AR December 2006

Private equity firms from Chicago, with hundreds of millions of dollars under management, now control the country’s two largest glass recycling companies.

WHI Capital Partners (WHICP), with $100 million under management, acquired Lombard, Illinois-based Container Recycling Alliance LLC (CRA) in August. CRA is the second largest glass recycling operation in the United States. It has 8 recycling facilities throughout the country and processes roughly 500,000 tons of glass per year.

Adam Schecter, managing partner of WHICP, would not reveal the purchase price or annual revenue numbers. But according to the firm’s Web site, the private equity firm invests in mature and profitable, mid-sized companies with leading market positions and revenues of $10 million to $100 million. WHICP parent’s firm, William Harris Investors Inc. is an asset management firm with more than $1 billion under management.

“CRA had most of the primary attributes we look for in an investment,” Schecter said. CRA has a strong leadership position, differentiation in the marketplace, a strong management team, strong customer relationships and high barriers to entry, Schecter said.

The glass recycling company is unique due to its expertise in utilizing optical sorting technology to produce cullet, the crushed and cleaned post-consumer glass used primarily for reuse in new glass packaging, Schecter said. CRA uses state-of-the-art automated ceramic detection and color sorting equipment as well as full bottle destruction and decasing capabilities. CRA is able to take in mixed color glass and optically clean the glass of contaminants and then sort the glass by clear, brown and green colors.

Securing good, high quality supply is the biggest issue facing the industry, Schecter said. He said the market for recycled glass is a stable market with demand for clean recycled glass far outstripping supply. “As long as energy prices continue to be expensive, the current market conditions should continue or get better,” Schecter said.

WHICP partnered with Tom Riek, chief executive officer of CRA, to purchase the glass recycling division from Houston-based Waste Management Inc, according to Schecter. Riek previously served as president of CRA from 2001 to 2004 before being promoted to finance director of Waste Management Recycle America (WMRA).

“From our perspective, this was a CEO-led deal (with Tom Riek) and we welcome the opportunity to partner with strong executives who have an interest in purchasing and growing a company together,” Schecter said. “CRA produced some of its most profitable years under Tom Riek and his team’s leadership. Tom is a proven CEO.”

Riek agreed with Schecter’s market outlook. “The demand for recycled glass is very strong and I would expect that to continue. The challenge will be to continue to grow the supply side of the market to closer meet the demand side,” Riek said.

“The rise of energy costs has created strong demand for clean cullet by the container manufacturers who are working to maintain their profit margins. We look forward to working with our customers and establishing new supply sources.”

Liz Johnson, spokesperson for Waste Management, said that WMRA, North America’s largest provider of recycling services, decided that some secondary processing assets, including glass, were not a long-term fit. Therefore, it decided to sell CRA.

“A high level of interest was expressed by various groups for the glass business, and after reviewing the offers it was decided to divest of the group,” Johnson said.

“Glass recycling, like many other businesses, is an evolving and challenging business. WMRA felt that focusing on our core business and driving improvement in that area was a better use of our assets.” WMRA, formed in 2003, combines the assets and operations of domestic recycling processors and marketers within Waste Management.

Another Chicago-based private equity firm owns Strategic Materials Inc., headquartered in Houston. Strategic Materials is the nation’s largest glass recycling company. It operates a network of 31 processing plants and aggregation depots across North America. It sells approximately 1.3 million tons of glass cullet each year.

Strategic Materials is owned by Willis Stein & Partners LP. The private equity firm has approximately $3 billion under management. It invests in various industries with transaction values ranging from $75 million to $750 million, according to its Web site.

Willis Stein purchased Strategic Materials from Lincolnshire Management Inc., a New York private equity firm, for $136 million in October 2005. According to a press release at the time of the transaction, Lincolnshire realized an internal rate of return of 32 percent on its investment in Strategic Materials, which it purchased in 2002.

Curt Bucey, executive vice president and chief operating officer of Strategic Materials said annual revenues at the glass recycling company are around $160 million. Strategic buys scrap glass from approximately 1,400 different suppliers each year.

Bucey said he expects these market conditions to continue. “Demand has historically exceeded supply, but glass prices don’t tend to increase like other materials, as recycled glass is compared to the glass industries batch costs,” Bucey said. Batch costs include sand, limestone, and soda ash, which tend to not vary by much.

Freight costs are also impacting glass recyclers, Bucey said. “Freight costs are a very high percentage of our costs as glass is lower value material,” Bucey said.

Over the last few years container glass supply across the country has been converting to low quality, single stream from high quality color separated material, Bucey said. “This conversion is causing all involved to invest considerable capital dollars in order to be able to utilize the very low quality feedstock.” Bucey said that deposit states generate the highest quality of glass feedstock for glass recycling companies.

Americans generated 12.5 million tons of glass in the solid waste stream in 2003, according the Environmental Protection Agency. About 22 percent of the glass was recovered for recycling. Soft drink, beer, food, wine, and liquor containers represent the largest source of glass generated, according to the EPA. Glass in durable goods, such as appliances and consumer electronics, round out the sources of post-consumer glass.