Greenberg: Activist Stake May Make Clean Harbors Less Hazardous

(A version of this piece originally ran Thursday night on Herb Greenberg's Reality Check.)

SAN DIEGO (TheStreet) -- With Relational Investors taking a 9.08% stake in Clean Harbors (CLH), it would be absurd to keep it on the Watch List, where it has been red-flagged. (Activism and takeovers are always one way to make the red flags irrelevant.)

Clean Harbors would appear to be the perfect activist stock. One mistake after another, or, as I wrote in my original piece when I red-flagged Clean Harbors last November, it's a comedy of errors.

The company itself recognizes the problems. From its last earnings call, CEO Alan McKim:

...We're launching a broad strategic review of our operating structure, with a focus on how to better drive organic growth and improve our return on invested capital. We also have initiated a cost reduction program and are taking $75 million in additional costs out of the business and bringing our cost structure more in line with our current revenue profile. We are targeting areas ranging from our non-billable headcount, office consolidation, maintenance and logistics, with the goal of significantly reducing our overall expenses.

In its filing, Relation said:

During its fourth quarter earnings call on February 26, 2014, the Company announced a broad strategic review of its operating structure with a focus on driving organic growth and improving its return on invested capital. The Reporting Persons support such actions which may include divestitures or a tax free spin-off of assets that do not earn their cost of capital, do not directly feed waste streams to the Company's high return disposal assets or lie outside of the Company's core competency in waste disposal.

In other words, a dismantling of the deals McKim has put together.

The filing added:

The Reporting Persons believe the Company will have substantially completed the investments necessary for its strategic positioning by 2015. Therefore, a larger portion of excess cash flows in future periods will be available for distribution to shareholders through dividends and share repurchases. highest and best return alternatives. Based on the Company's current valuation, the Reporting Persons believe share repurchases represent a low-risk, high-return hurdle against which all alternative uses of capital, particularly acquisitions, must be benchmarked.

Reality: Clean Harbors has been begging for somebody to come in and attempt to make sure something happens. In retrospect, its initiation of a strategic review was like putting the request up in neon lights.

But the stock already trades at a lofty multiple relative to what many believe it's worth as a hybrid between a refiner and a hazardous waste company.

It's unclear exactly what Clean Harbors will sell, but lodging and re-refining would be a start.

The bigger question is whether the core hazardous waste business could then be sold to a corporate or private-equity buyer, assuming they would be willing to assume the liabilities that come with hazardous waste cleanup. (Unlikely.) Or (more likely, as the filing suggests) the remaining company would create some kind of low-to-no growth income-generating pure hazardous cleanup play -- in other words, a version of what Clean Harbors used to be.

This much is clear. This has been McKim's baby. As well-liked as he is (and he is well liked) his board is perceived to be weak and it could be argued it's time for somebody else to call, or at least get behind, the shots.

-- Written by Herb Greenberg in San Diego.

Follow @herbgreenberg

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

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