Frontenac, Mission Ventures Sweep Up Safety-Kleen Unit –

Frontenac Company and Mission Ventures recently led a management buyout of Safety-Kleen’s 3E Co., a provider of hazardous-material information management outsourcing. The acquisition closed at the end of September and represents Safety-Kleen’s efforts to pare its focus exclusively on its core businesses in the parts washer and waste management services industries.

The divestiture for Safety-Kleen comes on the heels of the sale of its Chemical Services Division to Clean Harbors at the start of September.

Frontenac and Mission equally split the financing of the deal, combining for a total of $25 million in the all-equity transaction. Less than half of that total, though, went towards the actual acquisition, as the bulk of the financing was put into a line of credit designed for acquisitions. Frontenac Principal Patrick Blandford said it tends to be relatively conservative in the financing of the deals, and added that as 3E represents a growth platform for the two firms, the use of leverage wouldn’t materially alter the potential returns.

This isn’t the first time Frontenac and Mission have worked together. They bought Stellcom, a San Diego-based wireless company, in a $35 million deal that closed near the end of 2000. Blandford told Buyouts that the two firms’ prior experience proved helpful in this latest effort.

The 3E Company is an environmental health and safety compliance and information management company. It has developed a comprehensive MSDS database and also operates an emergency response center that is available 24 hours a day, seven days a week. 3E has posted profitable annual growth for the past 10 years and going forward, Frontenac and Mission believe the company can eventually reach $100 million in annual revenues. The company was first acquired in 1997 by Safety-Kleen, which was itself acquired in a hostile take-over by Laidlaw in 1998. Safety-Kleen filed for bankruptcy after allegations of accounting irregularities in early 2000 led the company to restate its financial results for 1997, 1998 and 1999. However, Blandford notes 3E continued to churn out solid earnings and revenues throughout this, and, in the end, Safety-Kleen’s bankruptcy allowed Frontenac and Mission to acquire 3E at a “very attractive” price.

Blandford said the firms were especially attracted to 3E’s “recurring revenue business model,” noting the company typically posts a 95% renewal rate for its yearly contracts. The industry is fairly resistant to recessions, as it is driven by compliance and regulatory needs. Blandford also points out that the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA) continue to increase their governance over the handling and disclosure of chemicals, which only helps 3E going forward.

“The market for the services offered by 3E is estimated to be in excess of $1 billion annually,” Mission Ventures Managing Partner David Ryan said. The trend for outsourcing the information management in the hazardous materials industry appears to be on the rise. “Currently 300,000 companies in North America manage their OSHA reporting requirements in-house, with less than 5% outsourcing,” Ryan notes. However, he cites a recent study as showing that 33% of the companies intend to eventually outsource their environmental health and safety management needs.

Looking ahead, Frontenac and Mission expect the company to continue to post strong organic growth, outlining expectations for roughly 20% annually. As part of its plan to spur that growth, the company will expand its primary focus to the producer and supplier side of the chemicals industry, rather than just the client side. The firms will also be actively looking for add-on acquisitions to supplement the business. Blandford states 3E will initially be targeting related companies that will be able to leverage 3E’s existing infrastructure. Additionally, Blandford details that the industry is currently fragmented, with around 30 to 40 companies in the space. Of those companies, 3E will be specifically looking at the call-center operators that could benefit through the employment of its database and infrastructure.

Frontenac used the $560 million Frontenac VIII L.P. fund for the purchase, while Mission Ventures employed Mission Ventures L.P. for its half of the equity.