environmental EBJ: Who are the buyers and sellers of ily office acquiredSTV Group in October services business. companies and how has that evolved 2019, the Boxwood Merger Corp. SPAC over the last few years? acquired Atlas Technical Consultants in EBJ: What was learned from companies February of 2020, and Morgan Stanley in the sector remaining private and Nayak: M&A dialogue and activity Infrastructure acquired Seven Seas Water eschewing the IPO market? over the past several years, both at BMO Ontario Teach- in March of 2020, and Nayak: The process to become a public- and across the industry, has been broad- ers’ Pension Plan was one of the buyers ly traded company is usually long, expen- based. In addition to private equity sellers, GFL Environmental of in April of 2018. sive and requires the equity capital markets there has been a notable volume of family The prior owners of each of those assets or founder-owned companies monetizing, to cooperate. At the end of the process, the were an ESOP, a private equity fund and a owners will likely only have sold a por- as well as corporates divesting non-core corporate, respectively. businesses. These sellers have looked to tion of their interests in the company, if address evolving liquidity or generational EBJ: How are deals within the envi- any – often the proceeds from IPOs are management needs and to strategically op- ronmental industry unique and how first used to repay debt. Selling down all timize their investments. do they compare to the ones that take of the owners’ shares can be a multi-year place within other industries? process, during which time the share price In terms of buyers, public companies may move negatively. And being a public have continued to be active acquirors with Nayak: Companies in certain environ- company requires ongoing costs and man- a keen focus on long-term, strategic value mental services sub-sectors display less agement time to report financial perfor-

42 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 mance, engage effectively with investors are satisfied that the facts are fairly repre- relative attractiveness of their bids, a select and research analysts, and comply with sented. The process of writing this docu- group of potential buyers are subsequently regulations that govern public companies. ment usually takes several months because invited to meet with the management team That being said, pursuing an IPO provides of the number of parties involved (the and begin to conduct diligence. There may owners with partial liquidity while allow- company, its group of underwriters, com- be one or more subsequent down-select ing them to participate in the company’s pany counsel, underwriters’ counsel and rounds, where buyers are asked to conduct continued growth and resultant value ap- the company’s accountants) and the need increasingly detailed diligence and submit preciation, all while providing a currency to make high-level decisions that then revised indications of interest, including for additional M&A. need to be included in the document, such key terms of the purchase agreement, until as those related to executive compensation, final bids are submitted by one to a hand- In contrast, a sale process typically is board composition and governance. In my ful of the buyers remaining standing. After quicker, less expensive, and because suc- 16 year career, which has included work- a deal is agreed and signed, there may be cess ultimately depends on a one-time ing on a dozen IPO processes, the fastest I a need for the buyer to raise debt financ- negotiation with a handful of competitive have seen this process happen is 3 months, ing, which could mean 45 to 60 days pass buyers, is less dependent on the health of while the longest has been over one year. before the transaction closes. From begin- any capital markets. A sale allows owners ning to end, a sale process typically takes to capitalize on momentum in the busi- After this document is prepared, the between four to six months. ness and near-term catalysts by monetizing company will then publicly launch the all or much of their ownership interests. IPO, which requires key members of the EBJ: How are companies redirecting Owners of environmental companies that management team to travel for a multi- their strategies because of COVID-19? have chosen recently to sell their businesses week roadshow, during which they review Nayak: Given the nature of services pro- rather than taking them public have been a roadshow presentation in person with vided in the sector and the U.S. Depart- weighing these benefits and disadvantages hundreds of potential investors in up to a ment of Homeland Security Cybersecurity and deciding that pursuing a sale satisfies dozen different cities. At the end of these & Infrastructure Security Agency’s identi- more of their objectives. meetings, the underwriting group will of- fication of critical infrastructure workers fer a deal to the company and its owners, These processes don’t have to be mutu- as essential, companies have needed to re- with specific terms including number of ally exclusive – companies can simultane- think and refocus their current strategies shares and issuance price, based on the ously pursue both outcomes and deter- for keeping employees safe in the current level of interest from investors. Before the mine which is the right path when terms environment. This includes implement- decision to launch the IPO is made, the become clearer. This is the path GFL ing protocols to minimize health risks underwriting group will advise whether Environmental pursued before ultimately and providing resources to facilitate work- immediate market conditions are well deciding to sell the company to BC Part- from-home initiatives, where possible. suited to an offering – while waiting for ners, Teachers’ Private Capital, and GIC in such a “market window” to appear, the fi- In addition, with increased uncertain- April of 2018. Ultimately, these new own- nancial information that is included in the ty in the broader economy, we are seeing ers did determine that accessing the pub- prospectus may go stale, requiring an often companies take measures to ensure that lic equity markets was the right path, and involved refresh and subsequent re-review they have enough liquidity to weather the successfully completed the company’s IPO by the SEC. storm, however long it may last. This in- in March of 2020. We acted as an advisor cludes tapping into their credit lines by and a bookrunner in both transactions on In contrast, a sale process involves the drawing down on existing revolvers, work- behalf of the company. company and its financial advisor preparing with their existing lenders to increase ing a confidential information presenta- EBJ: What are the differences between access to credit, or raising new permanent tion, or CIP. Because in a private sale trans- IPO and M&A processes? debt or equity capital. action the burden of diligence is on each Nayak: A company pursuing an IPO potential individual buyer, the CIP is typically an approximately 75-page marketing prepares an offering document, also Lacking clarity on the duration known as a prospectus, that details the in- document that discusses the investment vestment merits of the company, histori- and financial highlights of the business and and severity of the COVID-19 cal financials, associated risks, and other industry. Buyers, ranging in number from impact, it is difficult to envision information that is relevant for potential five to 500 depending on the desires of the equity investors in making their invest- owners and nature of the sector, are asked significant or transformative ment decisions. This several-hundred-page to sign a confidentiality agreement, after M&A transactions in the near- document is primarily a legal document which they are invited to review the CIP as opposed to a marketing document, and and submit initial, non-binding indica- term that are not driven by a typically goes through several rounds of re- tions of interest based on the information distressed seller. view and comment by the SEC before they that it contains. After parsing through the

Strategic Information for a Changing Industry 43 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Companies have also needed to rethink their inorganic growth strategies for the time being. M&A has been a consistent SANDBERG STRESSES THE IMPORTANCE driver of earnings growth within the sec- OF MANAGEMENT PREPARATION AND tor, but until there is more clarity on the duration and severity of the COVID-19 INTEGRATION PLANNING TO SUCCESS IN M&A impact, it is difficult to envision signifi- Sandberg Consultants is a business consulting firm that assists in transitions of small- to cant or transformative M&A transactions medium-sized environmental, geotechnical, and engineering firms. Sandberg Consultants has in the near-term that are not driven by a assisted multiple firms on the buy side to grow or on the sell side as an exit strategy including distressed seller. Most active sale processes locating potential target firms to providing valuations, integration, and creative solutions to have gone on hold and most sellers that complete a sale or purchase. Clients include Environmental, Remediation, Engineering, Geo- were planning to come to market have de- technical, and Drilling firms across the US and Canada from New York and Florida, to Colo- cided to delay until there is more clarity on rado, Nevada, and California. financial performance and valuation. Derrik Sandberg, President. Mr. Sandberg has worked in the geosciences and business man- EBJ: What impact will COVID-19 have agement for over 25 years beginning in the field as a Geophysicist, then transitioning to man- in the environmental industry? agement and eventually owner of two environmental firms. Derrik sold his last company to Nayak: The environmental industry is Cascade Drilling as their first purchase in 2011 and then assisted Cascade in the purchase of typically a late-cycle outperformer with additional firms for over 3 years before founding Sandberg Consultants. population increases, housing starts, and new business formation being good lead- EBJ: What’s been the flow of new them, but now have the potential issue of ing indicators of industry growth. In ad- companies coming to you to seek valu- overextending themselves. dition, environmental subsectors have ations? What type of companies have historically outperformed other industrial been looking for your expertise? Have Firms looking to sell have been in the sectors through recessions – for instance, they been new growing firms, are they industry for many years, and have success- the environmental consulting industry de- looking for ownership transitions, what fully grown or maintained their business, clined just 3.2% during the Global Finan- are they looking for and what type of but are looking to transition out for even- cial Crisis between 2008 and 2009, and assistance do they need? tual retirement. We advise firms to discuss the municipal solid waste sector actually and review potential sale options years in Sandberg: Recently, due to the Vi- advance because of the time it takes to not grew in five of the last six U.S. recessions. rus situation, activity has slowed. We are That being said, the recession that has been only find an interested party, but also the still actively working with a few firms but need to stay with the new business for 2-3 caused by COVID-19 has so far resulted in many of them requested a “pause” for a few a more compressed downturn compared to years to transition and integrate their cli- months to see how the market plays out. ents, know-how, and other operations. the Global Financial Crisis, causing com- Most of the firms we are currently working panies exposed to commercial, oil & gas, with are environmental, geotechnical, and EBJ: With all the consolidation that and transportation end-markets, or with engineering. we’ve seen in the industry over the last project exposure, to experience steeper de- decade or more, how would you say the clines in revenues and making it difficult One of the first items a company re- challenges have changed for the small to concurrently adjust their costs. quests is a valuation of their company. The or for the mid-size company in the companies are either sole ownership or consulting engineering industry? While initially there was hope that multiple owners that would like a general a return to normal GDP growth would idea of their value to potential purchas- Sandberg: With the consolidation it is be quick, most strategists agree that we ers. On the buy side, we provide valuation becoming more difficult for the mid-sized are likely looking at a longer path to re- ranges of prospective targets by reviewing firms to find a smaller firm with a good fit. covery as social distancing measures con- the financials including any reasonable ad- Similarly, the larger firms are seeing their tinue. That said, the federal government justments to a company’s earnings. Simi- mid-sized firm purchase options decrease. continues to spend meaningful dollars in larly, on the sell side, we review financials For the small and mid-sized firms looking bipartisan stimulus packages to support in- and recommend reasonable valuation to sell, they appear to have a larger pool dividuals, the economy, and the financial ranges. of firms to choose from. However, there markets. Ultimately the environmental in- are some firms that are now digesting (industry will benefit, as it has in prior reces- Until recently, many of the mid-sized tegrating) their purchases and are on hold sions, from support that is provided by the firms were looking for new purchases or for further purchases. federal government in the form of spend- their first purchase to grow their business. ing on infrastructure, including in funding Most are now, understandably, cautiously EBJ: Data indicates that internal for broadband, water systems, roads, and reviewing or “pausing” the purchase of tar- growth is substantially higher in small public transit.  get firms as it is not only new territory for and mid-sized firms. Do you find this

44 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 is true and what client sectors or client aging cash flow for operations can be chal- Sandberg: The more thorough and preferences are driving this? lenging for small to medium sized firms. transparent the firms are with each other, the more likely they are to meet expecta- Sandberg: It is only natural for small There is a delicate balance between growing quickly and experiencing cash flow is- tions. Surprises and unknowns muddy the to medium-sized firms to grow at a higher integration deal. The best deals are where rate than a large firm. As a percentage, it sues and expanding in a controlled manner that works for the company. both firms are honest and transparent is much easier for smaller firms to grow. about all their issues so that there are few However, there are still many small firms EBJ: What will be the pace of M&A to no surprises during purchase/sale and that have remained relatively small for activity in the environmental industry integration. Very thorough due diligence many years. They find a size that works for for 2020 and 2021? and reasonable expectations from buyer/ them and their market with small year-to- seller is the best. This includes in-depth Sandberg: With the current uncer- year growth changes up and down, but in discussions with employees about their tainty, it appears that M&A activity will general stay at a similar relative size. The desires/expectations from the transition slow for the rest of 2020. If the economy mid-size firms are tending to have more and interesting incentives for the selling begins to re-engage, 2021 will most likely internal pressure to grow so are looking firm’s employees to stay on and be excited show more M&A activity. The rate of ac- outside organic growth to expand their about the potential new opportunities. Of tivity will most likely follow the general business. course, providing ownership possibilities rate of economic activity. For those firms to key employees is one way to keep those EBJ: What operational issues are these that have a solid base, acquiring a firm(s) important employees engaged in the suc- companies struggling with most and may be a good opportunity. Rather than cess of the combined firms. Additionally, how do you suggest they overcome the recent seller’s market, the tide will most both firms need to agree on their business them? likely turn to being a buyer’s market. strategy for the 2-3 year period of the pos- Sandberg: One of the most common There will be more risk on the seller’s sible earn-out. By having a detailed busi- issues is integration. On the buy side, it side as the buyers will be more cautious ness/financial plan in place and common is very important to fully understand the and if/when they do buy, it will be more future goals enable the firms to become operations and culture of the firm they on their terms. In the past year, sellers more successful in the transition and inte- are purchasing. The more they understand tended to have more of the advantage be- gration process. the operational procedures, client relation- cause of the smaller pool of firms selling. EBJ: Are there any particular regional ships, and internal culture, the better the Some of the ways to continue to engage market or M&A variations you observe? integration. Interviewing in depth all the firms in M&A activity will be stretching mid to upper-level managers is important out earn out terms to reduce the risk of the Sandberg: There seems to be more in- to get a feel of the management style, ex- acquiring firm, as well as more liberal es- terest on the buy side for firms in South- pectations, and operations. cape clauses should the economy not pick ern California. There is also interest in EBJ: Which are some of the obstacles up. the SF Bay Area, Sacramento, and Pacific that small and mid-sized firms encoun- EBJ: Which type of deals are more Northwest. There is limited interest in Las ter while trying to achieve their growth likely to meet expectations? Which type Vegas and Reno. There is more interest in goals? of deals are least likely to meet expecta- expanding into Texas and Florida, but So- Cal seems to be most in demand Those Sandberg: As with most firms, person- tions? Which obstacles lead to deals failing to achieve expected value? wanting to sell are in each of the markets nel are what make the company. Until – no one market seems to have more firms recently, many of the firms we are work- wanting to sell.  ing with would hire key positions to help grow the firm. But with the tight marketplace (as of January), firms are looking to purchase another company to inherit the Typical issues with a small firm include revenue fluctuations year whole group of employees. The hope, of over year resulting in hiring and laying off personnel year over course, is to bring on a high percent of year. They are slow to hire and then slow to lay off resulting in solid performers in the group of employees with the purchase. inefficiencies. In addition... managing cash flow for operations can Other typical issues with a small firm be challenging for small to medium sized firms. There is a delicate include revenue fluctuations year over year balance between growing quickly and experiencing cash flow issues resulting in hiring and laying off personnel year over year. They are slow to hire and and expanding in a controlled manner that works for the company. then slow to lay off resulting in inefficiencies. In addition to personnel issues, man-

Strategic Information for a Changing Industry 45 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

EBJ: Congratulations on the merger of US Ecology and NRC. What are some US ECOLOGY TOPS $1 BILLION IN highlights of the transaction?

REVENUE WITH NRC DEAL; SAFETY & Feeler: Prior to the NRC merger, we DECONTAMINATION SERVICES WELL SUITED recently completed a series of successful acquisitions and organic initiatives that TO POST-COVID BUSINESS ENVIRONMENT allowed us to achieve significant growth, US Ecology has provided hazardous, universal and radioactive waste and environmental positioning us to pursue additional merger services for commercial and government entities since 1952. As the EPA established the RCRA and acquisition initiatives. NRC and its act in 1976, US Ecology company broadened its waste disposal capabilities to help customers subsidiary companies have been a partner achieve safety and compliance per regulatory requirements. and customer of ours for years. We knew their values and dedication to safety, com- Through organic growth supplemented with strategic acquisitions, the company has amassed pliance and customer service aligned with five hazardous waste landfills, three energy waste landfills in Texas, and one radioactive waste ours. When the NRC holding company landfill. US Ecology also has over 20 treatment and recycling centers, and over 100 service cen- presented the opportunity for us to merge ter and response standby locations which offer a comprehensive set of field and industrial services our companies, we knew the complemen- in North America, and around the globe. They are a leader in providing OPA-mandated stand- tary service offerings would help us contin- by and emergency response services. US Ecology currently has approximately 4,000 employees ue to realize our goals of offering industry- and $1 billion in revenue. Over the years US Ecology has expanded their service capabilities leading solutions and best-in-class service. and industries served, providing solutions for the manufacturing, refining, oil & gas, utilities, mining, remediation, retail, transportation, emergency and standby response industries and The closing of the merger with NRC more. US Ecology now offers decontamination and preventative cleaning services in response to Group has helped our company achieve the Coronavirus outbreak. close to a billion dollars in annualized revenue for 2019, while expanding our ser- Jeff Feeler, Chairman of the Board, President and Chief Executive Officer (CEO) of US vice offerings and geographical footprint, Ecology, Inc. Mr. Feeler brings over 25 years of business experience serving in various executive making us an industry leader. level positions including US Ecology’s Chief Financial Officer from 2007 to 2012.

ECOL + NRC: A Compelling Combination

Source: US Ecology, 2020.

46 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

EBJ: Please describe the various cycles The decision to rebrand most of the We are preparing to support our custom- of the transaction. NRC business was based on US Ecology’s er’s efforts to reopen operations in a safe strong company history and recognition manner for employees and customers with Feeler: NRC was looking for a strate- within the environmental services indus- our COVID-19 cleaning and decontami- gic sale, the economy was healthy and we try. With over 65 years of experience, and nation services. were well-positioned with strong financial longevity as a publically traded company performance. Once we learned the interest EBJ: Have you provided similar type of on the NASDAQ, the decision to rebrand in the merger was mutual, the deal came services during other health crises such to US Ecology was strategic for the growth together rather quickly. The overall process as Ebola and H1N1? and future success of our wholly-combined took approximately nine months, which company. included receiving necessary approvals Feeler: We provide response services from the SEC to move forward with the EBJ: Have you performed any other 24/7, each and every day, calling upon merger. Overall, the process was quite recent transactions? extensive experience to safely and reliably smooth and moved along well due to the support our customers. We built off NRC’s Feeler: We have not completed any alignment between the companies in terms decades of experience and established pro- transactions since the November 1 merger of product offerings as well as culture and tocols from responding to the SARs, Ebola with NRC. However, we continuously values. and H1N1 outbreaks, among other health apply our M&A strategy of adhering to crises. This expertise of providing disin- EBJ: What challenges should be ex- a disciplined approach to identify strate- fection and preventative cleaning of virus pected during the integration of two gic assets that support our vision of being outbreaks, coupled with US Ecology’s organizations of this magnitude? the premier provider of environmental safe handling of hazardous and infectious services in the future. We continually fo- waste streams by utilizing our vast network Feeler: Our first priority has been to cus on building the industry’s best team, of disposal and service facilities allows continue to deliver unequaled service ex- delivering even greater service excellence, US Ecology to be the premier provider of cellence to all customers. We have done a offering more innovative solutions for our comprehensive environmental services and good job ensuring our customers experi- customers to achieve compliance in an ev- COVID-19 response. ence uninterrupted, best-in-class service er-changing regulatory landscape, and en- while offering an even stronger set of envi- EBJ: What other impacts has CO- sure the safety of all parties each and every ronmental services. VID-19 had? In which other ways have day. If and when opportunities arise that you changed your strategy to adapt to Together our combined team is work- align with our company mission, vision the situation and minimize impact? ing to educate customers about the en- and goals to offer best-in-class customer hanced service capabilities now available service and environmental solutions, we Feeler: As the coronavirus pandemic so we can meet their environmental needs are ready to assess and grow strategically continues, we have seen significant de- in the most efficient and effective way. and when appropriate. mand the last few weeks for decontamination and preventative cleaning services. As with any merger, a challenge is pre- EBJ: Can you tell us about your CO- Our teams have mobilized and cascaded sented when integrating two different -fi VID-19 Decontamination and Disposal PPE and other resources appropriately to nancial and IT systems into one. But our Services? When did you start providing ensure our ability to continue to meet the team members have remained focused and these services? Who are your clients? needs of businesses across the country. Our dedicated on a smooth transition into uni- What percentage of your field personnel 24-hour call center, on-call response crews fied systems. are working in this type of projects? and pre-stocked trucks and trailers make EBJ: What strategy are you using to Feeler: We are currently providing our responses streamlined and efficient. incorporate both brands? various decontamination and preventative cleaning services for a wide variety of pub- As an essential business, we are deliv- Feeler: As with any merger of this size, lic and private sector customers across the ering vital COVID-19 services and main- the integration process will take some time. U.S. including retailers and pharmacies, taining our normal day-to-day treatment Most of the NRC business and services cruise lines, airlines, schools, large indus- and disposal environmental services. Our lines will be rebranded US Ecology. How- try, building services companies, govern- facilities remain open and strong. Our ever, certain services lines of NRC are very ment agencies and utilities. This service in- operational field teams continue to work specialized and have tremendous brand cludes decontamination of sites that have on site, while adhering to COVID-19 recognition, so their brand name will be had direct or potential exposure to the standard operational procedures and pro- retained. This includes NRC’s standby re- virus, or proactive preventative cleaning tocols put in place to protect health and sponse services that will operate as NRC, a of high traffic areas or frequently touched safety. We continue operations to ensure US Ecology company, the high hazardous surfaces. We have performed over 500 of our customers achieve compliance with all Specialized Response Services business will these projects already and expect to see local, state and regulations to protect hu- retain SRS branding and international op- significant ongoing demand for these vital man health and the environment. Where erations will retain the NRC brand. services as businesses resume operations. appropriate, office personnel now work- Strategic Information for a Changing Industry 47 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 from-home to ensure proper social distancing amid this trying time. US Ecology & NRC Group Merger Continues a Interesting Financial & Market Path for Both Companies; Launches EBJ: What changes do you expect to see within the environmental industry over COVID-19 Safe Operations Program in 2020 the next year due to this pandemic? US Ecology, a Boise, Idaho-based provider of environmental services, has been in business since 1952, growing for more than six decades via organic growth as well Feeler: Our services are essential ser- as acquisitions. Its recent growth endeavor is its merger with NRC Group (NRC), a vices to support many industrial segments Houston-based provider of comprehensive and safety-driven solutions for the oil and throughout the markets we operate in. gas, transportation, chemical, industrial, power and government sectors. The deal, Though many business have had to shut which was finalized in November 2019 via an all-stock transaction with an enterprise down, most of our customers have not as value of $966 million, has created one national provider of industrial and hazardous they provide critical products to both consumer and B2B end markets. Therefore I waste management services. The combined company now has more than 3,800 em- do not see much change in a post COV- ployees working in 13 countries in more than 130 locations. ID-19 environment. "NRC brings highly complementary services and customers to US Ecology... cre- One area we will watch closely is what, ates a leadership position in standby and emergency response services... expands the if any, manufacturing may be brought scale of key service verticals to drive volume to US Ecology's fixed facilities while add- back to the United States as a result of ing specialty waste landfill disposal capabilities focused on oil and gas exploration,” extreme shortages of supplies and equip- said Jeffrey Feeler, president, CEO and chairman of US Ecology, in a statement. US ment. Supply chains and other logistics Ecology owns and operates five hazardous waste landfills, three energy waste landfills may warrant diversified manufacturing and one radioactive waste landfill. It also has 20 treatment and recycling centers and across geographies and to be better posi- more than 100 service centers throughout North America. tioned for unique events like we are experi- NRC had established a leadership position in marine- and land-based emergen- encing today. If manufacturing is relocated here in the U.S., it will provide additional cy response, including a premier standby network. As a nationally recognized Oil opportunity for companies like US Ecol- Spill Removal Organization, NRC generates a recurring, compliance-driven revenue ogy to provide services. stream, with upside from spill events and international expansion, particularly in Mexico and Canada. The acquisition adds more than 50 service sites that provide EBJ: How are M&A transactions differ- emergency response services, light industrial services and waste handling to drive ent during a tough economic period? recurring base business through US Ecology’s broadened national service network, Feeler: While this is truly a unique situ- including retail compliance, lab pack and less-than-truckload waste transportation. ation, we’d expect M&A dynamics to be NRC itself did a big deal in 2018 with J. F. Lehman & Company and Hennessy driven by the state of the overall economy Capital acting as lead financial partners to consolidate, sell and listNRC Group as and the economic cycle. We also expect a public company. NRC acquired at least 10 companies in 2014-2018, including that most transactions will be limited to 250-person SWS Environmental Services (Fort Worth, Texas) in 2018 and prior to distressed situations, and the pace will that ENPRO Services, Op-Tech Environmental Services, Sureclean Limited, Emerald overall fall for the balance in 2020 and Alaska, Specialized Response Solutions, Boom Technology, Water Truck Services, and possibly inyo 2021.  CleanLine WWS. Looking to 2020 and beyond, US Ecology is focused on executing its integration Our teams have mobilized plan, looking for areas to add new technology, new services and new capabilities and and cascaded PPE and other identifying tuck-in acquisitions to bolster its network. resources to ensure our ability In April 2020, US Ecology, in response to industry’s need to safely reopen and re- to meet needs across the sume operations as the initial coronavirus outbreak slowed, announced a new, proactive cleaning and decontamination solutions package for commercial and government country. Our 24-hour call customers: the COVID-19 Safe Operations Program. The multi-faceted program center, on-call response crews supports a full range of business needs to safely reopen and resume operations, including one-time or on-going decontamination, preventative or proactive cleaning and and pre-stocked trucks and waste disposal services. The COVID-19 Safe Operations Program is available to cur- trailers make our responses rent and prospective US Ecology customers in manufacturing, automotive, insurance, streamlined and efficient. retail, hospitality, transportation, healthcare, industry, oil and gas and other sectors.

48 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Ryder: The rapid expansion of our business has provided considerable person- RSK KEEPS UP A BRISK M&A PACE TO RANK AS #3 nel challenges, as you might expect from FIRM IN THE UK; GROWS ON THE CONTINENT a company that has grown exponentially. WITH M&A IN GERMANY AND ITALY Our human resources team has worked hard to ensure that we meet these challeng- RSK is a fully integrated, environmental, health, safety and engineering consultancy em- es head on and are prepared as the compa- ploying more than 3600 staff worldwide with headquarters located in Helsby, UK. In 2016, ny grows further. We have employed sev- RSK was awarded the prestigious Queen’s Award for Enterprise in international trade, one of eral individuals specifically to assist with the UK’s highest accolades for business success. With a turnover of over £250 million, RSK was the acquisition efforts. This includes Tony ranked the third largest UK environmental consultancy in Environment Analyst’s 2019 Mar- Meakin, from Dow Schofield Watts, who ket Assessment Report.RSK has a diverse client base but mainly services key accounts for clients is currently on secondment as our merger within the energy, property, manufacturing, water, government and transportation sectors. Key and acquisitions director. clients range from energy giants such as BP, Shell, Texaco, National Grid and ExxonMobil We have also found that as we engage in to multinational manufacturers such as United Technologies, BASF, GlaxoSmithKline and our mission to provide with clients an end- Kimberly-Clark. In the financial year 2018/2019, RSK completed 12 acquisitions: Central to-end offering by acquiring companies Alliance, Non Destructive Testing Services, Copeland Wedge Associates, Twig, CAN, PB Drill- that complement our existing services, we ing, bts Group, the TBF Contracting businesses, Pellings, Dr. Tillmanns & Partner, Headland have needed to employ more specialists to Archaeology and Drilling Supplies & Hire Services. In the financial year 2019/2020, RSK cement these services and provide a joined- acquired 11 businesses: Consents Solutions, Biocensus, Adverbo, RAW Technology, Geocore Site up service offering. We are committed to Investigations, Ecologia Environmental Solutions, ATP, Silcock Leedham Group, Salix, Nicho- finding the best professionals to ensure we las O’Dwyer and Morrison Falklands Ltd (now trading as RSK Falkland Islands). Further can achieve this. acquisitions are planned in the current 2020/2021 financial year.. RSK was honored with an EBJ Business Achievement Award foe 2019 M&A acitivity. Communicating our strategy and acquisitions to the wider group is essential Dr Alan Ryder, Chief Executive Officer and Founder. Mr. Ryder has actively led the business in taking the business forward. Each time for 30 years and taken it from being a small environmental consultancy delivering projects for an acquisition is made, I and/or one of our oil and gas companies to a leading integrated environmental, engineering and technical services divisional directors introduces the business business employing more than 3,600 people in 26 countries. In addition to his role as chief to all existing employees. We then follow executive officer, Alan currently leads RSK’s global division, which has expanded the company’s this up with subsequent global commu- footprint in regions including the Middle East and Africa. nications to ensure that everyone in the group is familiar with the new business, its EBJ: Congratulations on your progress to continue our track record of acquiring employees and its services. This is vital for in 2019. Has the partnership with Ares businesses built by entrepreneurs that have us to attain the level of collaboration that Capital Management changed the cul- a strong culture and loyal staff. In FY16– we set out to achieve. ture while the company was in acquisi- 17, we acquired 3 businesses; in FY17–18, tive mode and adding new companies we acquired 7 businesses; in FY18–19, EBJ: Do you have a set or staged pro- to the mix? there were 12; and in FY19-20 RSK access for integration that you generally quired 11 more. In Environment Analyst’s stick to? Or do you find that each com- Ryder: Our acquisitive strategy has re- 2019 Market Assessment Report, RSK was pany requires its own process? mained largely the same over the past few ranked the third largest environmental years. We provide clients an end-to-end of- Ryder: Given the large number of ac- consultancy in the UK, up from ninth in fering by identifying business that will fit quisitions that we have made over the last 2018. So, our growth strategy is going very well into our existing family of companies few years, we have learned some of the best well and we are also maintaining RSK’s and investing in them. Although the coro- ways to integrate new business acquisi- core values as we expand, which is very im- navirus pandemic makes it an uncertain tions into the wider RSK group. This has portant to us. These include maintaining time for businesses around the world, our included office tours, presentations and our family feel, making a positive contri- acquisition strategy stays much the same. more personable things like getting new bution to society and working to reduce We want to continue to invest and will fo- businesses involved in well-being events RSK’s carbon footprint while helping our cus in market segments that are less likely such as our global Pedometer Challenge. clients to do the same. to be negatively affected by COVID-19 This involves a high level of organisation than others. EBJ: How have you been resourcing and prioritisation, as well as what we do your acquisition strategy in terms of best: coming together to act as one team. The financing from Ares Capital Man- personnel, and how do you engage the However, we recognise each business is agement has enabled us to act on this everyday project and business develop- different and we do tailor our approach strategy and given us the financial clout ment staff in supporting that strategy? to each specific business’ needs by work-

Strategic Information for a Changing Industry 49 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 ing closely with their existing management EBJ: In general, how have you gone tal consultancy by EA, up from ninth in team to ensure we embrace their needs. about identifying and qualifying poten- 2018, we believe that we are demonstrating tial acquisition targets, and how are you that our acquisition strategy is more than EBJ: While the UK has been your home going to expand that ability with your paying off. Smaller businesses generally fit market, we note that you have had some plans to add 12 to 15 companies a year? in with our core values better, as, although interesting geographic expansion with we are expanding into being a medium to the acquisitions in 2019. Tell us about Ryder: Our typical target companies large business, we are proud to retain our Germany and Dr. Tillmanns? have 25–250 employees and a £2 mil- smaller business, family ethos, etc. Yes, we lion–50 million turnover. When valuing Ryder: The acquisition in Germany is will continue to acquire smaller businesses, acquisition candidates, RSK takes into just one of many that we will be making in but we may also look to invest in some consideration the number of employees, mainland Europe. This specific acquisition larger businesses too; it all depends on how the turnover, the diversity of the cus- brings a site investigation drilling capabil- we feel that they will fit within the existing tomer base and the owners’ plans for the ity to RSK in Europe and further capacity RSK family of businesses. Regarding the business. We are particularly looking at in terms of geoenvironmental work. The deal process, as mentioned Tony Meakin is targets across the UK, Continental Eu- Dr. Tillmanns brand is well established positioned at Dow Schofield Watts and has rope, former Soviet Union countries, Af- and respected and we had already worked streamlined our deal process from A to Z rica, the Middle East and Asia. RSK often on some schemes in common before the so we can control third party costs on each buys targets whose owners are starting to acquisition. This collaboration has contin- transaction. plan for their retirement and are looking ued and increased since, a situation entire- for a gradual exit. Targets should provide EBJ: Finally how does your global ap- ly in line with our anticipated outcomes. complementary services to our existing of- proach and your mission statement help We now have a staff of about 70 in Ger- ferings and, most importantly, share the you appeal to the new generation of sci- many across six office locations. With a -di RSK ethos. In spite of the coronavirus entists and purveyors of technology that verse set of clients, the potential to expand outbreak, we ended FY19-20 with a dou- you seek to access to create and deliver further in the country and in the range of ble acquisition, the very much welcomed the innovative solutions you’ll need to services we offer is without question. positive news that construction company provide to stay ahead of the market? Although COVID-19 has brought Morrison Falklands Ltd (now trading as Ryder: Our mission statement is “to challenges to global business, it has also RSK Falkland Islands) and consulting en- provide outstanding services from an ex- brought us together in the battle to over- gineering practice Nicholas O’Dwyer had cellent working environment by being come this pandemic that has affected the joined RSK. Although it is an uncertain well-motivated, ambitious and enthusias- whole world. We are always looking to time for businesses around the world, our tic professionals”. This statement is sup- innovate and apply new technologies and acquisition strategy aims to diversify the ported by our nine guiding principles, approaches to meet our clients’ challenges business. In particular, we want to invest which have shaped our approach for the and drive efficiency. The situation regard- in market segments that are less likely to last 30 years. At our centre, are our people, ing coronavirus only makes us more deter- be negatively affected by COVID-19 than our clients and our employees. By provid- mined to adapt and to find a solution to others. Nicholas O’Dwyer and Morrison ing the best working environment, includ- our client’s problems. Falklands tick these boxes. We see investing being dedicated to health and safety in ing in them at this time as increasing our all that we do, to achieve the best, most in- EBJ: What about Ecologia Environmen- resilience, rather than weakening our com- novative end-to-end solutions, we hope to tal solutions, the Italian market and pany. We will continue to look at acquisi- attract the best, most hard-working, loyal your positioning within the country? tions that strengthen our group as we head employees to help us continue to deliver into FY20-21. Ryder: The Italian market operates in this. One challenge, which we are commit- a very regional manner; there are several EBJ: Many of your peers contend that ted to embracing, is that of climate change. specific requirements that must be demon- buying companies in the relatively We are working to reduce our own carbon strated in terms of technical management small ranges that you do of 10, 20, footprint and want to help our clients do of projects, so we are pleased that we can 40 or 50 staff members is inefficient the same, so we hope to find profession- fulfil these through both RSK Italia and because of transaction costs and time. als who want to help us achieve that aim. Ecologia. However, there is a difference in Have you been able to streamline the COVID-19 is another big challenge for emphasis between our two brands there: process, and do expect to keep buying us, but we are an adaptable business and Ecologia leads on remediation implemen- companies in that range as you grow to are doing everything we can to support the tation and RSK offers more of a consul- your target of a billion in revenue? global fight against this pandemic, while tancy led approach. Both fit together well maintaining business resilience and sup- Ryder: Given that we have achieved a and we have seen an increased interest in porting our clients. Our upmost priority is £250 million turnover this year, up from all our activities since the two business the safety and well-being of our employees, about £90 million in 2015, and are now have collaborated. clients, families and communities.  ranked the UK’s third largest environmen-

50 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Alford: Every acquisition is different, so every integration is different. Branding is NV5 ADDS NINE COMPANIES AND $200 handled on a case by case basis with the MILLION IN RECORD M&A YEAR IN 2019 timing hand-tailored to each new company. Typically, however, the smaller the NV5 was founded in 2010 as the third in a series of related ventures dating from the early newly acquired company is, the shorter 1990s. NV5’s CEO and several top management executives have been working together for the time period is until fully assuming the over 20 years. From the outset, NV5’s plan has been to become a national and international NV5 name. The ultimate goal is to have all leader in each of its six business verticals: infrastructure, energy, construction quality assurance, companies operate under the NV5 brand program management and environmental; and more recently, technology. Infrastructure has and doing so, is just a matter of time. always been considered the over-arching discipline feeding the other business lines with the com- EBJ: Will you continue acquiring pany’s growth being achieved both organically and through M&A transactions. In 2013 NV5 companies at the same rate in the near completed an IPO, and in subsequent years a warrant redemption and two follow on offerings future? What type of companies would raised additional equity capital. NV5 common stock is traded under the symbol of NVEE on you be looking into incorporating into the NASDAQ exchange. Close to a quarter of NV5 shares are owned by company personnel, the NV5 family? former sellers and other related parties. Alford: 2019 was a record-breaking year As of March 2020, NV5 has approximately 3,500 employees and operates out of more than for our M&A. Our goal going into 2019 100 offices in the US and abroad. Over the course of the past ten years, NV5 has completed was $50 million in run-rate revenues from 40-plus acquisitions. With the most recent acquisition in late December of 2019, NV5 brought new acquisitions by the end of the year. Quantum Spatial Inc. into the family, became the largest, full-service geospatial solutions pro- As it turned out, our run-rate revenues vider in North America, and established a platform to provide technology services as the sixth for 2019 from new acquisitions exceeded business vertical. Donald Alford, Executive Vice President, Strategic Growth. Mr. Alford has $200 million. With our largest transac- served NV5 in this position since 2010 and he is responsible for M&A activity. Prior to NV5, tion closing just before the end of the year, he assumed a similar role working with NV5’s CEO Dickerson Wright in two previous ventures M&A focus going into 2020 was on inte- dating back to 1998. gration and organic growth. Small tuck-in EBJ: As of December of 2018, NV5 We seek to promote a culture of part- deals, which would support existing opera- had 2,384 employees and your nine nership with all employees and drive equity tions and promote organic growth, would acquisitions added 1,100 employees to ownership as deep as possible throughout be considered on a selective basis. Also, a the company. How do you deal with an the company. One of the primary reasons high priority was placed on growing our integration of such magnitude? for the 2013 IPO was to provide a readily new technology business line and poten- liquid vehicle by which NV5’s employees tial acquisitions, which could support that Alford: Our approach to integration initiative. may vary depending on the characteris- could own equity. In an acquisition we tics of the newly acquired company, but include our common stock as part of the Those two M&A priorities, tuck-ins to two practices remain constant with each selling shareholder’s consideration and we existing operations and opportunities to new deal. First, we have a dedicated team bring these new leaders on board as our grow our technology business line, remain consisting of our CFO, in house counsel, partners. We also grant restricted com- our primary focus, although temporarily CAO, IT head and a senior operations mon stock to key individuals not sharing the COVID-19 situation may result in executive. That team spearheads our due in the sale proceeds of their company and postponing deal closings until later in the diligence effort and switches over to in- create additional partners in that manner. year when more clarity exists. tegration after the deal closes. Thus, the We use that same restricted stock in our bonus program and other incentives as a EBJ: NV5 has focused a lot on the same individuals are interacting with the public sector, 68% of your revenue leadership on the seller’s side from start of strategy to further perpetuate our culture of partnership. comes from those clients. What unique the process through integration and ideally capabilities do you provide that give developing positive relationships during This commitment to making the prin- you a particular advantage with those due diligence to be built on in integration. cipals and key people of a newly acquired type of clients? Second, although integration is first and firm our partners from the closing onward foremost a collaborative effort, we look for has been an extremely motivating factor Alford: NV5 has purposely focused on the seller’s key people to take the leading when bringing a new company on board the public and quasi-public sector because role going forward as active participants on and has gone a long way to facilitate a suc- these sectors are typically more stable, and weekly calls to monitor progress, set priori- cessful integration process. the type of services required line up with ties and determine benchmark dates. We NV5’s expertise and skill sets. Infrastruc- need complete alignment with the seller to EBJ: What about your branding strat- ture engineering and support services for champion the integration plan within the egy? How are you incorporating 2019’s transportation and water/waste water rep- newly acquired company. nine new brands into the company resent our largest business line, and all

Strategic Information for a Changing Industry 51 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 these services are provided for public cli- NV5 2019 Acquisitions ents. Our technology business line, with Quantum Spatial Inc. (QSI), is our sec- NV5 (Hollywood, FL) completed nine strategic acquisitions in 2019 that added ond largest vertical. It derives two thirds 1,100 employees, enhanced service offerings in the environmental, technology, in- of its revenues from federal, state and re- frastructure and energy markets, and broadened the company’s geographic coverage. gional clients, and much of the balance In January 2019, NV5 acquired Celtic Energy (Glastonbury, CT), a national of its revenues comes from quasi-public firm specializing in energy project management and oversight, enabling NV5 to se- clients like utility companies. Clients for cure additional energy-efficiency program capabilities and fuel the growth of current energy services, our third largest business energy-efficiency revenues. line, include quasi-public clients like utilities, healthcare providers and educational In March, NV5 acquired The Sextant Group (Pittsburgh, PA), a national provid- institutions. er of audiovisual, information and communications technology, acoustics consulting, and design services. EBJ: Quantum Spatial, acquired by NV5 in December of 2019, provides a In April, JV Surveying (Phoenix, AZ), a land survey and mapping firm, was add- unique type of service. Could you pro- ed to complement NV5’s existing ALTA survey services. vide a company overview? What type of In June, Page One Consultants (Orlando, FL), a program management and con- advantage does it provide to NV5? struction quality assurance firm, came on board withAlta Environmental (Long Alford: Quantum Spatial’s core services Beach, CA), a consulting firm specializing in air quality, environmental building sci- include geospatial data and mapping, veg- ences, water resources, site assessment and remediation, and environmental health etation management, asset management, and safety compliance services. DoD intelligence and telecom asset man- In July, NV5 picked up GeoDesign (Wilsonville, OR), a geotechnical, environ- agement. The acquisition of QSI with its mental, geological, mining, and pavement services firm, andWHPacific (Portland, 600 personnel immediately provided NV5 OR), a firm that enhances NV5’s design engineering and surveying services. with a national footprint for full-service, geospatial solutions as compared to NV5’s November brought the addition of GHD’s forensics engineering business, which regional data gathering capability prior to enriched NV5’s current forensic staff. the acquisition. In December 2019, NV5 acquired Quantum Spatial (Sheboygan Falls, WI), the QSI’s service offering also complements largest full-service provider of geospatial data services in North America. NV5’s growing surveying work, which ac- Full Year 2019 financial highlights for NV5 as reported in NV5’s 2019 annual counts for approximately 14% of its total report include: revenues. QSI adds proprietary software and advanced solutions in high-value ana- • Total Revenues for 2019 were $512.9 million from $422.1 million in 2018; lytics in a rapidly expanding market. QSI further embeds NV5 in the federal govern- • Net Revenues for 2019 were $398.4 million from $334.3 million in 2018; and ment by bringing on board its multi-year • Adjusted EBITDA in 2019 was $68.6 million from $59.8 million in 2018. contracts based on qualifications and experience with clients like USGS, Depart- Prior to any influential COVID-19 impact NV5’s 2020 Outlook communicated ment of Homeland Security and NOAA. on January 7, 2020, stated that the Company expected 2020 Gross Revenues to range from $700 million to $730 million. Both NV5 and QSI have long term relationships with state and regional authori- ties and are now in a position to leverage their respective capabilities to each other’s clients. Similarly, both NV5 and QSI have We have a dedicated team consisting of our CFO, in-house long, successful histories with utilities, but counsel, CAO, IT head and a senior operations executive. That with different companies and/or in different geographical areas. Finally, in NV5’s team spearheads our due diligence effort and switches over to entrepreneurial environment QSI will find integration after the deal closes. the support and encouragement necessary to flourish and continue its track record of strong organic growth and impressive bottom line results. 

52 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

HFL Consulting Ltd. SLR CONTINUES AMBITIOUS GROWTH In November 2019, SLR acquired UK-based HFL Consulting Ltd., a fore- STRATEGY WITH MORE M&A; PASSES $200 runner in sustainable process safety man- MILLION AND $60 MILLION IN US WITH agement services, combined with proven NEW ENGLAND ACQUISITION OF MMI business improvement capabilities. Prior to the acquisition, SLR had strong pro- SLR is a global provider of consulting and advisory services to private and public sector cli- cess safety capabilities in the U.K. which ents in a range of business sectors including infrastructure, built environment, natural resource were expanded with the HFL team. The development, energy and power, industry, and financial services. SLR has over 1,400 employees team provides a unique blend of leader- throughout the U.S., Canada, Ireland, the U.K., France, South Africa, Namibia, Australia, ship, management, consulting, engineer- and New Zealand. Their U.S. operations include over 420 staff located in 30 offices in 26 ing, and training services that makes them states. SLR’s global revenues were approximately $200 million in 2019 with the U.S. opera- the natural partner of choice for businesses tion contributing $60 million, which includes the acquisition of Milone & MacBroom Inc. of all sizes across the process industries, (MMI), a 200-person company based in Connecticut with offices throughout New England. including those in the oil and gas, chemi- Respondents to this EBJ Q&A are: Kevin Rattue, Director and U.S. Regional Manager; Steve cals, polymer, pharmaceutical, healthcare, Locke, President and Director of U.S. Business Growth; Mike Staton, Managing Principal. waste, and allied industries. HFL and SLR now deliver a comprehensive set of services EBJ: What is SLR’s strategic approach Power, and Industrial sectors. to promote safety and efficiency in design, towards the development and growth operation, maintenance, modification, of the company? And where does your Acquisitions are a key component of and decommissioning of complex hazard- Environmental practice fit into this our growth strategy. During the past 13 ous facilities. strategy? How are acquisitions support- months, we completed five acquisitions RPA Inc. ing the achievement of your company globally with three in North America. goals? These acquisitions were completed to fur- In 2019, SLR acquired RPA Inc., a ther diversify our revenues and to increase Toronto-based mining advisory firm. RPA SLR: We have ambitious growth plans our exposure to clients in the infrastruc- has over 60 employees with teams located across our core geographies. Our contin- ture, built environment and natural re- in Toronto, Denver, and London. The ued success is based on our people, client- source sectors. RPA team includes geological, mining, focus, service development, operations and metallurgical consultants that bring excellence, and successful organic and ac- EBJ: SLR has acquired various com- world-class mining advisory services to quisitional growth. SLR’s growth strategy panies over the past year or so. What SLR’s existing Mining & Minerals prac- incorporates the promotion of employees, are some highlights of the following tice, not only in North America and Eu- the careful recruitment of additional hires, acquisitions? rope, but across the globe. Together, SLR and the acquisition of firms that will allow Milone & MacBroom Inc. (MMI) and RPA are now be able to offer our cli- us to successfully expand into attractive ents in the mining sector a complete range geographic areas and diversify our service In January 2020, SLR completed the of services from value creation and genera- offerings. acquisition of MMI, a premier engineering, environmental services, planning, tion through resource and reserve work to With our MMI and RPA acquisitions, and landscape architectural firm with environmental and social risk and liability SLR has broadened the scope of services seven offices and 200 people in the North- management. that we offer to our North American cli- east USA. The primary synergy between Novus Environmental Inc. ents to be more consistent with our global MMI and SLR is cultural alignment and capabilities. Our priorities in M&A are to a shared commitment of all employees to In April 2019, SLR, acquired Novus work with organizations where we have a increasingly grow the U.S. operation in a Environmental Inc., a 25-person envi- strong cultural and strategic alignment, controlled and profitable manner. The ac- ronmental firm headquartered in Guelph, complementary skills/geographic foot- quisition of MMI builds on the U.S. op- Ontario. Their focus is on providing spe- print, and where we believe we can add erations core technical strengths through cialized air quality, wind and climate, and value. the expansion of services related to envi- acoustics and vibration services to clients throughout North America and interna- We are particularly interested in devel- ronmental permitting and compliance, tionally. The Novus team has expanded our oping relationships with innovative, entre- environmental due diligence, landscape ar- ability to service clients in eastern Canada preneurial, and people-focused businesses chitecture, civil and structural engineering, while helping strengthen our existing air with sophisticated environmental consult- transportation planning and engineering, and acoustics and vibration teams in Cal- ing and advisory capabilities and an estab- water resource engineering, coastal resil- gary, Alberta. The team continues to oper- lished presence in Infrastructure, Clean iency, and ecology. ate globally and has increased and further

Strategic Information for a Changing Industry 53 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 diversified our service offerings. While not COVID-19 situation could result in some people aspects of change are harder to plan new to SLR, Novus has added numerical firms wishing to explore being acquired for for in a systematic way. The most typical and physical modeling capabilities related similar reasons. challenges we have seen is the misalign- to micro-climate and pedestrian wind ment in expectations. As a result, we have Access to considerable acquisition fi- identified a number of things that are criti- comfort studies, snow and sand drifting, nancing (debt and equity) through our and increased our technical abilities in cal for us to focus on including (1) engag- banking syndicate, and CCP’s ongoing ing early and building alignment on the climate and meteorological forecasting to commitment to support SLR’s manage- our North American team. Our combined people/cultural aspects of integration, (2) ment team in delivering our growth strat- ensuring there is alignment on the strate- team has an increased depth of resources, egies through acquisitive opportunities expertise, and geographical reach to better gic objectives for the deal and the expecta- means that we will be active in speaking tions of how benefits will be realized, (3) service our clients with expanded opportu- with firms that might wish to be acquired. nities for the employees. disciplined planning and communications around all aspects of the integration plan- HydroSimulations ning (including technical/people/stake- The people aspects of change holder aspects) and critically, (4) strong In March 2019, SLR acquired Hydro- and clear communication and engagement simulations, a team of groundwater spe- are harder to plan for in a with management, staff, and clients. cialists based in New South Wales, Austra- systematic way. lia. Building on SLR’s leading capabilities EBJ: Which type of deals are more and industry recognition in groundwater likely to meet expectations? Which type services in the APAC region, HydroSimu- EBJ: What will be the pace of M&A of deals are least likely to meet expecta- lations has provided additional expertise activity in the environmental industry tions? Which obstacles lead to deals and advice in hydrogeology, groundwater for 2020 and 2021? failing to achieve expected value? modelling, stream-aquifer interaction, and groundwater management in a number of SLR: We believe that M&A activity SLR: In terms of our overall assessment target market sectors, and they have broad- will accelerate in Q3 and Q4 of 2020 rela- of the M&A market we offer the follow- ened SLR’s geographic reach through a tive to Q1 and Q2 activity. Further, it is ing comments. Deals that are more likely New South Wales presence. likely that firms that have been adversely to meet pre-acquisition expectations most impacted in Q1 and Q2 in 2020 will con- often have similar operating cultures and EBJ: How has Charterhouse Capital sider being acquired due to cash-flow and there is enough overlap within market sec- Partners supported SLR over the past business continuity concerns. Firms such tors and technical service offerings that the year? as SLR, with access to significant acquisi- cross-selling of expanded to services to key tion funding, will be well-positioned to clients is pretty straight-forward for teams SLR: Charterhouse Capital Partners complete acquisitions subject to the align- from both companies. (CCP, London) is a very supportive busi- ment of business interests. ness partner, and their experience investing Deals that seem to fall short of meeting in the environmental and advisory sectors We expect the large engineering/con- expectations have fewer synergies between provides valuable insights as we strategize struction firms to remain active consolida- market sectors and similar services, and the and implement our growth plans. SLR tors in acquiring firms that can help secure integration of marketing efforts, service of- management and CCP continuously work ‘large-scale’ projects to drive revenues in ferings, and project executions is not as together to develop and implement our the federal and public-private partner- straightforward. It is our opinion that the business strategies. ship sectors. SLR’s focus will be to con- biggest obstacles to deals failing to achieve tinually expand our geographic footprint EBJ: What can you say about SLR expected pre-acquisition accreditive value and diversification of our service offerings acquisition strategy? expectation are the lack of communication through acquiring firms up to six or seven between the firms at the project manage- SLR: Our acquisition strategy is based hundred employees in our core business ment level, where most of the business on our abilities to identify and successfully sectors. development and project execution oc- integrate the employees of acquired firms curs; the management of the acquired firm EBJ: What are the most common chal- into our company. We were able to make resisting changes and not fully integrating lenges that you’ve seen lately during a number of acquisitions post-2008, as a operations; and unanticipated issues as- integration execution? number of firms expressed interest in be- sociated with ‘surprises’ not disclosed pre- ing acquired by SLR. We believe that the SLR: We operate on the basis that in- deal. financial crisis gave reason for these firms tegration is primarily about people and to consider options for their owners to change management. Over time, we have crystallize shareholder value and for them developed our own integration guidelines The biggest challenge is to access broader markets to diversify work that helps us to understand and plan the misalignment in expectations. opportunities for their employees. The technical elements of the integration. The

54 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

EBJ: What impact has COVID-19 had 2018 Deal with Charterhouse Capital Partners Fuels SLR’s M&A in your business? In which ways have n March 2018 UK-based SLR Consulting agreed to a partnership with London-based you changed your strategy over the past private equity group, Charterhouse Capital Partners, to support its business through month to adapt to the situation and I its next phase of development, and leading to the exit of SLR’s 10-year private equity minimize impact? investor 3i. The deal allowed Charterhouse is to acquire a majority shareholding in the SLR: The health and safety of our em- company, but SLR’s management team and other employees retain a “substantial equity ployees is our biggest priority with nearly stake in the business" as it was announced at closing later in 2018. everyone having the ability to effectively At the time, SLR CEO Neil Penhall said: "I am delighted to confirm Charterhouse work from their homes or conduct field- as our new investment partner. We have ambitious plans for further organic and acquisi- work using social distancing and other tive growth and development of the business... In selecting Charterhouse, we have a new protective measures. Our robust IT plat- financial partner who recognizes SLR’s unique positioning in the market and has extensive form has helped us to continue deliver- experience in the environmental and advisory services sector. Furthermore, Charterhouse ing our services to clients while working is very keen to support our exciting ongoing acquisition plans. It is very clear we share the remotely. In financial terms, we are experi- same values and a clear vision of what we can achieve together." encing some slowdown in client payments, but the reduction in our fee revenues in Charterhouse has a demonstrated history in the environmental consulting & engineer- March and April are expected to be less ing industry, partnering with both Intertek and ERM. Charterhouse exited from the than fifteen percent. As such, we have been ERM deal in 2015 on a sale to OMERS Private Equity and AIMCo. (OMERS stands for able to retain nearly all of our employees. Ontario Municipal Employees Retirement System.) Charterhouse partner Chris Warren commented at the time of the deal: “We have been very impressed by SLR’s plans.... There EBJ: What impact do you think this is a tremendous market opportunity for SLR through both organic and acquisitive growth pandemic will have in the environ- and we’ll ensure that the company has all the support needed to take advantage of it." mental industry in the short and long terms? 3i first invested in SLR in 2008, taking over from the company’s previous backer, Liv- ingbridge, which invested in 2004. At the point 3i came on board with SLR the company SLR: Due to the economic impacts of was valued at £100 million, employing around 650 staff with revenue of £55 million, the pandemic, non-critical environmental with more than half coming from the UK. From 2008-2018, SLR more than doubled projects have been put on hold by many its annual revenues, growing to over 1,100 staff based in 70 offices around the world and clients. The short-term impact is a reduc- business outside the UK accounting for two-thirds of revenues as of 2018. Paris-founded tion in revenue for the global environmen- global investment banking and venture investing firmAlantra that has 540 people in 35 tal market and environmental firms are countries advised SLR on its investment from Charterhouse, providing an exit for minor- making staffing adjustments to compen- ity investor 3i and allowing Charterhouse to hold a majority position. sate. Smaller firms that don’t have a diversified client base could be hit particularly Charterhouse History Includes Successful 2015 Exit With ERM hard over the next three to six months. The In June 2015 Charterhouse Capital Partners agreed to sell its stake in environmental long-term impact will be further consoli- consultancy Environmental Resources Management (ERM) to Canadian pension fund dation within the environmental markets OMERS for an enterprise value of $1.7 billion. Charterhouse had bought a 55% stake as smaller firms try to minimize their risk in ERM in 2011, at which time ERM, operating from 163 offices in 42 countries and and medium-sized and large firms re-focus employing more than 4,800 people, was reportedly valued at $950 million. The rest of on growth initiatives. ERM is owned by partners in the firm. “Under its ownership, sales and EBITDA (earn- EBJ: How are transactions different ings before interest, tax, depreciation and amortisation) have increased substantially, while during a tough economic period? the number of partners ... has grown by more than 35%,” Charterhouse said after the deal was closed. While complete financial details were not disclosed, sources familiar with the SLR: We do not expect to construct our matter said the sale meant investors had made a 2.4 times multiple in cash on capital con- transactions differently as a result of the tributed (MoC). Under Charterhouse’s ownership, ERM had seen revenue increase 40% pandemic. Our acquisition model in terms and EBITDA rise by more than 55%, helped by at least six acquisitions during the period. of valuation, deal structure, due diligence processes, completion, and integration is London-based Charterhouse has not limited its interests to the environmental industry expected to remain as applied over the last or professional services, with a 2015-stated sweet spot of western European deals between several years.  250 million and 2 billion euros. By the end of 2015 had completed over 140 transactions worth an aggregate value of over 50 billion euros. The ERM deal was the fifth exit from Charterhouse’s CCP IX fund, after sales of its stakes in Card Factory, Deb Group, Wood Mackenzie and Bureau Van Dijk, which reportedly had collectively returned investors 3 times MoC. ERM has plateaued in revenue in recent years so it is unlikely OMERS will see a similar return as CCP, and reports in 2020 indicate some management shake-up but that the partnership model at ERM provides ample incentive for future appreciation.

Strategic Information for a Changing Industry 55 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

LaBella: Our environmental practice prior to the Aztech acquisition was about LABELLA M&A ADDS CONTRACTING IN 80% environmental consulting work, and NY AND ENVIRONMENTAL IN PA; SEEDS about 20% environmental contracting work. Aztech’s practice was exactly the op- NEW WASTE & RECYCLING PRACTICE posite, so it felt like a natural fit. We also shared some common clients (like state LaBella Associates (LaBella, Rochester NY) has experienced an average of 20% year-over- agencies) and saw complementary oppor- year growth for the past decade. With over 800 employees across 20 office locations, the firm’s tunities with clients we did not share. growth has been the result of a continual strategy of diversification. While the firm has been active in M&A (closing 12 deals in the past 5 years), an award-winning culture has been a Though LaBella had a presence in the catalyst for organic growth. NY Capital Region, we did not have the environmental personnel needed there to LaBella’s work is broadly categorized into 4 sectors: Buildings (architecture and design, appropriately service the geography. Stra- building engineering, hazardous building materials), Infrastructure (civil, transportation, tegically, we’re always looking to bring a planning, survey), Energy (utility engineering, renewables, program management) and Envi- full-service approach to all geographic lo- ronmental (environmental consulting, contracting, waste and recycling). cations. Greg Senecal, Senior Vice President & Director of Environmental. Mr. Senecal is a Certified With Aztech’s emphasis on environ- Hazardous Materials Manager with more than 29 years of experience in designing, managing, mental construction, the acquisition qua- and conducting numerous environmental site assessments, remediation projects, and Brownfield drupled the number of geoprobes and redevelopment projects. Greg joined LaBella’s six person Environmental team in 1990; today he drilling rigs within the LaBella organiza- is responsible for the direction of more than 150 environmental professionals. tion, and helped the growth of our geo- EBJ: How has business been for LaBella cant organic growth, adding a rotary drill- technical practice in addition to environ- over the past couple of years? ing capabilities right as the Aztech acquisi- mental capabilities. tion was closing. LaBella: The past few years have be Aztech brought LaBella additional ex- marked by substantial growth, both or- EBJ: What is LaBella’s strategic ap- pertise in design, operations and mainte- ganic and through M&A. A few highlights proach towards the development and nance of remedial systems, and deep exper- have been developing our services for the growth of the company? And where tise in emerging contaminants (PFAS). The utilities market, establishing new regions does your Environmental practice fit PFAS (Perfluoroalkyl substances) expertise in Ohio and Virginia, and being part of into this strategy? is particularly timely. PFAS contamination the surge of renewable energy develop- (caused by substances used in everyday ment. LaBella: Our strategy has always been products like Teflon or Goretex, as well as strength through diversification. This -in fire suppression foams) is a widespread is- We’ve been proud to accomplish this cludes adding services to meet client needs sue that impacts many LaBella clients, and growth while maintaining our culture. We (for example, our Program Management Aztech’s experience is a leg-up in the effort were named the #1 Top Workplace in our team was created organically in 2012 and to address it. hometown of Rochester, NY in 2019 and is now our largest service area at 29% of EBJ: Can you tell us about the success became a Certified Great Place to Work. revenue) and adding geographies to reach stories that you’ve experienced along the We have also successfully completed a new markets. long-planned leadership transition. transaction and integration processes? Our financial strategy is focused on cre- EBJ: What about the highlights of your ating the ability to be reactive to oppor- LaBella: We place a tremendous value environmental practice? tunities as we see them. We have built an on culture at LaBella. It’s been critical in organization with agility and nimbleness. allowing us to attract the talent we need to LaBella: Our environmental practice grow. So, success for us is when we really grew by 30% in 2019 and 42% in 2018. This serves our Environmental practice feel the cultures clicking. Our goal is not A major area of growth for us was environ- particularly well, because as politics, sci- to totally assimilate the new companies mental permitting and ecological consult- ence, and technology evolve, so to do envi- into the LaBella culture, but to add their ing for energy generation and transmission ronmental opportunities and regulations. strengths to our culture, and vice-versa. projects. This has included traditional en- We’re well positioned to pivot with these We certainly felt successful this holiday ergy sources and renewable projects. changes. season when we attended the Aztech holiday party and felt right at home. We developed a small environmental EBJ: Can you tell us about the recent construction LLC in 2014 that focused on acquisition of Aztech Technologies? With Aztech, it’s been very rewarding Geoprobe sampling and small remediation What were the principal M&A strategy to see the multi-disciplinary team that has projects. Our LLC team has seen signifi- drivers for this deal? come together to focus on the PFAS is-

56 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 sue. Our marketing team has been able to This allows us to pursue projects of the size fills: leachate and landfill gas. Therefore, present the Aztech expertise on that issue and complexity that really benefit from La- how leachate is disposed of (currently to in ways Aztech would not have been able Bella’s multi-disciplinary approach. POTWs) and how landfill gas is managed (passively vented or actively collected) may to on their own. Expertise and research is The immediate foothold an existing be affected. Similarly, composting and re- regularly being shared between our wa- firm offers can be an important factor for cycling processes may also change since ter/wastewater teams, waste and recycling success. Adding resources to a strong foun- PFAS are in recyclables and compostables. teams, and environmental teams. As a di- dation has been an effective growth driver Landfill operations may also be affected. rect result of the LaBella-Aztech marriage, for LaBella. we’re well positioned to be able to address PFAS are in WWTP sludge, a significant a very complicated issue that we believe EBJ: Within your Environmental quantity of which is land applied as nu- will impact many communities in the near Practice, you have an expertise in Solid trients for crops. If land application of future. Waste Management. What are some WWTP sludge is banned, the only other industry trends? option currently available to WWTPs is EBJ: What have been the major chal- disposing their sludge at landfills. Large lenges? LaBella: A trend that has begun in the volumes of sludge could lead to both odor last couple of years is the banning of or- management and slope stability challenges LaBella: Connecting all the opportu- ganic food waste from landfills as a way to for landfill owners. In summary, while the nities that come out of a new acquisition reduce greenhouse gas emissions. As this degree of the impact is unknown at this can be challenging. With a successful trend grows, the industry (local govern- time, PFAS regulations will impact solid integration, there are relationships and ments and private landfill companies) will waste management and recycling.  expertise to share, but it can be tough to need to develop processes and programs find time for that activity between regular for collecting, separating, and managing workloads.Managing change (any change) this organic waste via composting or an- PFAS are in WWTP sludge, a requires empathy, transparency, and trust. aerobic digestion. That has helped us manage any challenges significant quantity of which PFAS in the Waste Stream along the process. is land applied as nutrients As PFAS regulations develop across the EBJ: Please comment on other recent for crops. If land application acquisitions related to your environ- country, management of solid waste will mental practice. be affected. At this time, it is not known of WWTP sludge is banned, exactly what will change. However, PFAS the only other option currently LaBella: We acquired PA Techtonics in are in materials that are in household gar- 2017 with the goal of adding core environ- bage and demolition debris, which have available to WWTPs is mental services to our existing service mix been disposed of at landfills for more than disposing at landfills. in Pennsylvania. 50 years. It is no surprise that PFAS are We acquired Joyce Engineering in in the decomposition products of land- 2017 which started our Waste & Recy- cling practice. The Joyce team focused exclusively on solid waste solutions for LaBella Associates Acquisitions: 2015-2020 clients in the Mid-Atlantic and Southeast. Aztech Nov 1, 2019 LaBella’s broad service portfolio created BHNT Architects June 1, 2018 opportunities for one-stop shopping for DPC Engineering August 1, 2015 existing Joyce clients, and LaBella is now able to offer waste and recycling expertise Gardner + Architects November 1, 2016 to our municipal and private clients in the J. Hennemuth Surveyors August 7, 2018 Northeast. We see a tremendous opportu- Joyce Engineering November 1, 2017 nity to pair LaBella’s significant solar pow- Keystone Architecture February 25, 2019 er experience with the Joyce team’s deep KM Armstrong Associates April 27, 2017 expertise in closed landfills. PA Tectonics August 1, 2017 EBJ: How will acquisitions help LaBella TCI Environmental May 21, 2018 succeed in the near future? US Infrastructure July 29, 2017 Sandberg Kessler Architects April 1, 2016 LaBella: As the scale of LaBella has grown, acquisitions allow us to enter new markets or services with “horsepower” that is proportional to the rest of the company.

Strategic Information for a Changing Industry 57 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

a valued partner (and fierce competitor) on several projects with, and adjacent to, Barr. BARR COMPLETES 5 ACQUISITIONS IN LAST When the opportunity arose to join forces, 5 YEARS AFTER 4 IN ITS FIRST 45 YEARS; we jumped at the chance. STRENGHTENS ITS NATURAL RESOURCE EBJ: What was Barr’s previous experi- FOCUS ON POWER, MINING, FUELS & WATER ence with acquisitions? Barr: We have completed nine acquisi- Barr (HQ) integrates engineering and environmental expertise to help clients develop, man- tions in the past 50 years, with five final- age, process, and restore natural resources. Offices are centered in the Midwest and western ized in the last five years. Each has pro- U.S., but clients’ projects are located throughout the Americas, and around the world. Barr has vided complementary services, additional approximately 900 staff in 10 offices in the U.S. and Canada, and most of those staff are the clients, sometimes additional geographies, employee owners of Barr. Barr has been incorporated for more than 50 years, and they have and always a strategic purpose that revolves worked with thousands of clients over the decades. Barr has acquired nine firms during the around serving our clients. These acquisi- company’s history, including five in the last five years. Respondents are: tions have varied in size from five to more John Lee, Barr’s President and CEO. Mr. Lee also serves as a principal civil engineer in the than 30 personnel. They include compa- Engineering and Design business unit and has more than 40 years of experience. While his focus nies in Minnesota, Michigan, Missouri in the last decade has been the power industry, John has worked for clients across Barr’s major and Utah to support multiple practice ar- industry sectors, including mining, fuels and natural resource management organizations. eas including mechanical, structural and electrical engineering, and sediment and Ward Swanson, Vice President & Senior Environmental Scientist. Mr. Swanson has 27 environmental remediation. These acquisi- years of experience with environmental chemistry and quality assurance. He has served on Barr’s tions have helped us support our existing Management Team and currently is a member of the Board of Directors. clients and improve our capabilities to expand in these markets. EBJ: How has business been within complementary services to Barr’s electrical your environmental practice over the engineering practice group, and Marquez Barr has a detailed process for identi- past couple of years? Environmental Services brought new cli- fying and completing acquisitions that ents and quality personnel to our environ- includes obtaining input from multiple Barr: Our environmental practice has mental permitting group. Together with stakeholders. One of the factors that is seen solid growth over the last five years existing Barr staff, these new groups have paramount in our process is our focus on as we have maintained a steady focus on enabled Barr to establish an office in Colo- the culture of the firm joining us. Over the growth areas within our main sectors — rado and expand our presence in the West. years, we’ve cultivated a strong culture of mining, power, fuels and the public sec- This location complements our offices in ownership that centers on solving client tor — as well as expanded our work with Bismarck, ND and Salt Lake City, Utah problems. We have turned down opportu- manufacturing clients. This growth has and helps us support our clients. nities that may have fit our firm’s growth been supported by acquisitions that have plans when we’ve felt the differences in EBJ: What type of synergies did you improved our position and added more culture between the two firms would have identify prior to these acquisitions? services that benefit our industrial clients. been challenging to overcome. We also have long-running experience in Barr: As with the previous firms we’ve helping our clients address issues related EBJ: Barr provides services to clients acquired, both High Energy and Marquez to per- and polyfluoroalkyl substances that operate in various sectors. Could were unique in terms of how they operate (PFAS). This expertise has generated you provide trends on each of these and how they came to Barr. During our last unique opportunities in all areas of our sectors and explain how those trends strategic planning period, Barr’s leadership organization. are shaping demand for environmental team — with input from our employee services? EBJ: Can you tell us about the recent owners — brought forth a principle that acquisition of High Energy Inc.? acquisition could be used as a tool to help Barr: Many of our clients have been af- address our strategic imperatives. Over fected, and likely will be further affected Barr: We completed two recent ac- the past several years, Barr has led several in the near future, by the current global quisitions in the Denver area: High En- initiatives to build capacity and new ca- pandemic. We anticipate that an extended ergy Inc. and Marquez Environmental pabilities within our electrical engineering delay in recovery of end-use markets may Services Inc. High Energy is a leader in practice group. As part of these efforts, we result in a glut of products necessitating in- providing electrical engineering services began our first proactive acquisition search dustrial facility slowdowns or shutdowns. to industry, and Marquez Environmental in the history of the firm. High Energy These developments, in turn, could impact Services provides exceptional service in was identified as a talented group of peo- the timing of non-essential environmental environmental permitting to the fuels in- ple that fit our strategic plans. By contrast, efforts. Actions would include halting fa- dustry. High Energy Inc. brought a set of Marquez Environmental Services had been cility expansions, new facility permitting

58 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 and construction-related activities. The largely by GHG emissions. Beyond facing cating for development of a new technolo- following discussions are focused on long- a challenging regulatory environment, the gy or conveys strong interest in a problem- term trends beyond the impact of the cur- oil and gas industry must respond to in- solving approach that requires research rent situation. vestors, banks and other stakeholders, who and testing, the DOE is much more likely are paying close attention to the industry’s to fund a proposal. Mining contributions to climate change. Further, EBJ: What other funding sources are growing needs for stakeholder consulta- Within the mining sector, much of the there available for companies that oper- tion, referenced in the mining section, also environmental-related work generally cen- ate within the environmental industry applies to this sector. ters on environmental impact statement to conduct technology related R&D? studies, as well as regulations and laws that require ongoing and timely monitoring Barr: Federal agencies such as the En- and surveys. Due to the issues worldwide Industry once focused on vironmental Protection Agency, Health with tailings basin failures, clients are in- moving water off the land and & Human Services, and the Department vesting in geotechnical solutions and addi- of Agriculture, as well as many agencies tional monitoring. Also, from an environ- away, today, there is a massive under these departments, may fund tech- mental consulting perspective, producing shift toward keeping water nology-related R&D. In addition, research and complying with permits is now the institutions such as universities, private minimum threshold that companies must onsite and reusing as much as research companies, and government re- meet to win approval for new projects. possible for water supply. search labs at times demonstrate interest in Much more consultation with public and partnering with other organizations to fill tribal entities is needed as communities fo- gaps in their expertise. Barr has a role in cus on the protection of land, water and EBJ: Barr is involved in various tech- providing engineering support to bench- human health. These considerations have nology development projects funded scale concepts that are ready to scale up to been major drivers for numerous projects by the Department of Energy. Can demonstration or commercial application and they continue to present major hurdles you provide an overview of the type of and require design, design review and en- for multiple sectors. This would include research that is important to them and gineering cost estimates in order to secure service areas of permitting, compliance, some cutting-edge technologies that financing. and consulting with diverse communities. are likely to come out from this DOE EBJ: Barr has a Water Management program over the next couple of years? Power Practice. Could you provide informa- Barr: The DOE is a large organization tion about industry trends related to The main environmental driver for the whose interests are incredibly diverse. Re- the following type of services: power industry continues to be related to search topics involving any form of energy Coal Combustion Residuals (CCR). A Water Supply are likely to find a home whenever a sound regulatory target for a number of years, proposal for funding can be considered. Whether people live in California the legal challenges and changes in regula- The possibilities include wind, solar, bio- or Michigan, everyone realizes the risks tory timelines related to CCR continue to mass, fossil, nuclear, hydropower, geother- around sustainable water supply. Having a move the goal posts for owners. mal, tidal and more. In addition, subtopics reliable and safe water supply for drinking Some new trends we see in this industry within each of these sectors are meaningful water or business presents a major risk that include creating habitat for pollinators for areas of research. For example, Barr cur- utilities and private industry constantly renewable energy, as well as addressing the rently is supporting research on the extrac- evaluate. While industry once focused on end of life for renewable energy. For ex- tion of rare earth metals under a DOE- moving water off the land and away, today, ample, what do you do with turbine blades funded project. We’re also supporting a there is a massive shift toward keeping wa- when they have reached the end of their demonstration project which will test, at ter onsite and reusing as much as possible usable life? Currently, the only place they a full scale, the ability to suppress aerosol for water supply. The new EPA National could go is landfills, but are there other op- formation in the combustion zone of a Water Reuse Action Plan (2020) is a great tions? lignite-fired utility boiler, which has impli- showcase of how we can be more creative cations for improving boiler efficiency and around water supply to manage risks and Fuels improvements in the application of carbon be more resilient. capture. We are supporting a project that is While far from new, the issue of green- Water Storage house gas emissions (GHG) is ever-pres- testing a passive method to eliminate sedi- ent. Oil and gas clients will keep striving to ment buildup behind hydroelectric dams. Overall, water storage follows industry better manage and reduce their emissions. The DOE does have an industry sup- guidance on the volume to store in order Permits for new projects that run the gam- port role that can dovetail with advancing to manage risk. Water storage in general is ut of environmental permits are increasing- environmental goals. If industry is advo- still very expensive to build and maintain. ly challenging to come by, a trend driven Strategic Information for a Changing Industry 59 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

A few new trends: Restoration of Wetlands, Watersheds, Human Resource Trends: The water Lakes, and Streams resource industry is facing a huge work- - New water towers are becoming hard- force shortage and is scrambling to meet er to site, and systems are looking at using Landowners are looking for new ways workforce needs as massive retirements hit surplus water and reuse to offset potable to restore and improve water quality and the water industry and public sector. The water demand. The more we can get cre- wetlands — often in response to increased industry as a whole needs more students ative about how to store water in times of public pressure for better management entering STEM and vocational careers to surplus (flooding, stormwater runoff etc.) of land and water resources. Partnerships maintain service and develop new, creative and use for times of scarcity, the more re- have been really helpful to make this hap- solutions to problems. High-paying and silient we can be. pen, including regulatory-public-private steady careers are available in areas such as partnerships. There are myriad benefits to - Another interesting trend is fitting water chemistry and treatment, electrical these restoration projects, but they take a water storage into the landscape, such as controls, smart water systems, mechanical long time to plan, organize and finance be- building athletic courts on top of buried treatment plant equipment operators, and fore implementation.  storage tanks. These are good integrated lab technicians. design solutions with stacked community benefits. The availability of water supply, Barr Acquisitions 2015-2020 along with having adequate water stor- Barr Engineering (Minneapolis, MN) has followed an organic growth model age to meet demands, pose constant risks acquiring just nine firms in the past 50 years, with five finalized in the last five years: for cities and business alike. This is a high concern for areas of the world experiencing In October 2019 Barr acquired High Energy (Denver, CO), an electrical, civil, water scarcity. and structural engineering firm serving electric utility clients. Water Treatment In May 2019 Barr acquired Denver-based air quality and emission specialist, Marquez Environmental. The addition expands Barr’s capacity to support upstream Every year, we seem to find more con- and midstream oil & gas industry with environmental permitting and compliance taminants of emerging concern to be wor- services in Colorado and the surrounding states. The 20-strong woman-owned Mar- ried about, and water treatment is getting quez Environmental provided air quality, engineering and management services, increasingly complicated. Think of how with developed relationships with federal, state and local government agencies. new contaminants like PFAS, 1,4-dioxane or blue/green algae have changed needs. In September 2018, Barr announced the acquisition of Sage Environmental, a Utilities are struggling to update treatment consulting firm established in 1998 in Salt Lake City, Utah, expanding Barr’s capac- to new standards and maintain affordabil- ity in environmental permitting and compliance; site assessment, investigation, and ity. Generally, new regulations are driving remediation; asbestos inspection and abatement; and air and water monitoring. change, although public perception is also In June 2016 Barr acquired Darg Bolgrean Menk (Golden Valley, MN), a struc- driving lower tolerances for contaminants tural engineering firm. present, even if they are below federal guidelines. The water industry and uni- In August 2015, Barr acquired Horizon Environmental (Grand Rapids, MI), an versities need to maintain a high level of environmental engineering consulting firm that was founded in 1994. early research on emerging contaminants and affordable treatment methods to try to Water Equipment & Chemicals Companies with US Operations stay ahead of this ever-changing paradigm. Water E&C Global WE&C Revenues Firms Avg ($mil) Share Water Distribution Revenues ($mil) The biggest changes occurring in water >$1 Billion 9 25,526 2,836 62% distribution are the costs of maintaining $500-1,000 Million 6 4,320 720 11% aging infrastructure and the focus on re- $200-500 Million 12 3,240 270 8% ducing lead and copper in distribution systems. Utilities are struggling to update ag- $100-200 Million 18 2,270 126 6% ing infrastructure and reduce public health $50-100 Million 28 1,900 68 5% risks while also maintaining affordabil- $20-50 Million 60 1,680 28.0 4% ity. There is a huge lack of trust in public drinking water due to high-profile public <$20 Million 1,280 2,180 1.7 5% health incidents such as Flint, Michigan. It US Water E&C Companies 1,413 41,120 29.1 will take years of proactive communication Source: EBJ database of Water Equipment & Chemicals companies, based on surveys, interviews and compiled and transparency to rebuild public trust research on public and private companies. Note: WE&C revenues generated worldwide by US companies, and US that the water distribution system is safe. operations of foreign companies so total is more than the US market

60 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

lar Environmental brought leadership, site remediation technical expertise and FARALLON RELIES ON STRONG CORPORATE a commitment to expand our northern CULTURE & ‘THE FARALLON WAY’; California operations through a foundation of diverse long term former Stellar COMPLETES ITS FIRST ACQUISITION IN 2019 Environmental municipal and private clients ranging from universities, cities and Farallon Consulting services offered incude Environmental due diligence, construction park districts to major industrial research, and development, stormwater and environmental compliance, sediments, engineering design manufacturing and development clients. and cleanup, landfill services, vapor intrusion investigation and mitigation, subsurface and The Farallon Way culture was a perfect fit remedial investigations, and litigation support and expert services. Farallon largely works with for Stellar Environmental. Stellar clients private sector clients including attorneys, developers, lenders, insurance companies, and indus- will be better served by the broader range trial companies. Public sector clients include municipalities, ports, and state agencies. Farallon’s of environmental services, including envi- 2019 revenue was approximately $20 million with 90 full-time-equivalents and 8 locations: ronmental compliance, litigation support, Washington: Bellingham, Seattle, and Issaquah, Oregon: Portland and Baker City, California: and sediment characterization and design. Folsom, Oakland, and Irvine. EBJ: What type of synergies did both Amy Essig Desai is Farallon’s CEO and Principal Scientist. Ms. Desai has over 23 years of companies have prior to the acquisi- experience in the environmental industry and she has been instrumental in the firm’s growth, tion? including doubling revenue over the last five years, service line diversification, and geographic expansion in Oregon and California. She is committed to Farallon’s distinctive culture, inter- Desai: Our company’s missions and nal development of future leaders, and providing fulfilling careers demonstrated by continuous core values were well aligned and the op- professional growth and high personal satisfaction. portunity to expand and diversify our presence in Northern California was a shared EBJ: How has business been for Faral- EBJ: You talk about “The Farallon Way” goal. lon over the past couple of years? can you provide more information about this framework? EBJ: What was Farallon Consulting’s Desai: Farallon is a multidiscipline en- previous experience with acquisitions? vironmental consulting and engineering Desai: Formalized in 2011,“the Faral- firm that works on some of the most so- lon Way” outlines the Company’s mission, Desai: Farallon’s focused growth since phisticated projects along the West Coast. vision, and core values. Employees are ex- 2014 and expansion into Oregon and Cal- The company has doubled its revenue over pected to be responsive and flexible, and ifornia has been entirely organic. We have the past five years. The Company’s growth to deliver cost effective solutions to clients. considered other small (approximately is attributed in part to “The Farallon Way,” Senior staff are expected to mentor and $1-2M) acquisitions in the last couple of a framework that all employees at Farallon nurture junior staff, encouraging the ju- years. These acquisitions did not come to value and embody which was developed nior employees to become future leaders. fruition either due to purchase price dif- around its core values. “The Farallon Way” “The Farallon Way” was created in order to ferences or misalignment around culture. applies not only to client interactions and ensure the long term preservation of Faral- EBJ: Farallon owners sold the company delivery of services, but also to Farallon’s lon’s unique corporate culture and to con- to employees back in 2017. Could you own internal employee-owned culture, tinue to improve the Company’s relation- tell us more about it? and emphasizes transparency and mentor- ship based business development practices. ship. EBJ: Please tell us about the recent Desai: There is a tremendous amount EBJ: What about the highlights of your acquisition of Stellar Environmental? of consolidation occurring in the A/E in- environmental practice? dustry. Farallon has been committed to Desai: Farallon acquired Stellar Envi- both ownership and leadership succession Desai: Farallon’s foundation is built ronmental Solutions Inc. in late 2019. from the beginning. Over the last decade, on a strong strategic and solution-focused Stellar Environmental has provided the Farallon considered various ownership technical practice with a shared dedication San Francisco Bay Area with environmen- succession approaches. In 2017, Farallon to service-oriented quality and superior tal consulting services for nearly 25 years. sold the firm to its employees and we are work product. Farallon is committed to The acquisition of Stellar Environmental now 100 percent employee owned. Faral- its amazing people and has attracted top has helped us diversify our environmental lon employees earn shares in the firm for talent in the industry. We believe in One expertise, leadership, client base, and ser- every year of employment. Ultimately, we Farallon, company-wide resource sharing, vices in the San Francisco Bay Area. believe that transferring ownership to our being nimble, partnering with and being employees, those most responsible for and EBJ: In which ways have you been able responsive to our clients and team mem- invested in our continuing successes, was to diversify in the San Francisco Bay bers, performing exceptional work, and the best strategic approach for retaining Area through the acquisition? having fun along the way. our culture and our people. Desai: Farallon’s acquisition of Stel- Strategic Information for a Changing Industry 61 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

EBJ: Farallon provides a wide variety ban areas. Redevelopment continues to of environmental services. What is the be hot in our markets on the West Coast, March 2020 Environmental company’s specialty? especially in the Seattle area. Clients have Industry Summit in San Diego had to become more risk tolerant over the postponed until September Desai: Farallon’s specialty is being re- years due to a lack of available properties 8-10.... 50th Anniverary of the sponsive and strategic while integrating su- with no environmental impacts. Life in- environmental Industry still on! perior technical expertise with a thorough surance companies and national banks are understanding of client business goals, competing more with regional and local EBI continues its regulatory hurdles, economic matters, and banks. The smaller banks are also able to be Environmental Industry legal issues to deliver differentiated solu- more strategic with borrowers and consul- Summit series with... tions. We take great pride in our deliver- tants such as us. Regulatory requirements ables and our outstanding staff. and environmental standards are continu- Environmental Industry EBJ: Can you provide information ally evolving and we have several “industry Summit XVIII about some outstanding projects that influencers” who are involved in the pro- September 8-10, 2020 you’ve worked on over the past year? cess of updating existing requirements and standards and those who are involved in Coronado Island Marriott Desai: Farallon has had the opportunity developing new ones. Resort, Coronado CA to work on some of the most sophisticated projects along the west coast. Those proj- EBJ: What was different in this transac- ects include redevelopment of multiple tion from the previous ones that you Pacific Northwest city-wide blocks in densely urban areas tried to perform in the past. Can you Environmental Industry impacted with contaminants, assessing explain what do you look in a company Summit V vapor intrusion and mitigation, support- that you are planning on acquiring in July 30, 2020, Washington relation to its culture and what makes a ing cost allocation for Superfund cleanups, Athletic Club, Seattle WA designing and implementing cleanups be- good fit for Farallon? neath buildings, precedent setting litiga- Desai: We always start with the people tion support projects, and complex regula- New England and are they aligned with the Farallon tory compliance. Our goal is to be strategic culture. We look for technical excellence, Environmental Industry partners with our clients and work with the strong leaders, project diversity, client re- Summit V regulatory agencies to transition projects lationship philosophy, and risk tolerance. December 4, 2020 from investigation to cleanup to closure. EBJ: What is so unique about Farallon’s One Financial Center, Boston EBJ: What market trends have you culture and staff? noticed in your top service lines? Dates TBD Desai: Farallon’s culture and its staff is Desai: Our top service lines have been built around a strong work ethic, cultiva- Texas Environmental due diligence, construction support, engi- tion of lasting relationships, superior qual- Industry Summit II neering services, and compliance support ity work, open communication at all levels, for last couple of years. There has been a Houston TX ongoing professional development, recog- notable increase in industrial sector work. nition and reward of exemplary work, and E-commerce is driving the need for indus- Washington DC having fun.  trial properties in both urban and subur- Environmental Industry Summit IV, Hunton Amount of Private Investor ‘Dry Powder’ by Type by Year Andrews Kurth Conference Center, Washington DC

Environmental Industry Summit Antarctica February 2021 in Source: Prequin cooperation with Oceanites; As part of our philanthropic activities, Environmental Business International sponsors and supports the nonprofit organization Oceanites.

62 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

History has shown private equity managers that transactions completed in an CLAIRVEST COMPLETES SIXTH INVESTMENT economic downturn or shortly afterward, IN SOLID WASTE & RECYCLING; LOOKS tend to perform very well. It is important to note that the private equity industry TO REMEDIATION AND C&E NEXT has significant capital to invest and when Interview with Michael Castellarin, Managing Director at Clarivest Group Inc. (Toronto) thinking over the mid to longer term, that and Dan Spiers, of 2020 Environmental Group (San Francisco & Seattle) in April 2020. should help M&A activity to return. Further, there remains a significant 2020: Please give us a quick back- lockdown persists for an extended time. amount of debt capital from private lend- ground on yourself and Clairvest? Therefore, due to significant uncertainty, ers that will be available to fill the gap left the short-term impact has been to mate- MC: Founded in 1987, Clairvest is a by regulated banks if they back away from rially slow M&A activity for the next 30 private equity investment firm and we are financing M&A over the medium term. days except for deals which were very far currently investing from our sixth fund, along in the process. While I am not an ep- 2020: We know that you have been launched this year, which is capitalized at idemiologist or macro investor, I have read investing a lot of time tracking the $850 million. Clairvest has been invest- some of the writings of Tomas Pueyo who various environmental markets. Are ing in the waste management and envi- provides a framework on how the next there any particular services or markets ronmental services industry for the past eighteen months may look. Right now, in the environmental space that are of 15 years, and we have recently completed we’re in the hammer phase where we’re high interest to Clairvest? And that you our sixth platform investment in the sec- dealing with the rapid and dramatic shut- think are going to be the more attrac- tor. We have not made an investment yet down of our economy and the uncertainty tive services in the wake of COVID-19? but have been diligently studying the en- that it is causing. The good news is that vironmental consulting, engineering and this phase is temporary - once the curve in MC: Clairvest is open for business and remediation sectors and looking to find a one’s region begins to flatten or the pace of we remain keen on several sectors within terrific company and management team the virus’ growth slows, governments will the overall environmental industry. Speak- with which to partner. In terms of size, we start to gradually open up the economy. ing specifically about environmental contend to focus on companies generating $5- Such gradual re-opening will kick-start the sulting, we think that there may be several $25 million of pre-tax earnings and we are dance phase. trends – some which may now accelerate targeting to invest at least $25 million per due to Covid-19 - that are positive for well transaction. 2020: What do you see as being the positioned companies. longer term implications of COVID-19 In terms of my background, I am on M&A activity? As part of heightened risk manage- Managing Director and I have been with ment, for example, the demand for indoor Clairvest since 2002. I oversee industry MC: for private equity firms, they will air testing and industrial hygiene services research, investment origination, and be motivated to make investments in, or should increase. Also, as we move past the transaction execution with a focus on en- acquire, strong companies that are posi- lockdown and into more of a recovery, we vironmental services sector. I am currently tioned well to come out of the crisis and anticipate companies will accelerate efforts a Board member for our two investments gain market share. to nearshore supply chains. This should in the solid waste management sector. I earned my M.B.A. from Northwestern University’s Kellogg School of Manage- Tomas Pueyo: Hammer & Dance Phases of Pandemic Response ment and a Bachelor of Commerce with honors from Queen’s University at Kings- ton. 2020: A pressing question on everyone’s mind is how the COVID-19 pandemic has impacted M&A activity, particularly for private equity (PE) investors?

MC: As a healthcare crisis, Covid-19 is unprecedented in our lifetime in its global impact. As an economic event, it raises many unknowns about how the sudden demand shock will affect business activity and consumer behavior—especially if the

Strategic Information for a Changing Industry 63 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 lead to growth opportunities for environ- or they didn’t have the financial horse- buyer is going to look for, and how to mental consulting companies with a pres- power to support continued growth. It is approach the market? ence in production and manufacturing. possible that this health crisis and resultant MC: As we enter the dance phase and economic recession is the straw that breaks It is also possible that as part of a longer economic activity picks up, then I imagine the camel’s back for some business owners, term economic stimulus plan post Cov- sellers are going to take a more nuanced and hence causes some, who’ve been delay- id-19, there is the passing of an infrastruc- position in how they present their compa- ing the decision, to pull the trigger and ture bill spurring significant investment ny. For instance, how well positioned are sell. At a time like this, interested buyers spanning many years. This of course would they to add talent and grow? For some, this should have well financed balance sheets benefit many consulting and remediation is an opportunity to show where the posi- prepared to fund deals. firms with expertise across numerous ver- tives might be. For example, did the CO- ticals and geographies. At Clairvest, we’re at the beginning of VID-19 crisis create new revenue streams our sixth fund, which is a 12 year fund; so or win you new clients? Do you have an But stepping back from Covid-19, we for us, an economic recession may present exciting acquisition opportunity? are enthusiastic in terms of the long term a very good time to try and partner with prospects for well positioned environmen- As a long term investor, we’re more fo- a best in class environmental consulting/ tal consulting firms. There are key signs cused on the characteristics of the markets remediation firm interested in deepening in society of continued tailwinds behind being served by a prospect company, the its competitive advantages and growing. environmental trends. In the past year, competitive positioning of the company, we have seen oil companies commit to 2020: Many of prospective sellers are the strengths, weaknesses and depth of new environmental targets and technolo- assessing their options and wonder- our prospective management partners, and gies from clean power to hydrogen fuel, ing if this is the right time to go out to lastly, what the 5+ year growth and strate- banks withdraw from coal financing and market. What advice would you give gic outlook is, rather than focusing on the automakers releasing a swathe of new elec- them in terms of what a prospective PE short term.  tric cars onto the market, while renewable energy – particularly solar energy - and storage continue to become increasingly Clarivest Current Portfolio Companies in Solid Waste competitive with fossil fuels. DTG Recycling Group (DTG) is the leading construction and demolition 2020: Considering that Clarivest is (C&D) debris recycler in the Seattle/Tacoma region. DTG owns and operates eight experienced with minority positions transfer and recycling facilities plus a landfill - hard to replicate assets which serve with its investments, does COVID-19 the densely populated, strongly growing and sustainability-focused greater Seattle change that strategy, or reinforce your region. Over the past few years, DTG has leveraged its unique assets to forward approach to investing in companies? integrate and grow its collection operations and further develop end markets for the MC: Winston Churchill is credited profitable diversion of recyclable commodities. Since 2017, the Company has grown with saying, “Never let a good crisis go its revenue over 4x. DTG has a proven track record of developing new markets for to waste”, but he may not have been the recycled products and implementing innovative sorting techniques to deliver sus- first. As investors, we certainly want our tainable waste solutions to its customers and to municipalities. In January 2020, portfolio companies to approach the cur- Clairvest made a $29 million equity investment for a minority ownership position to rent situation with this frame of mind and for new investments, we seek to find back the principal owner, Dan Guimont, and his experienced management team in business owners and management teams their aggressive growth strategy. who believe that coming out of this crisis, Winters Bros. Waste Systems of Long Island (WBLI) is the leading non-haz- great opportunities will present themselves to improve the competitive position and ardous solid waste collection and disposal company based in Long Island, New York. growth prospects of their business. So, a WBLI’s operations include a diverse set of collection services, eight MSW and C&D time like this reinforces our approach to transfer stations and a dual stream recycling facility - all serving the densely popu- investing alongside heavily invested man- lated Long Island market. WBLI’s collection operation serves approximately 15,000 agement teams who want to aggressively commercial and 9,000 residential customers in Nassau and Suffolk Counties. Since expand. acquiring the assets from Progressive Waste in 2015, WBLI has made three tuck Across many industries and sectors the in acquisitions and doubled its earnings as part of a turnaround of the operations. past few years, we have met with owners In March 2015, Clairvest invested $28 million for a minority ownership position and management teams who have ex- backing Joe and Sean Winters and their deep management team to execute the turn- pressed a desire to execute acquisitions but around and regional consolidation. haven’t closed deals because either their valuation expectations were too high and/

64 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

Valicor acquires Affiliated PPC’s 2015 Environmental Deal for PRITZKER PRIVATE Wastewater Environmental Services ENTACT In February 2020 Valicor Environmen- Pritzker Group Private Capital made CAPITAL PUTS tal Services acquired Affiliated Wastewa- its first acquisition in the environmen- VALICOR ON FAST ter Environmental Services (AWES), ex- tal industry with the 2015 acquisition of FORWARD panding its leading network of wastewater ENTACT (Westmont, IL) from Austin processing facilities into the Denver mar- Ventures and TGF Management Corp. n July 2019 Pritzker Private Capital ket. AWES operates a premier centralized ENTACT provides environmental and I(Chicago) signed a definitive agreement wastewater treatment (CWT) facility in geotechnical construction services on pri- to acquire Valicor Environmental Ser- Denver, Colo. In acquiring AWES, Vali- vate sector remediation projects. vices, a leading provider of non-hazardous cor expanded its presence into the Western PPC partnered with ENTACT’s man- wastewater treatment services in North United States and strengthens its position agement team, that remain a large share- America, from Wind Point Partners. as a leading nationwide provider of waste- holder, continue to lead the company and Pritzker Private Capital invested alongside water treatment services. The AWES ac- serve on its board of directors. ENTACT, Valicor’s management team, who con- quisition increases the number of Valicor founded in 1990, offers a broad range of tinue to lead the business. Headquartered centralized wastewater treatment plants to environmental and geotechnical construc- in Monroe, Ohio, Valicor provides non- 15, with 26 facilities overall, as the com- tion services and has a proven track record hazardous wastewater treatment services pany continues to grow its national foot- of successfully executing its client’s most through a network of centralized wastewa- print. Valicor’s acquisition strategy focuses challenging projects. The company distin- ter treatment facilities and extensive trans- on acquiring operators of CWT facilities guishes itself via its long history of safety, portation fleet.Houlihan Lokey served and other providers of waste management technical excellence and field expertise. as lead financial advisor, andRaymond and environmental services, including ma- ENTACT delivers its services on a na- James served as co-financial advisor to terials recycling, used oil processing, prod- tional basis, including water management Valicor. uct destruction, landfill solidification, and and site restoration, in-situ and ex-situ related services. treatment, cap and containment, sediment Pritzker Adds to Valicor in Valicor expanded its corporate profile removal, and geotechnical construction September 2019 in 2020 and network of strategically locat- services. ENTACT also possesses an in- In September 2019 Valicor Environ- ed centralized wastewater treatment facili- house treatability laboratory dedicated to mental Services acquired Strength En- ties. The company transports and processes enhancing waste treatment and solidifica- vironmental, a company that operates a diverse wastewater streams that result from tion/stabilization efforts. centralized wastewater treatment facility the manufacture of industrial and consum- “Our permanent, proprietary capital near Detroit in Inkster, MI and provides er goods. Valicor’s mission-critical services base will support ENTACT’s world-class waste treatment and disposal services, on- allow customers to meet federal, state, and team and provide them with the resources site industrial cleaning, and transportation local regulations by safely and responsibly needed for their continued growth,” said services. Customers are in the automotive, disposing of oily water, leachate, soaps, David Rosen, Pritzker Group Private Cap- industrial, energy, utilities, government, line flush waste, and similar waste streams. ital investment partner at the deal’s clos- metals, chemicals, education, and health- The company also provides a diverse set of ing in 2015. “This is Pritzker Group’s first care sectors. landfill solidification and product destruc- acquisition in the environmental services tion services. Valicor is an ISO 14001 cer- Valicor provides non-hazardous waste- industry and we expect to remain active tified organization and takes great pride in water treatment services to more than investors in the sector.” its environmental compliance process. 5,000 customers throughout North Amer- ENTACT annual revenues were listed ica. The company’s services allow custom- Pritzker Private Capital acquires North in ENR’s top 200 environmental compa- ers to meet federal, state and local regula- America-based middle-market companies nies in 2017 and 2018 as $155 million tions for disposing of oily water, leachate, that have enterprise values between $100 and $156 million respectively, after rang- soaps, line flush waste and similar waste million and $750 million and EBITDA in ing from $140-150 million from 2011 streams. Strength expanded Valicor’s Mid- excess of $15 million. Sectors of interest to 2014. The firm’s M&A activities have west footprint and builds on its position as include manufactured products, services been limited, although in June 2018 it an- a leading wastewater treatment provider in and healthcare. The firm is led by Tony nounced it had acqured the assets of VIAS- the region. “We are very excited to expand Pritzker and the former investment and ANT a decontamination, demolition and Valicor’s leading network into Michigan,” operating professionals of Pritzker Group remediation contractor based in Schaum- said CEO James Devlin, Devlin. “Valicor Private Capital. In July 2018, PPC held a burg Illinois.  continues to expand into additional geog- final closing of PPC Fund II LP at its hard raphies in order to better serve both new cap of $1.8 billion. The firm has offices in and existing customers.” Chicago and Los Angeles.

Strategic Information for a Changing Industry 65 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020

MONTROSE KEEPS UP THE M&A PACE WITH DAR GROUP a Player in APRIL 2020 ACQUISITION OF ARKANSAS-BASED Global Markets from the CTEH AND SUPPORT FROM GFI/OAKTREE Middle East; Buys 26% In April 2020, GFI Energy Group, an investments through our networks, experi- of WorleyParsons in 2018 affiliate of Oaktree Capital Management ence, and market insights... a key factor in (Los Angeles) closed an investment in Montrose’s decision to partner with us. and Angled For More 1,400-person Montrose Environmental Environmental services sector focus. While private equity players have taken Group (Irvine CA), a nationwide provider We’ve been actively pursuing opportuni- an increasingly influential role in the con- of environmental testing and remediation ties in the environmental services sector solidation of the consulting & engineering services to industrial, commercial and gov- for several years, and Montrose is our first industry in North America, Dar Group ernment customers. The investment sup- completed investment. In addition to its represents a significant strategic player. ported Montrose’s acquisition of 170-per- favorable industry characteristics and long- Following is a timeline of the firm’s devel- son CTEH, a environmental consulting term trends, the environmental services opment. firms specializing in emergency prepared- space is a natural extension of our core ness, response and recovery. • 1956: Four professors from the focus on utility, power and energy value American University of Beirut open In April 2020, Montrose Environmen- chains. a specialized engineering firm asDar tal Group acquired CTEH, an Arkan- Al-Handasah. choosing Beirut for its Capital deployment in a difficult -en sas-based scientific consulting firm that headquarters. vironment. Despite uncertainties in the specializes in emergency preparedness, re- economy and capital markets, we continue • 1958: Dar receives its first big commis- sponse and recovery. Since 1997, CTEH’s to find ways to invest. Our portfolio is in sion – the Kuwait Power Station. From scientific experts have combined their ex- relatively good shape, and we are well-posi- there, the company gradually evolves, pertise, state-of-the-art technology and winning projects in the Middle East, for tioned to focus on offense… helping own- conclusive data to resolve complex health, the Gulf Cooperation Council (GCC) ers in our sectors solve unique challenges, safety, environmental, toxicological and and in Africa. particularly through bespoke securities management challenges for broad range with a balanced risk/return profile. • 1970: Dar Al-Handasah becomes Dar of industries, including chemical, petro- Al-Handasah Shair and Partners. taking leum, manufacturing, mining, transporta- Montrose Environmental Group was the revolutionary step of handing 60% of tion, government, legal, power and utili- one of the first to emphasizen environ- ownership to senior employees with lead- ties. Based in North Little Rock, Arkansas, mental responsibility as not just an im- ership and technical skills. The partner- CTEH currently has more than 170 em- perative but as a strategic asset and uses ship model drives Dar forward as senior ployees in Dallas-Fort Worth; Denver, ; the tagline The Future of Environmental managers realize that growth is essential to Houston; Indianapolis; Jackson, Mississip- Solutions with an integrated approach to the firm’s development. pi; New Orleans; Portland, Oregon; San design, engineering, and operations apply- • 1986: Dar Group is formed. U.S. Antonio; Carlsbad, California; Saratoga ing the latest technology from lab services architecture and design firm Perkins and Springs, New York; and Seattle. to stack testing to regulatory compliance Will joins Dar—the first in a number of with 1,400 employees in over 60 locations. strategic partnerships. GFI’s characterizes its investment model as not quite typical private equity, In October 2018, Oaktree made a sub- • 1989: T.Y. Lin International, a U.S. and Andrew Osler summarized a few high- stantial first investment in Montrose. Oak- civil and structural engineering firm, joins lights of their approach in a statement an- tree is leading global investment managers Dar Group, increasing Dar’s stronghold in the U.S. and opening up new opportuni- nouncing the investment in Montrose: specializing in alternative investments, ties in Asia. Structured, non-control equity invest- with $125 billion in assets under management as of December 2019. Oaktree’s • 1990: Dar makes its third acquisition, ment. GFI focuses primarily on partner- Power Opportunities Group invests in U.K.-based Penspen, an engineering, ing with owners and management teams profitable, growing companies with in- operations, integrity and maintenance ser- as control investors, though we also have novative products and services used in the vices company for the oil & gas industry. a track record of successful minority in- energy and power industries. The firm -em vestments. Montrose was seeking a value- • 2007: Dar Group acquires lead- phasizes an opportunistic, value-oriented ing U.S. airport and aviation planning added, non-control partner, and we were and risk-controlled approach to invest- consultancy firm Landrum & Brown, able to structure a creative solution that ments in credit, private equity, real assets opening up the aviation sector in China, addressed their needs. Whether or not we and listed equities with over 950 employ- Asia, Australia and the Middle East. own a controlling interest, we apply our ees and offices in 18 cities worldwide. full effort and resources to add value to our • 2009: Dar Group acquires American

66 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 firm Ross & Baruzzini, enhancing its engineering, technology consulting and architectural expertise and capabilities SOLID WASTE INDUSTRY CONSOLIDATION in the aviation, education, government, healthcare and mission critical industries. CONTINUES WITH LEADERS OLD AND • 2009: Dar Group further expands its NEW EXTENDING MARKET POSITIONS U.S. building system design presence by onsolidation is an ongoing trend in Waste Management’s 1st quarter 2020 acquiring Integral Group. Cthe solid waste and recycling industry, earnings call with analysts also shed some • 2012: Dar acquires the U.K.-based but 2019 saw a notable wave of activity. light on initial data following the March consultancy firm Currie & Brown, which With the potential for economic, politi- 2020 economic shutdown. Volume de- in 2016 itself acquired Sweett Group plc. cal or other shifts on the horizon in 2020, clines were reported across-the-board ex- many companies appeared to view 2019 as cept for residential which showed a sub- • 2013: Dar Group acquires Italian a prime time to keep expanding. stantial increase. The company reported a engineering company Maffeis providing 20% decrease in volume of 3rd party waste specialist engineering services for Tension The biggest deal was the announcement to their landfills, a 16% reduction in their Membrane/Fabric Structures and ETFE of the now year-long pending acquisition commercial volumes and a 25% increase foil designs for long span structural appli- of Advanced Disposal Services by Waste cations such as stadia covers, facades and in residential volumes. Like all companies, Management, the industry leader’s largest retractable roofs. cost controls in response to the economic deal in decades. Now firmly positioned as shutdown were instituted and waste man- • 2017: Dar enters a strategic partner- the fourth-largest in North America be- agement relied on their flex labor system ship with GPO Group, an international hind WM, Republic and Waste Connec- and their technology tool M100 for route multi sector engineering company, of- tions, Canada-based GFL Environmental and labor optimization, leading to a 6% fering planning, design and operation had a roller coaster year in 2019 with an reduction in commercial routes, a 15% re- services for transportation, building, on-again, off-again IPO saga and contin- environment and automotive projects. duction in industrial routes, and the park- ued expansion and acquisitions. Waste ing of 6% of their fleet. • 2018: Dar Group acquires a strategic Connections, Casella Waste Systems and 25.9% equity stake in WorleyParsons. Republic Services also made notable ac- Data on the larger volume roll off con- quisitions. Expanding activity by private tainers typically used by industrial custom- In late 2019 Australian industrial en- equity players – such as Macquarie In- ers, however, indicated that the bottom gineering company WorleyParsons re- frastructure Partners and Closed Loop may have been hit around the middle of ported that it informed the country’s for- Partners, among others – is also part of a April. Executives on the call reported that eign investments regulator of “creeping growing trend. compared to pre-Covid volumes and start- acquisitions” by its biggest shareholder, ing on the week of March 15th, volume Dubai-based Dar Group. WorleyParsons WM AND ADS DEAL A YEAR IN reduction compared to the average week reportedly rejected a $2.2 billion full take- were down 4.6%, 11.6%, 14.6%, 17.7%, over bid from Dar Group in 2016, and Dar THE MAKING 19.6%, 15.1%, and 11.8% in the last week owned 20.2% of the company at the time, Although announced in April 2019, of April. Solid waste roll-off volumes may according to Refinitiv data. WorleyPar- Waste Management’s acquisition of ADS not be the best proxy for the U.S. economy sons’ announcement came in response to a had not closed as of the middle of May but as one analyst said “there is truth in previous report by the Australian Financial 2020. Waste Management executives an- garbage”. Review that Worley had told the Foreign nounced the expectation that the deal Investment Review Board that Dar was would close by the end of the 2nd quarter. GFL COMPLETES IPO... AT LAST seeking to take control of the company Waste Management generated $15.5 bil- and that it believed the move would be lion in revenues in 2019, up from $14.9 In March 2020, Toronto-based GFL against Australia’s national interest. billion in 2018 based on strong organic Environmental raised nearly $2.2 billion growth and some acquisitions. WM spent in an initial public offering (IPO) of 17 The AFR report added that Worley has $529 million on acquisitions in 2019, so million subordinate shares at $19 each in requested the regulator to reject an ap- he $4.9 billion deal for ADS moves the both the United States and Canada. GFL plication by Dar Group in which it has needle a bit more. ADS generated revenues paid off $1.26 billion in debt and CEO sought the regulator’s permission to in- of $1.62 billion in 2019, up from $1.56 Patrick Dovigi said the IPO won’t change crease its stake. Observers agreed that Dar’s billion in 2018. Like many deals in solid the company’s M&A strategy, but “puts history of partnerships hardly indicates a waste an objective is further optimization our balance sheet in a place where we have strategy of hostility in its takeovers, nor of hauling routes and disposal assets, but the ability to be a little bit more nimble any jingoistic tendencies either in favor of anti-trust regulators remain keen to main- and a little bit more versatile.” GFL is re- its Middle Est roots or its American busi- tain some competitive balance and will reported to be in contention to purchase di- ness environment where the majority of its quire as much as $200 million of assets to vestitures from Waste Management’s pend- holdings lie.  be sold off as part of approving the deal. ing acquisition of ADS. GFL was close to Strategic Information for a Changing Industry 67 Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 launching an IPO in 2018 and 2019 be- will continue. GFL re- GFL Environmental: Q1 Revenues 2019-2020 fore stopping short each time. The desired ported a 4.9% rise in share price has fluctuated throughout the solid waste pricing and 1000 Liquid Waste process from $20-24 in the fall, to $20- a 29.2% increase in Infrastructure & Remediation 21 a week before the IPO, to a final $19. overall quarterly rev- 93 Dovigi told Waste Dive that phone calls enue year-over-year. Solid Waste: USA 800 with a small group of interested investors It spent $1.13 billion Solid Waste: Canada 131 “gave us the confidence to actually go,” be- on acquisitions during cause they viewed a new waste stock as a Q1 alone, much of 73 defensible position despite broader market that for County Waste 600 111 turbulence. “We had a very good book in and American Waste. the $20 to $21 range,” but Dovigi said it GFL didn’t specifically 435 was worthwhile “to give $1 to the investors report material Q1 to show some good faith given that they’ve revenue effects from 400 supported us through the most volatile COVID-19, but it did 341 market that anyone’s seen since 2008.” see volume declines beginning around Dovigi had repeatedly said he was in no mid-March. April 200 rush to go public, including following the revenue was down 273 announcement of a 2019 private equity re- 196 by 9.9% and 8.7% capitalization, but prior to the IPO he said for solid waste. Ef- GFL had now gotten “to a size and scale 0 fects were particularly where it needed to be a public company,” Q1 2019 Q1 2020 notable in Canada, indicating it gets harder to keep recapital- Source: GFL Q1 2020 quarterly report and form 6-K which had mandatory izing large private companies, and that the stay-at-home policies, IPO now brings in new investors. whereas solid waste revenue in the United than $1.3 billion of liquidity “with no ma- GFL’s filings indicate it will use the pro- States was only down by 4.2%. terial debt maturities in the near term.” ceeds to fully pay off notes due in 2022 GFL’s roll-off hauls declined week-over- and 2023, pay down a little less than half In April 2018 GFL Environmental was week until beginning to stabilize around of outstanding notes due in 2026 and recapitalized through a new investor agree- late April, at which point they were still 2027, and repay debt in two other catego- ment that valued the company at $5.1 bil- off by 18%. Dovigi reported the commer- ries. In total, this will account for a little lion in a deal which came after speculation cial revenue stream was down by around more than $1.2 billion, with remaining about an IPO. The recapitalization deal 7% at its low point and has recovered to proceeds slated for general purposes in- was led by U.K.-based BC Partners and now be off by around 4-4.5%. “We are cluding future acquisitions. Further debt Ontario Teachers’ Pension Plan and HPS now having customers reengage as they are payments are also a possibility, as GFL still Investment Partners, Macquarie Infra- preparing to reopen, which is another sign carries a sizable amount of debt. structure Partners III and Hawthorn Eq- we perceive that is indicating the worst is uity Partners were bought out as partners. GFL has completed 100-plus deals behind us,” he said. After the deal 65% of the company was since 2007, including the major 2018 ac- GFL’s infrastructure and soil reme- owned by outside parties, with Ontario quisition of Waste Industries, which estab- diation business saw 6% organic revenue Teachers’ Pension Plan comprising half of lished its significant presence in the United growth during Q1, with Dovigi reporting that share and BC Partners and two un- States. Earlier in 2020, GFL closed on the about 85% of job sites are now operational named parties making up the other half. purchase of Virginia-based County Waste again. Revenue for the liquid waste line, and Michigan-based American Waste, Following GFL's $2.8 billion acqui- expected to be “most impacted,” was down both of which were in progress prior to the sition of Waste Industries in 2018, the by 7.4% due to a variety of factors such as last IPO attempt and reportedly required company has continued to close mul- lower oil prices. Like its competitors, GFL additional funding. Those two deals, along tiple smaller deals in both the United reported plans to reduce discretionary with other recent tuck-ins, reportedly add States and Canada. Following the early costs. Planned 2020 capital expenditures $440 million of annual revenue in Cana- 2020 deals, County Waste CEO Scott of around $440 million have been reduced dian dollars. Earl became a shareholder. Earl has a long by about $100 million, due in part to eas- background in the industry, having previ- In May 2020 GFL Environmental re- ing off what CFO Luke Pelosi described ously sold companies to BFI and Waste ported its first quarter as a public company, as an “active replacement schedule” for Connections. He acquired a majority stake but it reported multiple signs of resiliency equipment. Combined with an April bond in County Waste in 2011, later growing and indicated its active expansion strategy offering, Pelosi said GFL now has more with additional investment from private

68 Strategic Information for a Changing Industry Environmental Business Journal, Volume XXXIII, Numbers 3/4, 2020 equity firm Clairvest Group. County 2018 U.S. Solid Waste Industry by Companies Waste had operations in Virginia and Number of $mil SWM % of Category 2018g Pennsylvania with six transfer stations and Companies Revenues Market one MRF and reported revenues of $180 Waste Management 14,114 22% 3.8% million in 2019. Republic Services 10,041 16% 0.0% In February 2020, GFL purchased of Waste Connections 4,006 6% 6.3% Michigan-based American Waste, a ver- Covanta Energy 1,868 3% 6.4% tically-integrated solid and liquid waste company, for $380 million. The com- Advanced Disposal Services 1,560 2% 4.7% pany's portfolio included the Wexford Large ($100–999 Million) 22 6,264 10% 1.0% County Landfill, one MRF and a C&D Mid-Size ($20–100 Million) 50 2,259 3% 3.2% recycling facility, among other assets. Small ($5-$20 Million) 330 2,902 4% 1.8% The Wexford County Landfill is projected to have more than 60 years of remaining Small (<$5 Million) 6,160 4,344 7% 8.3% capacity and American purchased it from Municipalities * 17,217 27% 0.7% the city of Cadillac MI in 2011. Total Revenues ($mil) 6,567 64,575 100% 2.6% American traces its roots back to the Source: EBJ model of the solid waste industry derived from Waste360 top 100, surveys, interviews and U.S. Census data on municipal income founding of Northern A-1 Sanitation Services in 1971 by Edward Ascione, Sr. Balcones Resources, founded in 1994 "The transaction is unique, in that Bal- His sons, Michael and Edward, founded by the Getter family, has grown to become cones is not representative of the usual PE American Waste in 2002 and have since one of the more successful private recy- target," Victor Bloede, managing direc- led the company the two brothers will stay clers in the U.S. The company has more tor of Dallas-based Transitus Capital told on to manage the company’s operations than 200 employees at facilities in Austin Waste Dive. "The investing universe for under GFL. GFL’s initial foray into the and Dallas, Texas, as well as Little Rock, recycling companies is rather narrow in United States started with Michigan-based Arkansas. The Austin MRF, retrofitted in the current market environment. In addi- Rizzo Environmental Services in 2016, for 2012, is seen as a particularly important tion, the field of well-run companies that a reported C$400 million. asset because it holds a processing contract have been able to survive the downturn is for 60% of the city's residential material. similarly narrow. It appears that a cyclically CLOSED LOOP PARTNERS The Balcones model has long been held up defiant buyer has found the opportunity ACQURIES TEXAS RECYCLER as an example of how recycling can work to make a solid investment in troubled economically with deliberate attention to times." In October 2019 Closed Loop Part- quality and an emphasis on reliable end ners purchased a majority stake in Bal- markets. According to Gonen, Balcones' model cones Resources, a Texas-based recycler, is scalable and will benefit from more direct through its Closed Loop Leadership Fund. “We don’t take things into this MRF relationships with companies throughout This marks the New York-based firm's that we can’t sell," Getter told Waste Dive Closed Loop's network. Since launching in first acquisition. Financial terms were not in 2018, referencing how he believed some 2014, Closed Loop Partners has made 46 disclosed, though Resource Recycling re- large public companies may have done so other investments across various branches ports the purchased stake was 80%. Bal- prior to global commodity shifts because of its platform. This includes a variety of cones founder Kerry Getter will remain in certain materials could cover the cost companies with direct relevance for both his role as chairman and CEO. Two man- of others. "When the market is hot, and MRF technology and materials process- aging directors from Closed Loop Partners people are making money, there are a lot ing. Plus, many key backers from the con- will join the Balcones board, as reported by of folks who don’t care about the conse- sumer product and retail sectors are look- Recycling Today. quences a couple years down the road. We ing for more and more recycled content in have not fallen into that trap." their supply chains. “We feel like the direc- According to Closed Loop CEO Ron tion that retailers, brands, consumers and Gonen, the plan is to build on Balcones' Given the financial toll of the recent shake-up, there has been minimal M&A regulators are moving is toward a system existing portfolio by possibly acquiring or that’s much more circular," said Gonen. "It building more MRFs in Texas. “There are activity for recycling—mostly just distressed assets since Republic Services may take some time for that full transition a lot of parts of the state and the region to happen, but as investors we’re excited where there is no infrastructure service at bought ReCommunity in 2017. While private equity buyers have been active late- to help lead and participate in that transi- the moment — a lot — and that’s going to tion."  be the primary focus," Gonen told Waste ly, it's even more rare to see one go after Dive. recycling because the business may not fit well with their average five- to seven-year holding period.

Strategic Information for a Changing Industry 69 Company Page/s Vol. XXXIII, No.3/4 ENVIRONMENTAL BUSINESS JOURNAL Q2 2020 2020 Environmental Group 22, 63 Advanced Disposal Services 67 COMPANY INDEX AEC Advisors 3, 12 GPO Group 67 Page One Consultants 52 AECOM 17 Greatbanc Trust Company 35 PA Techtonics 57 Affiliated Wastewater Environmental Services 65 Haley & Aldrich 19 Penspen 66 AIMCo 55 Harsco Corporation 42 Perkins and Will 66 AIMS Companies 39 Haskell 18 Pritzker Private Capital 27, 65 Alantra 55 Heery 14 Quantum Spatial 51, 52 Alta Environmental 52 Hennessy Capital 48 Ramboll 31 American Waste 68 HFL Consulting Ltd 53 Raymond James 65 Ardurra 16 High Energy 58, 60 Renewal Funds: 19 Ares Capital Management 49 Horizon Environmental 60 ROG + Partners 25 Atlas Technical Consultants 42 Houlihan Lokey 27, 53, 65 Ross & Baruzzini 67 Balfour Beatty 14, 18 HSA 17 RPA Inc. 53 Barr Engineering 60 HydroSimulations 54 RSK 49 Berkshire Hathaway 14 Innovyze 19 RTC Partners 16 Blue Point Capital Partners 39 Integral Group 67 Sage Environmental 60 BMO Capital Markets 42 Interstate Waste Services 28 Sandberg Consultants 44 BMO Financial Group 42 Jacobs 17 Seven Seas Water 42 Brown Gibbons Lang & Company 39 Joyce Engineering 57 SLR Consulting 53, 55 Bureau of Labor Statistics 3 JV Surveying 52 SoundEarth Strategies 24 Celtic Energy 52 LaBella Associates (LaBella) 56 Stantec 18, 19 CHA Consulting 20, 32 Landrum & Brown 66 Stellar Environmental Solutions Inc. 61 Charterhouse Capital Partners 54, 55 Langan Engineering & Environental 3 Strength Environmental. 65 Clarivest Group Inc. 63, 64 Leidos 18 STV Group 31, 35, 42 Clean Earth 42 Littlejohn & Co. 28 TAS Environmental 39 Closed Loop Partners 67, 69 Livingbridge 55 The Pritzker Organization 31, 35, 42 CME Associates 20 Macquarie Infrastructure Partners 67 The Sextant Group 52 Colliers International 14 Maffeis 67 TPG Growth 27 Conestoga Rovers and Associates 17 Marmon Group 35 TRC 24 County Waste 68 Marquez Environmental Services Inc. 58 T.Y.Lin International 66 CTEH 66 Matheson Advisors 29, 34 U.S. Bureau of Labor Statistics 2 Currie & Brown 67 Milone & MacBroom Inc. 53 US Ecology 46 Daedalus Projects 32 Mission Point Partners 19 U.S. Energy Information Administration 5 Dar Al-Handasah 66 Montrose Environmental Group 19, 66 Valicor Environmental Services 27, 65 Darg Bolgrean Menk 60 Morgan Stanley Infrastructure 42 VIASANT 65 Dar Group 14, 66 MWH Constructors 18 Wall Street Journal 22 Delos Capital 28 Novus Environmental Inc. 53 Waste Dive 68 Denali Water Solutions 27 NRC Group 46, 48 Waste Management 67 Dow Schofield Watts 49 NV5 17, 51, 52 WHPacific 52 DTG Recycling Group 64 Oaktree Capital 18, 19, 66 Winters Bros. Waste Systems of Long Island 64 ECT2 19 O’Brien & Gere 31 Wind Point Partners 27, 65 EHS-International 24 OMERS Private Equity 55 Worley 17 ENTACT 65 Ontario Teachers’ Pension Plan 42 WorleyParsons 67 Env’l Financial Consulting Group 36, 38, 40, 41 OptiRTC 19 WSP 18 Environmental Partners Inc. 24 Environmental Resources Management 55 EQT 19 Farallon Consulting 61 ENVIRONMENTAL BUSINESS JOURNAL FirstService Corp 28 GeoDesign 52 COMING UP IN EBJ Geosyntec 19 GFI Energy Group 66 EBJ Outlook 2020: Annual Snapshot Survey of 100+ Executives GFL Environmental 42 GHD 17, 52 Experts & Analysts Forecast Long-Term Impact of COVID-19 Global Restoration Holdings 28 Soilid Waste & Recycling: China Sword 3 Years In Subscribe or Renew Today! The 70% Solution: How Nuclear Can Solve Climate Change Visit ebionline.org