JCP Investment Management is targeting Casella Waste Systems (link to their letter). It owns 5% of this $220M market cap waste collector / landfill operator and is nominating three members for the board, including former Waste Management executive Brett Frazier, partner in several Texas based waste and landfill operations Joe Swinbank and finally the JCP founder James Pappas.
JCP took notice of Casella after the company has underperformed major peers like Waste Management and Republic Services over the last one-, three-, five- and ten-year periods. JCP blames this on the company’s subpar investments and weak operational structure. In reality, all that is rooted in the company’s dismal corporate governance.
The average board tenure is 15 years, with 4 (of 9) directors having been on the board for 20+ years. Two brothers, Doug and John, (one CEO and the other president of the construction subsidiary) are on the board and both own 100% of the Class B shares, which has 10-to-1 voting power. The company has paid Doug/John related companies $70M since 1995 (nearly 12% of cumulative cash from operations) and paid shareholders nothing.
Debt is also a big overhang here, trading at 6x debt to EBITDA (peer average is around 3x). Divestitures could help work that down. JCP has a long road ahead with this corporate governance nightmare, at least a three year runway. But one way of thinking about it includes, if JCP can get some corporate governance changes, we’ll likely see 8x EV/EBITDA (versus the current 7x and closer to peers), and JCP will be a cost cutting fool (estimated to get EBITDA margins closer to 20% - still well below peers), and there could be a third of debt cut in 36 mos., ultimately getting shares to between $13.50 and $15.