The Interesting Case of Bennett Environmental

July 11th, 2011 by Potato

I saw someone on BNN make Bennett Environmental (TSE:BEV) a top pick this week. I had never heard of the company before, and I like the phrase “classic value play ala Benjamin Graham” so I decided to have a look.

Irwin Michael isn’t just talking his book in the normal sense — he’s a major shareholder with ~18% control (or rather, his fund is). There was a recent proxy battle with a new board eventually being installed, and the proxy circulars are surprisingly good reads: describing a drama where the old board had next to no ownership stake, and was allegedly trying to get the company to use its cash hoard to buy a company related to a director, or make otherwise bad deals. And speaking of a cash hoard, they have a pretty hefty one: the stock closed Friday at $2.22, and had about $1.65 in cash.

Operationally, the company’s in trouble. When they have business, they generate tons of cash and look fantastic. But the technique they use for soil remediation is energy-intensive and costly, so it only makes sense to fire up the equipment for a large batch of soil. Thus, they stockpile contaminated soil until there’s enough to run a batch for a few months at a stretch. They shut-down in September (10 months ago!) and are still only 3/4 of the way to having enough soil stockpiled to begin another processing run. It’s not a very attractive business if they’re only making money in alternate years, and burning ~$7M/year twiddling their thumbs the rest of the time. Though even then, if they were trading closer to book (i.e., <$1.75) I might take a small position just to see what happens. I won't even bother putting this one on my watch list to see if it gets that cheap though, because with a billion dollars to play with, if ABC Funds wants to put a floor under it at ~$2 they easily can. Mr. Irwin's point was that with a new board and that big pot of cash, they'll go out and buy some other company which will improve their position: maybe something in a related industry that isn't quite so crushingly cyclical. It could be an interesting ride, but I'm not seeing enough safety at these prices to buy in on the what-ifs of an as-yet unidentified acquisition and the merits of a new board and management. Plus, there's a huge question with acquisitions like that: maybe they'll buy a company and the synergies or the price of the deal itself will return more than the cash value to the shareholders. Or maybe they'll over pay for something, burn through the remaining cash while they wait for contaminated soil to pile up, and have to declare bankruptcy. Or maybe something in-between: an acquisition that brings value, but only just enough to make up the difference between the $1.65 in cash and the $2.20 share price, leaving anyone who buys now somewhat disappointed. Anyway, interesting story, but not for me.

2 Responses to “The Interesting Case of Bennett Environmental”

  1. Patrick Says:

    If Bennett is going to buy company X, and there are no synergies, investors would have to wonder why they wouldn’t just buy company X themselves. Is Bennett’s chairman The Next Warren Buffet?

  2. Potato Says:

    Well put, Patrick!