Preparing for a Profitable Exit during All Phases of a Deal: a Case Study

By: Amy Bauer

Client Description

The Client: a private equity firm that focuses on making investments in lower middle-market growth companies with enterprise values of $30MM to $125MM across a variety of industry sectors including value-added distribution, specialized light manufacturing, and business and industrial services.

Project Objective

The initial goal of the project was to assist the client with environmental due diligence in their acquisition of a leading provider of eyewear and eye care accessory products and supplies in the United States and Europe. Our objective was to identify the potential environmental liability associated with the existing and former operating locations to ensure a profitable operational period and eventual clean exit for our client.  The project evolved into environmental health and safety (EH&S) regulatory compliance, remediation, Comprehensive Environmental Response, Compensation, Liability Act (CERCLA) Potentially Responsible Party (PRP) support, and subsequent divestiture support, as described in further detail below.

Project Background

The target company manufactured and distributed eyewear and eye care accessory products and supplies.  The portfolio included 7 existing operating locations in Canada, England, Texas, Indiana, Oklahoma, and Massachusetts, and 10 former operating locations in Illinois, Indiana, Massachusetts, Texas, Oklahoma, Minnesota, and England.  Prior to the acquisition in 2006, the client needed to evaluate the environmental condition and assess the likelihood of any contamination at each existing and former operating location to determine the potential environmental liability associated with those locations.

Work Scope – Environmental Due Diligence

EHS Support conducted Phase I Environmental Site Assessments (ESAs) for the three main existing locations in the United States (Massachusetts, Indiana, and Texas).  The Phase I ESAs were conducted in accordance with U.S. Environmental Protection Agency (USEPA) Standards and Practices for All Appropriate Inquiries (AAI); Final Rule (AAI Final Rule) as required under Section 101(35)(B) of CERCLA; and the ASTM International Standard Practice for Environmental Site Assessments.  The AAI Final Rule establishes specific regulatory requirements for conducting all appropriate inquiries into the previous ownership, uses, and environmental conditions of a property for the purposes of qualifying for certain landowner liability protections under CERCLA.

EHS Support also completed desktop environmental site assessments for the other existing and former operating locations, which were based on a review of the available information in the online data repository, publicly available environmental databases,and interviews with personnel. The desktop review proved to be more efficient and cost-effective for the client as these sites did not warrant full in-depth environmental review.

Although the AAI Phase I ESA is standard industry practice for initial due diligence, due to the ongoing environmental remediation at the site for historical volatile organic compound and fuel oil releases,a more intensive evaluation was required to address these identified environmental risk issues.  EHS Support reviewed aspects of environmental compliance associated with eyewear and eye care accessory products and supplies operations at each location.  The review of environmental compliance included an evaluation of federal, state, and local regulations pertaining to air, water, waste, and hazardous chemicals.

We also assisted the client with reviewing existing insurance policies, specifically environmental liability coverage Cost Cap and Pollution Legal Liability (PLL), and environmental indemnification agreements.  EHS Support identified third party/Superfund sites for which the target company was a PRP, meaning it was a potential polluter who could eventually be held liable under CERCLA for the contamination or misuse of the property.

In addition to preparing separate reports for the existing operating locations, EHS Support summarized all of this information in our proprietary  liability model, which quantifies the range of potential financial exposure associated with identified and future EH&S liabilities. This allowed the client to understand when these liabilities might occur over the investment period, and how much they may cost, based on our experience.

Work Scope – EH& S Compliance

After the acquisition, EHS Support worked with the eyeglass provider to track the progress of aspects from the environmental compliance evaluation completed as part of due diligence.  In addition to maintaining an EH&S compliance calendar, we also provided compliance support to the individual facilities, including waste inventory and reporting, and determination of air permit exemption.

Work Scope – Remediation

EHS Support was named the recognized “remediation contractor” in the insurance policy for two ongoing remediation efforts at the Massachusetts location.  EHS Support coordinated and directed the cleanup contractors, ensured that facility staff and tasks were on schedule, and managed communications to the insurance provider to track claims, ensure that activities were reported on schedule, and provide technical guidance.

Work Scope – PRP

In response to a Section 104(e) CERCLA letter from USEPA, EHS Support coordinated with the client and their legal counsel   to develop a strategy and provide the required information that may be requested.  As of the date of this project summary, no additional information was requested from USEPA.

Work Scope – M&A Divestiture

With EHS Support’s extensive knowledge of the portfolio, we were able to assist the client during its 2014 divestiture of the Company.  We coordinated with the client before a buyer was identified to prepare project summaries for the two remediation efforts, and compile information so that it was at our fingertips during negotiations.  In short, we ensured that EH&S issues were not a concern during the exit.  The issues we successfully identified during the initial due diligence process were addressed and framed in a manner that accelerated the divestiture with minimal EH&S related deal costs.

Project Results

EHS Support worked closely with the client and its legal representatives to develop both an acquisition and divestiture strategy.  Our understanding of the portfolio-related environmental risks allowed our team to leverage our knowledge to reduce the actual and perceived risks around the EH&S related liabilities to increase the client’s profits through a clean exit.

The information provided by EHS Support during initial due diligence of the Company helped the client after the transaction with the company’s ongoing regulatory compliance and risk management.  During the client’s ownership of the eyewear company, EHS Support was able to provide additional services, such as EH&S compliance, PRP, and remediation management.  EHS Support continues to assist the client with acquisition environmental due diligence and support services.

Amy. Bauer has 15 years of experience conducting and managing environmental site assessments, regulatory compliance audits, environmental investigations, and regulatory compliance support….
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