Looking Ahead

Recently, asset disposition and electronics recycling firm Intechra, Jackson, Miss., announced a change in ownership. Environmental Capital Partners (ECP), a New York City-based private equity firm, acquired the assets of Intechra Holding Corp. (IHC) in mid-August, forming Intechra Group LLC. While ECP holds a majority stake in Intechra, Marathon Asset Management, New York City, converted debt in IHC to an ownership stake in the new company.

The change in ownership comes at a time when many electronics recyclers and asset disposition firms are still feeling the effects of the economic downturn, which has resulted in softer commodity prices and reluctance on the part of corporations to refresh their IT equipment. Additionally, the electronics recycling industry has been hampered by negative press coverage that emphasizes the less-than-reputable firms that claim to be recycling electronic assets.

This spotlight on unscrupulous activities by some companies has helped to bring about a number of certification programs aimed specifically at electronics recyclers, including the e-Stewards Standard for Responsible Recycling and Reuse of Electronic Equipment introduced by the Basel Action Network (BAN), Seattle, and the Recycling Industry Operating Standard (RIOS) developed by the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C., that incorporates the Responsible Recycling (R2) practices for electronics recycling encouraged by the U.S. Environmental Protection Agency.Navigating successfully in this vague landscape can be a challenge for many companies, but Intechra’s CEO Michael Profit prefers to focus on the plateaus waiting amid the terrain rather than on the valleys.

“We are excited about where our company is and the opportunity to work with ECP and Marathon going forward,” Profit says. “Each of these firms has demonstrated an absolute commitment to the environment and to supporting our management team in maintaining Intechra’s leading industry position and developing the resources and client tools necessary for the future. We have a tremendous opportunity before us in an industry that continues to grow and define itself. We are excited about being the leader in that industry and having a strong voice in how the industry grows and evolves.” He adds, “We’re excited about the opportunity to set the bar high with a RIOS/R2 standard and to focus on responsible recycling, continuing to provide our clients with the services they have come to know and trust.”

Profit told Recycling Today about the factors that led to Intechra’s sale to ECP as well as the challenges the asset disposition and recycling segments are currently dealing with.

Recycling Today (RT): Can you please tell me about the factors that led to Intechra’s recent sale to ECP?

Michael Profit (MP): Intechra was founded on a recognition of the need in the market for a company to establish a strong presence in both geographic footprint and in service offering and capability, to really bring a single provider to market where clients could look at a breadth of capabilities available to them across the nation with integrated capabilities around logistics, asset disposition, physical security, remarketing capability, recycling capability, etc. Intechra was founded to accomplish that mission and to provide that level of capability and service to the market. Our growth was through a series of acquisitions that allowed us to establish that footprint and set of capabilities. We made tremendous progress and continue to offer a great service to our clients and to our markets.

We ran into an economic downturn last year that put a lot of pressure on the company due to its existing capital structure. These historic acquisitions were funded with a combination of debt and equity. As the economy continued to erode in performance and impacted our business, it made sense for us to look at restructuring the company’s capital base in a different way.

We set about looking at new investors in a way that allowed us to bring some additional capital into the business. Marathon Asset Management as our lender was in a secured position to protect its investment by security in the assets of Intechra’s operating groups. Ultimately the transaction that was completed with ECP involved the sale of those assets from Marathon as a secured lender to Environmental Capital Partners. We found ourselves in a very inflexible position from a financial state, and [this transaction] gives us that flexibility back. It eliminates the legacy debt from Intechra Group’s balance sheet, it provides us with a more rational ownership structure and really poises us for continued success in the near term and for growth opportunities going forward.

RT: When did you begin pursuing this transaction with ECP?

MP: The process that led to the culmination of this transaction with Marathon and ECP started over a year ago. Over the past year or so, we have really explored the opportunity to restructure the capital base of the business. This level of debt that we were interested in retiring was taken on in 2007 during the course of the acquisitions that were being made to fill out the rest of Intechra’s footprint and portfolio. We knew at some point that debt would have to be addressed.

We started looking in the first and second quarter of 2008 at options to attract additional equity investment in the business and to retire that debt. That progress was stalled as the economy took hold of not only our business, but most other American businesses, and really started to show the negative effect on the performance of the business. We stayed focused on right-sizing our operations and cost structure along with changing revenues and at no point wavered from the commitments that we make to our clients around information security and data protection and the environmental stewardship principles that we have . But the deteriorating economy resulted in equity being more difficult to attract at valuations that made sense to our board of directors. Our advisor, Lazard Middle Markets, assisted in the process and helped us change gears in our capital-raising effort. We ended up with an opportunity to enter into a partnership with ECP and Marathon, which we think is a great combination of three firms pursuing same objective.

RT: You said you went through a process of right sizing. How different does the business look now as compared to late 2007 when you completed all of the acquisitions?

MP: As part of acquisition strategy, we ended up with some excess capacity. I don’t think that’s an unusual state to be in, and some rationalization in the structure of the business when I joined in 2008 was truly necessary. We took out some excess capacity and we closed a couple of facilities, consolidating that business into other existing facilities.

RT: What role will ECP have in Intechra going forward?

MP: ECP is a fund that is targeting mid-market companies between $20 million and $150 million in revenue specifically in environmental industries. We are the first acquisition they have made, and I think they view Intechra as a platform company that they can continue to grow from, and future acquisitions may create some synergistic value between the two companies as well. They will be active investors, but I think they will continue to look to the existing management team and leadership of this company to effectively and efficiently run the business. In fact, one of ECP’s conditions of the transaction was that the existing management team stay intact. I don’t think they were interested in pursuing the deal if we were not going to be part of the company. They will be active investors, certainly as board members, but I don’t expect them to be involved in the day-to-day management of the company.

RT: What was Intechra able to accomplish by virtue of the Marathon Asset Management investment? 

MP: The funds that Marathon provided in the form of debt were used to further extend the geographic footprint and the service offering of Intechra. As I mentioned, they continue to be steadfast in their belief that this industry will continue to experience significant growth and that the capabilities and footprint that Intechra has amassed to go to market with, the service offerings that we provide and the organization that we’ve built is and will continue to be the leader in this industry going forward. They consistently have been fully behind the business and chose to convert the debt to equity as the transaction closed so they could continue to be an active participant in Intechra going forward, and we are excited to have them continue to be part of our team. 

RT: How do you expect Intechra’s operations will be affected by the change in ownership?

MP: Our commitment to the environment, to the security and protection of private and confidential information, to the reuse of assets that still have a marketable life in them and to the efficient and rational disposition of assets that no longer have useful life will certainly continue to be the values that we operate the business on.
Today our balance sheet is strong, the business is performing very well in the environment that we are in. Cash flow continues to be strong. I think our business is performing extremely well compared to others in the economy today.

Our clients, industry analysts and our employees all continue to be enthusiastic about the direction of the company and the outcomes that this transaction will provide to us in a forward-looking strategy.

RT: What role do you think various industry certifications will have in differentiating credible electronics recyclers from the less scrupulous operators?

MP: If there is a theme our industry needs to adopt in 2010, it is to solidify and promote a set of standards that really differentiate the quality providers from the lesser providers. The industry has had some well-earned black eyes over the last few years from unscrupulous companies doing the wrong thing. We are very excited about some of the momentum that has built around the EPA taking firm action against some of the companies that have been behaving irresponsibly. We think that the development of the Responsible Recycling standards, R2, by multi-stakeholders who bring expertise and a broader industry perspective is crucial to moving this industry forward to a level of certification where the best parties can easily be recognized and stand out from the companies that are playing off the playing field. Combined with a standard like RIOS, where there is an accredited third-party certification body that is attesting to a company’s ability to support the R2 standards, we believe that is clearly the right direction and will look forward to those standards being enacted.

RT: Do you think and industry-specific standard is going to become more attractive to your customers or are they still inquiring about ISO certification?

MP: They are certainly still inquiring about ISO standards, and in fact we carry two ISO standards as well as a health and safety standard. We are ISO 9001 and 14001 certified for quality management and environmental management, as well as OHSAS 18001 for employee health and safety.

I think ultimately the RIOS program aspires to be best of breed of all three of those standards and certifications rolled up under a specific industry focus so that there is a more straightforward look at how a company manages its quality programs, its health and safety and environmental programs with the added benefit that because it is developed by industry participants who bring varying views about how this is best done it also looks at the management of downstream commodity buyers and flows so that the whole package is tied off. It doesn’t just stop at quality or environmental management, it holds that system responsible for the downstream results.

We certainly would not move away from ISO certification in short term. We would continue to maintain those certifications simply because they are such a widely recognized standard. We have already started trying to educate our clients in as broad a market as we can reach as to the benefits of RIOS and R2. We would look forward to carrying both the RIOS/R2 and ISO certifications.

In addition, there are organizations like IDC that have published a GRADE standard, Green Recycling and Asset Disposal for the Enterprise. It is a great attempt by another credible organization to define the rules of how this industry behaves in a way that helps large enterprise clients understand clearly those companies that are managing their businesses in a responsible way. I think at last count, nine companies were GRADE certified.
We ultimately think that RIOS and R2 will be the set of standards that encompass all of the needs and requirements and accountability of the industry.

I guess it’s the evolution of an emerging industry. I would love to get to the point where the term “e-waste” was stricken from our vocabularies and the discussion was around responsible reuse and responsible recycling and we get away from the commoditization of providers or services in this industry are basically looked at as the electronic junk man.

Sometimes it’s just a matter of educating people that there are proper ways to do this and there is value in each of those streams that not only lessen impact of the disposal of those streams environmentally, but there is a financial incentive behind it.

RT: What do you foresee as the foremost challenges for electronics recyclers in the next decade?

MP: We’ll call it the opportunity rather than the challenge.

I think it really goes back to establishing a set of certifications and standards that is clear for not only industry participants but also for buyers of those services to understand and clearly differentiate between companies that are behaving responsible, that are transparent in their performance and behavior and that are truly offering value from those companies that don’t have that level of discipline and vigor in their operations. It is a great set of standards for the industry to be able to manage itself and police itself around. More importantly it gives the buying community a true sense and a true set of indicators and direction around the companies they should be engaging for these services.

I think we will likely see some level of movementby the federal government in addition to the work that some of the state governments are already conducting. I think that 2010 will be an interesting year for the solidification of the industry and governmental views on the industry in really establishing the right standards to operate the businesses from.

It has been a challenging 18 to 24 months for the industry, and we’ve seen the exit of some players from the industry. It is going to be an interesting 2010 if we continue to see recovery and growth in the economy and as IT spending habits return to some sense of normalcy. How do corporate clients really look at service providers and how do they really look at effectively managing the outflow of used assets into resellable markets?

Michael Profit is chief operating officer of Intechra, based in Jackson, Miss. He can be reached at mprofit@intechra.com. More information about Intechra can be found at www.intechra.com.