Compost and mulch market ripe for acquisitions

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Biosolids composting includes an aerated static pile method, as shown here, in Philadelphia.

Biosolids composting includes an aerated static pile method, as shown here, in Philadelphia.
Photo Courtesy of R. Alexander Associates, Inc.

The nation’s third largest solid waste company sold its compost and mulch unit to a private equity firm as the organics recycling market may start to see more acquisitions.

Fort Lauderdale, Florida-based Republic Services, Inc. sold Living Earth Technology Co. (LETCO) to Hunt Special Situations Group LP in Dallas for $37 million late last year.

LETCO is the largest commercial provider of mulch, compost, soil and other landscaping material in Texas. Republic Services reported at the time of the sale that LETCO has average annual revenues of $50 million and generates low double-digit operating income margins. 

“The timing and the price were right and we executed the sale,” said Will Flower, vice president of communications at Republic Services. “The divestiture of LETCO was consistent with Republic’s long-term business strategy, which is to focus on our core business of collecting, recycling, transferring and disposing of municipal solid waste in a cost-effective manner.”

Flower described LETCO as a non-core, stand-alone business. “The LETCO business model expands beyond the processing of recyclable waste material to include purchasing raw materials from suppliers, packaging finished product for resale to large retailers and the sale of non-processed material, such as landscape rock and stone to consumers,” he said.

LETCO, based in Dallas, operates 13 compost and mulch facilities, primarily in the metro areas of Dallas and Houston. Its products include a variety of mulches, compost, blended soils and soil amendments sold under the “Earth’s Finest” and “Living Earth” trade names. LETCO sells its products to commercial landscaping contractors, nurseries and large retailers.

Mark Rose, who has worked in the composting and mulch industry for 26 years, will continue to lead LETCO as president under the ownership of Hunt. Rose declined to provide details about the acquisition. “It would just divulge our business strategy,” he said.

However, a statement provided at the time of the LETCO sale provides insight to where LETCO is headed, which may include growth throughout Texas and beyond.

“Our partnership with Hunt will allow LETCO, once independent, to realize its full potential, pursue strategic opportunities and continue to provide excellent products,” said Rose, who has been with LETCO since 1991 when Republic Services purchased the company.

“In addition, we see an opportunity in continuing to scale the business through the development of new locations and select acquisitions. We look forward to taking advantage of Hunt’s financial and non-financial resources,” Rose added in the initial press statement.

Hunt, which focuses on middle-market investments in a variety of industries, also did not respond to questions about the acquisition. However, Phil Arra, president of Hunt, said at the time of the LETCO acquisition that the deal was consistent with the firm‘s investment philosophy.

“It’s an opportunity to invest constructively and maximize the value of a business in transition. We look forward to working collaboratively with management to maximize the value of LETCO,” Arra said in the statement. “In such a fragmented industry, LETCO will continue to be a market leader and promote a variety of green and environmentally friendly initiatives.”

LETCO and other mulch and composting companies are only a small fraction of the $7.2 billion lawn and garden industry, according to research by Freedonia Group, Inc. in Cleveland.

The market researcher predicts that demand in the United States for packaged lawn and garden consumables will grow 4.9 percent annually through 2010. The research firm said the best opportunities for new products are ones that offer convenience and good performance.

While LETCO is one of the largest mulch and composting companies in the country, the industry remains fragmented, said Ron Alexander, president of R. Alexander Associates, Inc., an environmental consulting firm that specializes in organics recycling in Apex, North Carolina.

Alexander said there are a few companies that may try to go national. But he said that most companies in the organics recycling industry are still small, regional players. A big company involved in composting today is one that owns two or three facilities, Alexander said.

This market fragmentation leaves plenty of room for acquisitions, like the private-equity buyout of LETCO, or for regional players to expand by buying others, Alexander said.

This year might turn out to be more difficult for compost marketing because of the current downturn in construction, Alexander said. Less construction means less landscaping.

“I think the downturn in the economy and less building may hurt us,” he said.

Last year was also a difficult one, Alexander said. There was flooding in parts of the country and drought conditions in other regions. “We just had a bad weather year,” he said.

Despite some of these localized market conditions, Alexander said there are some exciting developments underway in the composting market. He said that mulch and compost is starting to be used more extensively in environmental applications like erosion and sediment control.

Alexander said the biggest issue facing the organics recycling market is a general lack of knowledge about compost and mulch as well as composting as an environmental process. “I’m not sure that as a nation we have gotten the whole composting thing dialed in with the American public, but we need to.”

Of the 245.7 million tons of municipal solid waste generated annually, according to the EPA, yard trimmings and food scraps constitute 24 percent of the waste stream. The EPA estimates that 56.9 percent of yard trimmings are recovered for composting, while only 2.6 percent of food waste is currently composted each year.

The EPA reports that compost prices have reached as high as $26 per ton for landscape mulch and more than $100 per ton for high-grade compost, which is sold at the retail level.