Key Investors Pin Success for ITC to Buyout
How’s this for a growth company? Revenue up 36% in the nine months ended Dec. 31, earnings up 27%, order backlog up 54%. And add to all that the potential for significant business opportunities in the postwar Persian Gulf.
That ought to be enough to keep shareholders happy. But for International Technology Corp., the good news has been drowned out lately by the rumblings of key investors. Some want the Torrance-based waste-cleanup company put up for sale.
In fact, the ITC story is in many ways a strange tale of a hot 1990s growth company caught in a 1980s-style fight with disgruntled shareholders. Yet, however the story unfolds, the stock could be a tremendous performer during the next few years.
In the mid-1980s, ITC was a classic case of a Wall Street darling gone bad in a hurry. The company was one of the shining up-and-comers of the environmental-cleanup business. Spurred by expectations of great earnings growth as pollution control and cleanup moved to the fore of social aims, ITC’s stock rocketed to $27 in 1986 from $4 in 1984, as revenue more than doubled to $237 million.
But as is often the case with such wild Wall Street romances, the outlook was too good to be true. In 1987, ITC stumbled badly, encountering major problems with government authorities over the use of its landfills for hazardous-waste disposal. By December, 1987, ITC decided to exit the highly profitable landfill business--to the tune of a $110-million writedown.
The news was such a shock to investors that ITC’s stock plunged all the way to $2 by early 1988. It didn’t help matters that management, led by Chief Executive Murray H. Hutchison, was increasingly viewed as unresponsive--running ITC “like a private fiefdom,” says one longtime holder.
Since 1988, however, ITC has slowly rebuilt itself into a key player in hazardous-waste evaluation and treatment. About 3,000 employees serve a nationwide customer base, including many government agencies and the military.
The proof of ITC’s turnaround is in the numbers: Total revenue is expected to top $410 million in the fiscal year that ends March 31, up from $210 million in 1987. Earnings are expected at 52 cents a share this fiscal year, versus 24 cents in 1988.
And in the year ending March, 1992, earnings could end up anywhere between 60 cents and $1 a share, analysts say, depending in part on potential oil-cleanup-related contracts in the Persian Gulf. Prudential Securities analyst Vishnu Swarup says it is quite possible that ITC could land $100 million in cleanup business in the Gulf. If so, he says, that business alone could be worth 29 cents a share.
Why, then, would an ITC shareholder be unhappy--especially considering that the stock has moved consistently higher, to $10.625 now from those $2 days in 1988?
Henry Van der Eb, a Bannockburn, Ill.-based investor who owns about 4 million (12.3%) of ITC’s 32 million shares, says he simply doesn’t believe that the firm is big enough to compete effectively in the hazardous-waste business in the 1990s. ITC has the right technology, Van der Eb says, but it needs a deep-pocketed parent.
Early this month, Van der Eb filed a statement with the Securities and Exchange Commission indicating his desire to see ITC sold. The news caused a flurry of activity in the stock, even though Van der Eb’s view has been known for some time.
“We see (ITC) going from small to medium to large very quickly,” he says. “But I don’t believe they have the capital to take advantage of the business out there.”
And in fact, Wall Street generally remains cautious about ITC’s ability to deliver: At $10.625, the stock trades for 20 times this fiscal year’s earnings estimate, well below the price-to-earnings multiples afforded many larger competitors.
Van der Eb has been buying ITC shares since their dog days in 1988, he says. His average per-share cost is around $5. Although happy that he has doubled his money, he believes that a potential buyer such as Exxon Corp. or Bechtel Group might pay $15 to $18.50 a share for ITC. A foreign company might pay more, he says.
A buyer would pick up a firm with strong technology in four high-growth areas:
* Environmental engineering, such as consulting to government agencies on hazardous-waste problems and designing treatment systems for such waste.
* Analytical services, including lab testing and analysis of hazardous wastes.
* Remediation services, which is mostly the on-site cleanup of waste (including oil spills). ITC’s thermal incinerators are considered state of the art for disposal of contaminated soil and other waste.
* Pollution control systems and products.
Money manager Frank Husic, head of Husic Capital Management in San Francisco, looks at those businesses and sees ITC as a company “loaded with assets.” But he, too, worries that ITC won’t have the “critical mass” necessary to compete with larger waste handlers in the 1990s, such as Chemical Waste Management.
Husic, whose stake in ITC is about the same size as Van der Eb’s 12.3%, won’t go so far as to say he’s backing Van der Eb’s proposal to have ITC put on the block. But at the very least, Husic wants ITC to put its poison-pill anti-takeover provision up to shareholder vote this year. He intends to send ITC a letter to that effect. “The poison pill should be removed,” he says.
And what does ITC say about the views of its two biggest shareholders? The difference between 1988 and now is that, back then, ITC would probably have said nothing at all. Hutchison is no fan of the press or of spending time on shareholder relations.
Now, Chief Financial Officer Anthony DeLuca at least is willing to reply--if perfunctorily. “Every shareholder has got the right to express their views,” he says.
Hutchison hired DeLuca a year ago, and major shareholders give the CFO good marks for reopening communications. It was about time. Shareholders spoke clearly last summer when they elected outsider James McGill to the ITC board. He ran for the seat without the board nominating committee’s sanction and won anyway.
McGill, an Oklahoman who had sold a pollution control systems business to ITC in 1986, says he wanted to get involved in an operating business again, after “hiking and skiing” for a few years. “I felt I could contribute to the company,” he said. And so far, he maintains, he has been welcomed as “one of the team” by ITC management.
Does that mean Hutchison might now listen to Van der Eb and Husic as well? Chances are slim. Hutchison, whose family owns about 11% of the stock, clearly believes he has ITC running as it should.
DeLuca, responding to the question of ITC’s size and its ability to finance its growth in the 1990s, replies that “management and the board believe that our short- and long-term plans are ones that we can execute and that they have the interest of shareholder value.”
Translation: Bug out, troublemakers.
Yet the irony is that the longer ITC stays on track--and the louder owners like Van der Eb and Husic get--the greater the chance that ITC will find itself the recipient of an offer it can’t refuse. And even if no offer arrives, ITC’s growth potential could take the stock far higher over the next few years.
THE INTERNATIONAL TECHNOLOGY STORY
Meanwhile, sales and earnings, in millions of dollars, are up sharply:
Nine months Percent to Dec. 31 change Revenue $296.9 +36% Operating income 20.7 +60% Net income 12.5 +29% Earnings per share 0.38 +27%
Revenue by division, in millions of dollars:
Nine months Percent to Dec. 31 change Environmental engineering $149.9 +37% Construction and remediation 82.0 +40% Analytical services 37.8 +14% Pollution control 27.2 +64%
* STOCK, FUND CHARTS: D2
