Recycling Centers / large private companies DD?
Evaluating a recycling center run by a private company — was curious if anyone has invested in anything similar and also how to best do DD on companies like this to properly evaluate risk w/o Moody's etc.
[{"id": "flytkbf", "text": "What type of recycling? Also, is this a sale leaseback, or a purely investment sale?", "replies": [{"id": "flz37uo", "text": "Purely investment", "replies": [{"id": "fm090nk", "text": "Having worked for a debt fund that see 100\u2019s of these (and never lend on them), I personally wouldn\u2019t look at it. \n\nIt was the new hot investment in 2005 and they\u2019re still knocking around at 10/15m with 25% returns. If it was that good, unless the owner is getting out why is he selling (?) and why wouldn\u2019t funds and other investment vehicles be getting involved if it was that stable as a source of income. If they were that profitable, wouldn\u2019t an existing owner of a plant with the knowledge and resources buy these before they hit the market? I don\u2019t buy into it myself.", "replies": [{"id": "fm1p0os", "text": "That makes a lot of sense! What sorts of deals do you like at the moment?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "flyua4v", "text": "Big question you but basically you want to do the same thing that Moody's (ostensibly) is doing.\n\nVerify their financial statements by checking against their bank, customers, invoices, etc.  Big thing is you want to read their leases and important agreements--make sure there aren't any sneaky terms that might inflate the company's value artifically.", "replies": [{"id": "flz1iei", "text": "What sort of things artificially inflate a companies worth?", "replies": [{"id": "flz8700", "text": "Rent increases for instance.  Say they have a lease with the city or whoever, been paying $5000/month for the last year\u2014landlords sometimes give first year discounts or free rent for a few months\u2014but it goes up to $7000/month later this year.  Their costs are going up $2k/mo so future earning will be lower by $24K/year.  If you value the company at 10x earnings then that could be a $240,000 difference in price.  \n\nThis applies to basically anything\u2014deferred compensation to employees/executives, vendor agreements, contracts with apartment complexes (do they get a discount next year?  A month of free trash pickup if they pay on time for the next 12 months?).  \n\nFundamentally what you are trying to do in any Due Diligence is verify the metrics that you are relying on to value the asset.  The seller\u2019s gonna give you optimistic metrics wherever possible.  \n\nOff the top of my head make sure whatever landfills or recycling centers they\u2019re using are gonna stick around at manageable prices.  Maybe the city/county/state government is eyeing that site for redevelopment, planning to use eminent domain on it, or maybe nearby residents are suing them for bad practices (real or imagined).", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "flywvco", "text": "Does a recycling center typically have enviro issues? Even though it\u2019s a private company I would imagine there is still a lot of regulatory concerns.", "replies": [{"id": "flz394d", "text": "Yeah they do, so that is a huge concern.", "replies": [{"id": "flz3mbi", "text": "This would be my biggest concern; sold a site related to this and I found it very helpful to find an attorney who is well versed in the details beyond just a Phase I\n\nThere may extensive time horizons where liability is financially devastating.", "replies": [], "depth": 3}, {"id": "flzbp5d", "text": "Getting property/business insurance is going to be costly. I would imagine getting debt for it would be tough but any lender is going to demand a full environmental indemnification anyway. \nThe municipal and zoning regulations  should be looked at it as well as licensing by the operator. Even if it is currently zoned and licensed to operate as a recycling center does the town/state have different future plans for that site? \nWhat kind of compliance is required? Reporting to EDC or DEP (DEP here in NYC for local enviro endorsement)\n\nI\u2019ve never been in a deal with a recycling center but have dealt with sites with environmental issues so I hope my points are somewhat relevant!", "replies": [{"id": "flzw7cd", "text": "Yeha thanks for this response. Pretty clear that I\u2019d be getting in above my head with this.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "flzbzjf", "text": "I'm in both of these businesses. Recycling is in a huge crisis right now as China's national sword has caused chaos in global waste markets. Prices have collapsed for most recycling goods (mixed paper, aluminum). Many recycling centers are closing right now. Also Covid 19 is making haulers go straight to  the landfill.\n\nPM me if you want to talk more about it", "replies": [{"id": "flzw8zr", "text": "Thanks, I think you\u2019ve convinced me to not invest!", "replies": [], "depth": 2}], "depth": 1}, {"id": "fm08mgn", "text": "Regulation is my biggest concern with an asset like this, how much of the income stems from the government and or its policies regarding recycling. I.e. are businesses being forced to recycle in a certain way, and if the policy changes how much of that income would be affected. \n\nMy key views on regarding private companies would be; how much income is unattainable to the next business owner and how many expenses are also unattainable. I.e. favourable leases owned by the owners, who rent review as soon as you are the owner. Are there any agreements with friends, family or their other companies which are reducing costs dramatically. What you really have to do it create a market value and market cost with the markets costs and work backwards. I.e. if rent on those trading estates is \u00a325,000 a month, how much is our company paying, if it is lower, revert to \u00a325,000.", "replies": [], "depth": 1}]