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    Wednesday
    Mar062019

    PERFECT COMPANY: Should you buy TerraCycle?

    Tom Szaky, the founder and CEO of Trenton-based TerraCycle, is a charismatic leader. I first heard Tom speak at the Trenton Rotary Club in 2005 when he fascinated the audience with the novel idea of “negative costs.” Because other companies paid TerraCycle to re-use their waste products, TerraCycle had a better than 100% margin. His first product – a fertilizer spray – was distributed by Home Depot and Lowe’s, and seemed like a run-away hit.

    These days, Tom speaks to the World Economic Forum. In January in Davos, Switzerland, Tom announced TerraCycle’s Loop Alliance Initiative, which will ship leading brands in recyclable packages. Brands like Tide, Dove, Gillette, Hellman’s, Clorox, Pantene, Haagen-Dazs, and eighteen others have already signed to ship in the Loop box. Empty containers will return to a Loop processing plant for cleaning and shipping.

    The public has an appetite for TerraCycle and its mission. Globally, 14 articles are written about TerraCycle every day. The fastest growing part of TerraCycle is its Zero Waste boxes, which you can buy to ship back various problematic waste: for instance, fluorescent tubes. Instead of schlepping to the Mercer County Recycling Center once a year to idle in a lengthy line of cars, you can send the tubes back to TerraCycle where they will recycle the components into raw resources for new products.

    If you ask almost anyone about recycling, they will usually mention the plastic islands of the Pacific and earnestly assert that something must be done. They might also be aware that China has stopped taking our trash, that landfills in the northeast are filling up fast, and that the U.S. generates about ¾ ton per person in solid waste per year.

    Waste is a big problem, and Tom Szaky has created a company dedicated to the proposition of recycling items that are not normally recycled – in fact, dedicated to zero waste, which is a challenging idea that requires someone with charisma to sell it.

    We live in a time when story-telling may be the most important quality of a leader. You can make anything and you can finance almost anything, but only if you can tell a great story. At some point, the business falters and must adjust (this is so common that it is more fashionably called “pivoting”), and the leader must spin a new story. For Tom Szaky, this meant leaving behind his original product – the fertilizer spray – and re-focusing the company on creating new ways to turn waste into source materials.

    Companies sell their story to new employees, new customers and new partners. It’s very hard to enlist major companies in new systems, but Szaky has lined up great brands and retail partners for its Loop Initiative. The largest retailer in France – $79 billion “hypermarket” Carrefour – has signed on as has the largest retailer in the UK – $56 billion Tesco PLC.

    When I asked TerraCycle employees about competition, they could not think of any, which is sometimes a sign of naivete, but may be true for TerraCycle. Dumping waste – “tipping” in the industry parlance – is an easy, thoughtless way to make money. Why would anyone already in waste want to invest in innovation?

    Let’s say you had a nice career at Waste Management, a company with sales of almost $15 billion and a $43 billion market cap. Would you want to be the guy who begs for funding to start a new money-losing waste-mining initiative? No, you would want to be the hero in the finance department who makes the bold decision to buy TerraCycle after it’s done all the hard work and sales are taking off. Newsflash: “Genius financier makes smart move into innovative waste processing.”

    This kind of deal is already happening: in 2017, tire maker Michelin acquired Lehigh Technologies of Tucker, Georgia, which turns used tires into Micronized Rubber Powder feedstock for new tires.

    Of its 250 employees world-wide, TerraCycle has 10 scientists and engineers lead by former Dupont scientist Ernel Simpson. Ernel and his team have developed proprietary processes that turn waste usually thought to be non-recyclable into consistent feedstocks for other products. For instance, cigarette filters can be turned into plastic lumber, dirty diapers into roof shingles, and aluminized plastics (juice pouches) into sound deadening material. An important part of TerraCycle’s process is ensuring that the resources they extract conform to consistent specifications that enable reliable manufacturing.

    TerraCycle protects its processes as trade secrets rather than patents, which are expensive, require you to disclose your methods, and expire after 20 years. Other valuable trade secrets include Google’s search algorithm, Kentucky Fried Chicken, and The New York Times Bestseller List.

    TerraCycle is unlike any other Perfect Company because it is not a public company. It is conducting its own Reg A offering that began in January 2018, and is currently extended to mid-January 2020, but can close at any time. TerraCycle has never accepted venture capital and, by conducting a Reg A offering, is enabling anyone – not just accredited investors – to participate in the offering for as little as $100 per share, though you must buy at least seven shares for a total investment of $700.

    If the entire offering sells out, TerraCycle US will be valued at about $71 million depending on the selling expenses, which are estimated at the required maximum for the offering, but could be lower. The public is buying preferred shares, which can be converted to common; there will be a total of 750,000 preferred and common shares if the entire offering is subscribed.

    This is a private offering, so you will not have liquidity – that is, you will not be able to call your broker and say, “Sell!” if you need the money, but you can always ask the company if it would like to buy you out. The company says it would like to have a liquidity event in four to six years – that is, an event that enables shareholders to cash out. This is usually a purchase of the company or a public offering that would enable you to sell your stock into the public market, which, one hopes, has risen to a much higher price as a result of a fevered interest in TerraCycle and recycling.

    At this point, I would like to say, “Wow! Charismatic leader, profits, dividend, Loop, proprietary processes, world-wide operations, planetary crisis … what’s not to like? TerraCycle is a profitable, growing, innovative company that addresses an important global program.” However, it’s not that simple. The Reg A offering is for TerraCycle US – not the world-wide company. Loop is a spin-off with separate shareholders, so you would not participate in Loop – even in the U.S.

    TerraCycle U.S. has about 65 employees and is raising money to buy other companies with recycling technologies. Its first acquisition, Air Cycle of Lisle, Illinois, makes the Bulb Eater 3, which ingests a fluorescent tube in a second and has helped recycle 285 thousand grams of mercury.

    Here are a few things you’ll learn in the Offering Circular:

    You have no voting rights. Voting is over-rated. For all practical purposes, small shareholders’ votes don’t count anyway, and you never had any voting rights in great companies like Google either, which is controlled by its founders; if you had bought Google early on, you would be thrilled with your non-voting status.

    TerraCycle US can buy back your stock after 18 months. At first, I thought this limited the upside, but the management explained that they don’t want difficult small shareholders, and that, anyway, they would have to buy stock back at a fair price or face legal problems. I recall a shareholder who once left a rambling, expletive-laden message on my home answering machine because I took off on Friday for my fifth wedding anniversary. Some people think they are the next Carl Icahn; building a business is hard enough, so having an option to take them out is prudent.

    The offering is a liquidity event for JH Terra, an investing vehicle that has owned the parent company stock since 2008. JH Terra has traded its stock in the parent company for a chance to sell stock in this offering. You’re buying stock, and JH Terra is selling its stock for cash. The founders are further securing their control in the parent company (or at least reducing their dilution) by removing a shareholder while providing an exit strategy for JH Terra, an early investor. Financing a small, growing company is a creative process and a tug of war between losing control and enabling shareholders to earn excellent returns, so allowing JH Terra to trade parent stock and then sell into this offering seems like a reasonable treatment for an early shareholder who has held on for 11 years.

    The company is committed to paying half of after-tax profits in dividends. That’s nice, but hard to forecast.

    You may laugh out loud. I fully agree, but you rarely see this kind of statement in print: “Our Founder/CEO is inspired, brilliant and tireless.” That is the charm and possibility of TerraCycle: these are true believers on a mission, and some wildly successful institutions have been built on fervent beliefs. The United States, for instance.

    It’s hard to gauge whether or not you will make a great deal of money by investing in TerraCycle US because returns will depend on the interactions between the companies and on future financings. TerraCycle US will certainly benefit from the hype surrounding Loop, and it may also sell services to Loop. And the parent company may at some point acquire all the shares of TerraCycle US or exchange shares in preparation for a public offering, which would probably go out at a much higher price than the shares at offer today.

    The Offering Circular dutifully lists Risk Factors – many things that can go wrong. Let’s consider what could go right: (1) Governments could mandate zero-waste or more intensive waste reclamation programs to save the planet and respond to engorged landfills. (2) Loop could take off, and cause TerraCycle to roll-up its subsidiaries into a single entity for a public offering. (3) An enormous waste management company could buy TerraCycle as a prudent bet on a possible future. (4) TerraCycle could develop more proprietary processes that make mining trash more profitable than manufacturing new feedstocks. This is all fantasy, but fantasy meant to put into context the $71 million post-valuation of TerraCycle US.

    The question for an investor is: might TerraCycle US someday be worth a great deal more than $71 million? Stericycle (SRCL) is a medical waste company with a market cap of $4.5 billion. Clean Harbors (CLH) is an environmental and waste management company that, through its Safety-Kleen division, is North America’s largest recycler of waste oil; CLH has a market cap of $3.8 billion. Republic Services (RSG) is the second largest U.S. waste management company with a $25 billion market cap. There is money in trash.

    I believe in good intentions. I think the folks at TerraCycle will treat their investors better than most other companies because they are on a mission to enlist small investors and everyone else in a waste-free future. TerraCycle US may be a good investment for people who want to support that vision, earn a dividend, and have a shot at a ground-floor opportunity. TerraCycle US stock would also be a wonderful gift for a child who could learn about the TerraCycle vision and follow the company’s colorful marketing.

    Web Links for this Article:

    Investment Site:  ownterracycle.com

    The Loop Initiative: loopstore.com

    Zero Waste Boxes:  zerowasteboxes.terracycle.com

    TerraCycle’s first acquisition:  aircycle.com

    Offering Circular: bit.ly/2EG6KyO

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