Philip Services Corp.
Philip Services Corp.
Incorporated: 1990 as Philip Environmental Inc.
Sales: $1.5 billion (2004 est.)
NAIC: 423930 Recyclable Material Merchant Wholesalers; 325188 All Other Inorganic Chemical Manufacturing; 325998 All Other Miscellaneous Chemical Product Manufacturing; 562998 All Other Miscellaneous Waste Management
Philip Services Corp. is one of the largest providers of industrial services in North America. The company offers industrial cleaning and maintenance services, environmental and waste services, and oilfield services at more than 120 locations in North America. Philip Services is controlled by investor Carl Icahn.
Philip Services was formed through a series of transactions at the beginning of the 1990s, but its corporate roots stretch to a Canadian landfill, quarrying, and asphalt business based in Hamilton, Ontario, named Taro Aggregates Inc. that was founded in 1980. Nearly a decade later, in July 1989, Taro sold its landfill and ancillary quarrying assets in an all-stock transaction to a company named Lincoln Capital Corp., which became involved a year later in the transactions that gave birth to Philip Services' predecessor, Philip Environmental. Philip Environ-mental was formed by brothers Allen and Philip Fracassi, who had begun their business careers when they took over their father's bankrupt Hamilton-based trucking company in 1979. The Fracassis formed Philip Environmental, whose official corporate title initially was Philip Environmental Corporation, in June 1990, the same month Philip Environmental acquired a Hamilton-based waste management company named Branard Corp., in which each of the Fracassi brothers held an equity stake. Lincoln Capital, at this point, purchased a 50 percent interest in Philip Environmental. In December 1990, Lincoln Capital sold its interests in Taro to Philip Environmental and sold its 50 percent stake back to the company, marking the formal organization of Philip Environmental, which changed its name from Philip Environmental Corporation to Philip Environmental Inc. the following July. In May 1997, the company changed its name to Philip Services Corp.
It would have been difficult for the Fracassi brothers to imagine a more disastrous first decade for the business they cobbled together at the end of 1990. Marked by scandal, a stream of shareholder lawsuits, managerial instability, and profound financial problems, Philip Services lived a brutal existence during the 1990s, one that did not improve by much as the company limped through the first years of the 21st century. The company's pervasive problems, which resulted in one of the biggest annual financial losses in Canadian business history, did not surface until the late 1990s after an ambitious campaign for expansion spectacularly foundered.
Before Philip Services began its precipitous fall, the company moved in the other direction, recording impressive growth during its first years in business. The completion of several acquisitions greatly aided the company's expansion, including the September 1993 purchase of Waxman Resources Inc., a Hamilton-based recycler and processor of copper, aluminum, plastics, and ferrous metals. The purchase was important because its assets represented the future orientation of the company, but for less affirmative reasons the acquisition was significant because it marked the arrival of Robert Waxman at Philip Services' headquarters. (Waxman later became a central figure in the events that led to Philip Services' collapse). Several months after the purchase of Waxman Resources, the company acquired Nortru Inc., a Michigan-based hazardous and non-hazardous recycling business, and Burlington Environmental Inc., a Washington-based chemical waste management and environmental engineering and consulting business. In November 1994, Philip Services purchased Deslan Environmental Group Inc., a decommissioning and remediation services company based in Toronto. The company's acquisitive activities fueled its financial growth, exponentially increasing its revenue volume from CAD 60 million in 1992 to CAD 489 million in 1994. The growth was substantial, but the financial gains became larger after the company looked at the changing dynamics of its marketplace and fashioned a new future for itself as a consolidator in the scrap metals industry. The change in strategic focus made Philip Services a $2 billion-in-sales company (the company began reporting its financial totals in U.S. currency), and it also set the stage for the nightmarish late 1990s.
A Change in Strategy in the Mid-1990s
By 1995, according to Allen Fracassi's letter to shareholders in the company's 1997 annual report, Philip Services "had reached a crossroad." Fracassi, who served as president and chief executive officer while his brother Philip served as executive vice-president and chief operating officer, noted that the company's industrial clients were changing the way they did business. Outsourcing, the great corporate movement of the 1990s, drove companies to seek third-party vendors to take responsibility for functions otherwise performed by the companies themselves. While companies looked to contract out ancillary aspects of their businesses, leaving them more focused on their core pursuits, they also looked to reduce the number of vendors they contracted with, seeking a partner with comprehensive capabilities to meet their outsourcing needs. Such were the changes viewed by Fracassi during the mid-1990s that served as the impetus for his decision, announced in February 1996, to concentrate Philip Services' business on the resource recovery and industrial services market, thereby distancing the company from what Fracassi referred to as "the traditional environmental sector" in his letter to shareholders. Philip Services' relationship with its customers in the steel industry exemplified the new "one-stop-shopping" approach of the company. The company's early associations with the steel industry involved processing foundry sand for reuse in cement production, but its new approach called for it to not only provide scrap metal to feed its customers' furnaces but also to handle their waste stream, deliver their on-site maintenance and industrial cleaning, and provide final processing and distribution of their products.
Philip Services began fashioning itself into a new type of company first by divesting some of its assets before beginning its ambitious assault on the acquisition front. The company sold its municipal solid waste business in 1996, severing its ties to operations in Quebec, Ontario, and Michigan, and it sold a substantial stake in its utilities management operations. The additions to the company's holdings followed, financed initially by a $550 million line of credit to fund its acquisition campaign. Allen Fracassi looked at the resource recovery and industrial services sector and saw a wealth of acquisition candidates, aiming his acquisitive sights on a highly fragmented industry populated by a bevy of private companies without the financial and organizational resources required to serve the changing marketplace. The campaign began in earnest in December 1996. Philip Services acquired Houston-based Southwest Limited Partnership, Ohio-based Luntz Corporation, and the Alcan Alloys Plant located in Guelph, Ontario, each of which significantly expanded the geographic scope and service mix of the company's metals recovery group. The drive to consolidate the scrap metals industry took off with abandon the following year, when Fracassi purchased more than 30 companies, spending a staggering $1.3 billion. Among the most significant of the acquisitions were Luria Brothers, a Cleveland-based scrap broker and processor; the Steiner-Liff Group of companies; Allwaste, Inc.; and Allied Metals Limited, a steel scrap and mill services company based in the United Kingdom. Revenue shot upward as a result of the ambitious acquisition campaign, eclipsing $1 billion in 1997, just five years after the company collected CAD 90 million for its annual total. Wall Street—Philip Services' stock was traded on both Canadian and U.S. exchanges—approved of the company's moves to consolidate the industry, fueling an impressive increase in the company's stock and providing easier access to capital. The company's stock was trading for less than $8 per share in June 1996, rising to nearly $20 by September 1997. A $380 million stock offering in November 1997 easily sold out, as investors eagerly seized the opportunity to invest in Fracassi's growth strategy. Within months, the enthusiasm surrounding Philip Services turned to ire, as the company entered the darkest chapter in its history.
Late 1990s Collapse
The debacle of the late 1990s began January 1998. The company intended to spend the first part of the year initiating a program to integrate the numerous acquisitions completed in 1997 into its operations, but the year began with the announcement that there was a discrepancy between the book and physical inventory values in its yard copper business. Roughly 50,000 tonnes of copper had gone missing or had never existed. One month later, the company announced it would restate the financial results posted for the three previous years, further eroding investor confidence and triggering a storm of shareholder lawsuits. Some of the complaints charged that the company had known of its true condition before the November 1997 offering that raised $380 million. In May 1998, Allen Fracassi stepped down as chief executive officer, replaced by an executive touted as a turnaround specialist who was hired to sell assets, lead negotiations with banks, and restructure Philip Service. John G. McGregor occupied the post for five weeks before moving aside for the return of Allen Fracassi. McGregor was given the title of chief restructuring officer, but he left the company entirely before the end of the year.
We will increase the scale and scope of our activities by broadening and deepening our client relationships, and we will differentiate ourselves from our competitors by bundling services for our clients. We will pursue opportunities within and across our two major businesses—Metals and Industrial Services—and build profitable client alliances that complement our size and reflect our capabilities.
While Philip Services grappled with leadership issues, the company's problems attracted a renowned executive named Carl Icahn. Described by Fortune in its July 10, 2000 issue as one of the "buccaneers who prowled Wall Street in the 1980s, taking and gutting companies for sport and profit," Icahn made his living by preying on companies. Icahn profited handsomely as a corporate raider, accumulating an estimated $5 billion fortune by squaring off against massive companies such as RJR Nabisco, Western Union, and Texaco. When Philip Services began to falter, Icahn sniffed opportunity, believing that the company was undervalued because it was still producing substantial amounts of cash. In May, when Fracassi relinquished his chief executive officer post, Icahn paid CAD 80 million for a 9 percent stake in Philip Services and, along with a Los Angeles investment group, Foothill Partners III LP, acquired most of the company's mounting debt. The following month, Philip Services sued Robert Waxman, who had become president of the company's metals division, and two colleagues, demanding $240 million in damages for the trio's alleged role in the copper trading scandal. The settlement of the case against Waxman, which dragged on for more than five years, could do nothing to help the company in 1998, however. In the fall, the company announced it could not make interest payments on its more than $1 billion of debt, prompting Icahn, who had since increased his stake to more than 14 percent, to demand that Philip Services file for bankruptcy or let him take control of its operations. The company ended the year with a numbing $1.6 billion loss and began 1999 preparing to file for bankruptcy.
After months of negotiations with its lenders, Philip Services filed for bankruptcy in Canada and the United States in June 1999. While the company developed a restructuring plan in preparation for its return, Icahn increased his investment, building up a more than 40 percent stake in Philip Services. Under the company's restructuring program, debt holders became the holders of new secured debt and were given control of 90 percent of a new corporate entity, one whose business was heavily reliant on ferrous scrap sales. Philip Services emerged from bankruptcy protection in April 2000, getting what it hoped to be a fresh start in business. In September, when the company was led by a new president and chief executive officer, Anthony Fernandes, Philip Services moved its headquarters to the United States, where it derived roughly 80 percent of its sales. After operating out of Chicago for a brief period, the company established its headquarters in Houston.
Early 21st Century Offers No Relief
Despite the promise of an improving ferrous scrap market, Philip Services soon began to suffer from severe financial problems. The company lost $78 million in 2001 and $59 million the following year. In March 2002, as the company headed towards a $59 million loss, Anthony Fernandes resigned as chief executive officer, creating a vacancy that was not filled for more than a year. During the first fiscal quarter of 2003, Philip Services, despite rising prices for ferrous scrap, posted a $12.7 million loss, 45 percent more than it lost during the same period a year earlier. In April 2003, John Correnti, formerly chief executive office of Nucor Corp. and Birmingham Steel Corp., was hired as acting chief executive officer, but the arrival of a new leader did little to bolster Philip Services' cause. In May 2003, the company announced that if it did not reach a new financial agreement with creditors by the beginning of the following month it would be forced to declare bankruptcy again. The deadline passed without the required agreement, forcing Philip Services, for the second time in four years, to seek protection under Chapter 11 of the U.S. Bankruptcy Code.
Another attempt at a restructuring began in June 2003, when the company announced it would try to sell all of its operating units either as a whole or in parts. By September, a winning bidder for the company's assets was announced, Carl Icahn's High River Limited Partnership. Icahn controlled a majority of the outstanding shares of the reorganized company when it emerged from bankruptcy on the last day of 2003. Philip Services pressed ahead with its third attempt at achieving success in the business world, hoping to put its troubled past behind it. "Philip Services is emerging from this restructuring as a financially sound, formidable competitor in the industrial cleaning, environmental, and metals services markets," a company executive remarked in a January 7, 2004 interview with Canadian Corporate News.
Metal Management, Inc.; Safety-Kleen Systems, Inc.; Waste Management, Inc.
- The company is founded as Philip Environmental Corp.
- An ambitious acquisition campaign begins.
- Philip Services spends $1.3 billion on more than 30 acquisitions.
- Philip Services registers a $1.6 billion loss.
- The company files for bankruptcy.
- After emerging from bankruptcy in 2000, Philip Services again files for bankruptcy.
- Carl Icahn acquires majority control over Philip Services as the company emerges from bankruptcy.
Baxter, Kevin, "New Year, New President Named to Philip Services," American Metal Market, January 3, 2000, p. 16.
"Canadian Court Oks Philip's Restructuring," American Metal Market, November 10, 1999, p. 9.
Johnson, Greg, "Icahn May Take All of Philip Services," Daily Deal, June 5, 2003, p. 32.
Marley, Michael, "Icahn Top Bidder for Philip; Ch. 11 Exit Eyed by Year-End," American Metal Market, September 16, 2003, p. 1.
——, "Philip Services Eyes Asset Sale to Pay Off Debts," American Metal Market, June 5, 2003, p. 1.
——, "Philip Services Urged to Sell Scrap Business," American Metal Market, August 13, 2001, p. 1.
——, "Philip's Red Ink Swells, Mulls Filing Ch. 11," American Metal Market, May 22, 2003, p. 8.
McCann, Joseph, "Correnti Acting Top Executive at Scrap Firm," American Metal Market, May 21, 2003, p. 1.
Morrison, Scott, "Philip Files for Bankruptcy," Financial Times, June 29, 1999, p. 28.
"Philip Services Corporation Emerges from Chapter 11," Canadian Corporate News, January 7, 2004, p. 31.
Roggio, Armando, "Philip Services Fends Off Carl Icahn with Equity Capital," American Metal Market, November 24, 1998, p. 1.
Weber, Joseph, "Carl Icahn's Toxic Takeover," Business Week, December 28, 1998, p. 63.
Worden, Edward, "Philip Looks for Rising Ferrous Scrap Mart to Lift Operations," American Metal Market, November 2, 1999, p. 2.
——, "Philip Restructuring Moves Along," American Metal Market, March 9, 1999, p. 2.
——, "Philip Sees Light at End of Bankruptcy Tunnel," American Metal Market, December 3, 1999, p. 7.
——, "Turnaround Specialist Leaves Philip Services," American Metal Market, January 22, 1999, p. 7.
—Jeffrey L. Covell