pay attention to sb2000 tox is flying toot, page-13

I said i'd back up my reasons as to why i don't really like this acquisition when i got home, so here goes.

Firstly, Barry offers services that TOX (to my knowledge) currently doesn't offer. This means TOX is going outside their core competency of waste management. I don't like this, and nor should anyone else.

Secondly, it's a very capital intensive business. This is evident in a number of respects:
- PRM state so themselves in their announcement to the market;
- TOX is purchasing the business for $25m, with apparently $20m of assets. This implies (assuming there's not a big debt load, which i doubt there is) there's very little goodwill in the business. Low goodwill indicates a number of things, one of them being that the business is capital intensive.

Pretty much all of Barry's assets are specialised rolling stock assets which are costly to replace and costly to run. Think of it this way: Barry has to go to the clients to do the job and get the money - the better businesses are those where the client/customer comes to you (i.e. you have fixed assets that don't cost much to run). The great thing about TOX's prime assets (the incinerator & TDU in Western Australia) are that they just sit there, don't cost much to run, the client incurs the costs of TOX bringing the material to the processing site, then TOX process the material and charge a massive fee at high margins. Industrial services like Barry Bros are completely different. To run Barry, TOX will need to allocate extensive amounts of cash that i'd prefer were allocated to higher margin parts of their business, i.e. specialised waste management.

Thirdly, this industry is competitive and there are bigger and better players than TOX in the industrial services business, TPI being one of them. Competitive industries mean that the margins are low - if anyone bothered to read page 7 of PRM's most recent 1/2 yearly report, you'd see that that it took $19m of revenue for Barry to churn out $1.4m EBIT, which is a ***way*** lower margin than what TOX makes on its best assets (the incinerator and the TDU operations).

Fourthly, a lot of Barry's services seem to be water-intensive, which is not a good thing given the drought that's been going on for the last decade. Again, read p7 of PRM's most recent half-yearly report, or p13 of PRM's most recent annual report. This is a capital intensive business (as i've already explained) where the assets can potentially be under-utilised due to extraneous factors (i.e. drought) - this is not good. At the very least, if you run a capital intensive business (like Qantas, for example) you **must** always have your assets fully utilised (i.e., Qantas must get as many bums on seats as possible).

Fifthly, TOX has bought this business in a competitive sale process (according to PRM's announcement), which means they've almost certainly paid top dollar. What i liked about a lot of TOX's other, smaller acquisitions was that they were businesses bought without much competition, from usually small, family-owned operations, which meant that TOX probably didn't pay as much as they could've, and with their balance sheet power and management expertise, could quickly improve the acquired business. The fact PRM owned this business would mean that Barry is probably already being run quite efficiently and quite well anyway so i don't think there'd be a lot of 'low-hanging fruit' for TOX to pick on this one.

So that's it in a nutshell. As it stands at the moment, i'm not super impressed with this acquisition and the logic doesn't sit well with me. What i'd like to see at some stage over the next week or two would be a management presentation that details what ***their*** logic was in doing what they've done. Are they going to:
- Commit some of Barry's rolling stock to WA where they can utilise the assets more efficiently and extract higher returns?
- Build an incinerator/TDU somewhere on the eastern seaboard which you could then use some of Barry's assets to transport the waste?
- Sell some of Barry's less impressive services or divest some under-performing, non-core assets?

All these questions need to be answered. There's no doubt that TOX management will have a plan in mind, because buying Barry on its own makes very little sense. Hopefully the plan they come up with is one that can leverage off Barry to increase its asset utilisation, lift margins and drive what seems to be a pretty ordinary business much harder.

Cheers.