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How an Industry Analyst Breaks Down the Casella Waste Board Proxy Fight

November 2, 2015

9 Min Read
How an Industry Analyst Breaks Down the Casella Waste Board Proxy Fight

By Allan Gerlat

The battle for seats on the Casella Waste Systems Inc. board of directors is heating up as it gets closer to the Nov. 6 annual meeting and vote on the proxy dispute. The Rutland, Vt.-based Casella Waste wants its shareholders to re-elect its slate of existing directors. Investor JCP Investment Management LLC wants its two director candidates elected.

The Casella slate is called the White Proxy Card group and includes Jim O’Connor, long-time CEO of Republic Services Inc., who was recently named lead independent director, succeeding Gregory Peters, who continues as a member of the Casella board. It also includes William Hulligan, former chairman and CEO of Progressive Waste Solutions Ltd., Vaughan, Ontairo. And, the board includes John Casella, chairman and CEO of Casella Waste.

Leading the effort to change that mix with the Gold Proxy Card group is James Pappas, managing member of Houston-based JCP, who also is a significant investor in Casella Waste. He hopes to be elected to the board, along with Brett Frazier, a long-time senior executive with Houston-based Waste Management Inc. Pappas is looking for his team to replace John Casella and William Hulligan on the board.

Long-time industry financial analyst, Michael E. Hoffman, managing director at Stifel, Nicolaus & Co. Inc., recently talked with Waste360 about his view on the dispute and what it means.

Waste360: What’s JCP’s goal with their proxy proposal?

Michael E. Hoffman: I think JCP has made themselves very clear at this point. You look at the long history of total shareholder returns and the amount of capital that’s been spent, and (they) have an opinion. It got very personal, which is unusual, but they did.  And I’m not advocating there’s anything right, wrong or indifferent about it.

They have made their position that this company has been a poor steward of capital under John (Casella)’s stewardship, and that a change should be made. They’re prepared to go through a public process to execute that change.

Waste360: What do you see do you see as the pros and cons?

Michael E. Hoffman: I think the facts stand for themselves. If you look at it over a long continuum, this has not been a terrific (stock investment). There are some macro circumstances that have made for a challenging operating environment for Casella to perform, and others that have been clearly in their own control. In hindsight, would John and his team have spent the amount of money spent to develop the amount of airspace they developed, all in sort of a large chunk? Would Casella have been better off developing some airspace and then consolidating collection to capture volume to create the operating leverage? And ultimately (would they) have gotten to the same end point, but shown real economic progress along the way. At the point they completed the bulk of this capacity expansion and were just about to turn the corner and start doing tuck-in acquisitions, (the company) ran right into the buzz saw of the great recession. Now they’re sitting with a highly levered balance sheet and a dramatically changed economic environment, and they haven’t been able to do the tuck-in acquisitions.

This is really about the Western region. (Casella Waste) should be given credit in the last three to four years for making material improvements in the Eastern region. The Western region has too much airspace in that market. The only way to improve the asset utilization is a significantly low price, which is what they’ve ultimately had to do, to try and drive volume into those assets. Or be able to consolidate the market so that they control the volume and then you make the economic decision to redirect it to their assets, and still be able to hold onto pricing at the street. They don’t have the balance sheet to do that.

That’s their challenge as a company. To (President and COO) Ed Johnson’s credit–and he should be given this credit because I think he’s the one that brought the tools and the focus-he’s returned Casella to be able to deliver positive price. Before he got there, they hadn’t had positive price in a long time.

So I don’t think of Casella as a broken company. It’s highly levered, and the challenge it has is, can it grow out of that leverage with the limitations of the balance sheet by improving the performance of the business. It’s just a fact; the Northeast isn’t growing as fast as anywhere else in the country.

Ultimately what Pappas is arguing is that the shareholders would be better served by a sale of the company, given that this is a seller’s market. I think that’s probably the most compelling question. Why wouldn’t the board run a parallel path given that it is absolutely a seller’s market, and see what the temperature of deal market is? There have been suggestions that in the past they have looked at that– not for probably four or five years–and came away saying, that’s not very attractive.

Waste360: Does the fight largely come down to whether to sell the company or not?

Michael E. Hoffman: The fight right now is, do you persuade the shareholders that the Pappas slate will serve the company better by forcing more aggressive actions around improving shareholder returns? Will the Gold Card slate be better for shareholders, or will the White Card slate?

The short-term fight is about that. The long-term view of a shareholder, do you believe that this company is on a path to drive total shareholder returns? What could you sell the company for today versus what do you think that company is worth in 2018? If you give the company the benefit of the doubt they succeed in the goals–which are challenging, because the landfill part of it requires things that they don’t control to happen. Specifically, Progressive (Waste Solutions Ltd.) has to win the New York City contract and all that volume goes up to Seneca Meadows. And then the Manhattan Transfer Station does get built and completed and operates, and therefore Covanta brings that volume to Niagara Falls. And the combination of those two big chunks of volume coming into that market changes the economics of that market. Without that, you’re not changing the economics.

Waste360: Do you see it going to either the Gold slate or the White slate?

Michael E. Hoffman: Shareholders tend to keep that to themselves. This story has had enough challenges over the last decade. If you plot the share price from a charting standpoint for a decade, it’s not the prettiest chart in the world.

Think about it in the context of a decade: it’s down. You think about it in the context of five years, it’s basically flat. The last few years it’s been up, principally because of a lot of noise around this stuff. This has not performed well as a stock. So you’re sitting here, if you’ve been an owner, and the liquidity is challenging, and you’re a meaningful owner–if you own more than 1 percent of their stock–it’s a hard stock to get in and out of if you decide this isn’t going to get any better fast.

If you’re thinking any of those things, then you have to ask yourself, what creates the greatest level of improvement in the total shareholder returns, in a timely fashion. Pappas isn’t wrong when they go, “the company hasn’t been terribly good at predicting and meeting guidance.” It hasn’t. It’s getting better, but … Those are the things that are going through people’s minds.

Now having said that, the White Card slate, what company in the garbage business wouldn’t want to have Jim O’Connor and Bill Hulligan on it? Those two guys have forgotten more about garbage than most people will ever learn.

Brett Frazier is a peer of theirs. James Pappas is what he is. But Brett Frazier deserves to be on that list. He just happens to be on a different card. Remember Brett Frazier ran a $4.5 billion business for a decade for Waste Management that was all of the markets in which Casella is operating in, and then some. He was the eastern region (executive vice president). This was a big business, and it was one of the best operating businesses at Waste Management. So this is a talented executive. And this spurious remark that the only board he’s ever sat on is a country club board isn’t fair to his solid waste pedigree.

So that’s the challenge. If you stick with management, do you believe that O’Connor and Hulligan will bring the independence that will reflect who they are as people? Neither one of them suffers fools lightly or are going to sit idly about waiting for something to happen. They’re going to keep their hands on the back of this organization and push. Based on that you could see where shareholders would go that route.

The other side of it is will they be able to influence enough change within the context of the board’s willingness to take a more aggressive position, because this board from the outside world doesn’t look terribly proactive.

Waste360: With either scenario, how do you see the aftermath of that playing out?

Michael E. Hoffman: Like I said, I don’t think Bill Hulligan or Jim O’Connor would ever be accused of being shrinking violets. I know them well enough to know they’re going in and be independent. Nobody should be confused that just because they’re on the White Card, they’re not going in as “friends of the company.” They’re going in and do their job. That’s who they were professionally.

So in that context I think there’s much to be said for the influence they can have. This has been a weird board to watch as an outsider looking in. There are people on that board who should know better, and yet things were approved and continued. So how quickly can they influence that? I’ve sat on a public board before, and I can tell you there’s nothing more dysfunctional than the discord that exists if there’s friction at a board level.

If the Gold Card slate wins, you can be assured they come in with an objective of improving total shareholder returns; but again, probably far less sensitive about how aggressive they may choose to be or not be.

I think that’s what shareholders have to decide: If we stick with the White Card, do O’Connor and Hulligan come in, and behave in a manner which would be consistent with how they operated companies that they were senior executives at in this industry in the past?

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