Cleaning Up In The Cleanup Business?

The once-tantalizing game of takeovers is no longer in vogue, but some pros continue to engage in tracking down potential buyout bait. Attwoods, trading on the Big Board at 9 a share, looks as if it already has three strikes against it, including disappointing second-quarter earnings. So why do some big investors think Attwoods is quite a steal? Buyout buzzings, of course.

Poor results reported for the last quarter should have been ample reason for investors to scamper away, considering the market's acute sensitivity to earnings performance nowadays. And Attwoods is in a business that has lost its big appeal on the Street: waste-management. One other count against Attwoods: It is by no means a household name. As a British company whose operations are the fifth-largest in North America, it is trading in the U.S. through American depositary receipts.

TAKEOVER APPEAL. No matter, insists investment manager Jim Awad, whose Awad & Associates shepherds more than $100 million. What will drive the stock up is the company's takeover appeal. Laidlaw, the third-largest solid-waste management company in North America, owns 35% of Attwoods. Awad has been accumulating Attwoods stock because "it makes perfect sense for Laidlaw to buy the rest of Attwoods shares at its current price," he says.

William Fisher, an analyst at Raymond James & Associates, estimates that Laidlaw could make a bid of about 15 a share, in cash and debt, for the remaining 65% of Attwoods. Laidlaw's balance sheet, he notes, is flush with more than $130 million in cash--strong enough to help finance such a bid. Over the past nine months, the would-be suitor has reduced its debt-to-capital ratio from 47% to 39%. Laidlaw also has roughly $700 million in unused credit lines, plus $300 million in long-term debt financing. Next year, Laidlaw is expected to generate free cash totaling $100 million.

Why would Laidlaw want to acquire Attwoods? Overseas markets offer the best potential for growth, explains Fisher. Attwoods is in the business of collecting, recycling, and disposing of municipal, commercial, and industrial waste in Britain and Germany as well as the U.S. So by acquiring Attwoods, Laidlaw will get a sizable foothold in both Britain and Germany.

Integrating Attwoods' solid-waste services with Laidlaw's hazardous-waste disposal expertise in the cleanup of toxic waste in Germany, says Brown, "could have significant earnings potential" for Laidlaw.