Heckmann Loves Other People's Money

By Will Ashworth | August 14, 2008 AAA

The 1991 film "Other People's Money" starring Danny DeVito was basically a comedic version of "Wall Street". The movie underscored the importance of using the capital of others to build businesses. One man who should have a copy at home is Richard Heckmann, CEO of special purpose acquisition company (SPAC) Heckmann Corporation (NYSE:HEK).

Heckmann has made a career out of buying companies and his latest endeavor could be the icing on the cake of a long and storied career. I'll look at his efforts to-date to get his SPAC up and running. (To learn more about these public shell companies that offer many advantages over private equity, read SPACs Raise Corporate Capital.)

Twenty-Year Shopping Spree
Since 1990, Richard Heckmann has acquired more than 172 companies and built two organizations almost from the ground up. The first, U.S. Filter, had $17 million in revenue when he took the reins in 1990. Nine years later Paris-based Vivendi S.A. acquired it for $8.2 billion and the assumption of $1.8 billion in debt. In 2002, he took the helm of K2 Inc. and in four years more than doubled revenue from $582 million to $1.4 billion at the end of 2006. Jarden Corporation (NYSE:JAH) bought K2 in August 2007.

His latest purchase could arguably be his most lucrative. On May 20, Heckmann Corporation announced it was buying China Water and Drinks Inc., the fifth largest bottled water distributor in China and big supplier to Coca-Cola (NYSE:KO), for $625 million in cash and stock. Shareholders of the Chinese company could elect to receive $5 in cash per share or eight-tenths of a share in Heckmann stock. Most took shares in the new company.

Heckmann Strikes Again
Richard Heckmann and China Water's Xu Hongbin believe the combination will pave the wave for future growth. On June 17, it acquired 67% of Guangzhou Grand Canyon Distilled Water Co., Ltd, paying $19.1 million in cash for the distributor of bottled mineral water in China. Grand Canyon is one of Southern China's leading water brands. In the first quarter of 2008, it increased revenues 44% to $5.2 million and net income by 86% to $1.3 million. Great numbers considering the first quarter is the slowest for the business. It didn't take long to add a piece to the puzzle.

The opportunities to invest in China's water industry are too tempting to sit on sidelines. China has one of the world's lowest bottled water consumption in the world at 13.7 liters per capita compared with 110.9 in the U.S., yet China has generally poor quality drinking water. This will surely change and a fragmented market featuring over 250 competitors can only help its cause.

What Do We Have
Once the China Water acquisition closes in the fall, Heckmann Corporation will no longer carry around the SPAC moniker that so many have been unable to shake. It will be a real company with physical assets, etc. In terms of revenues, on a pro forma basis to the end of December 2007, you're looking at $75.8 million and income from operations of $18.5 million with an operating margin of 24.4%. Revenue for the first quarter ended March 31, 2008, was $20.6 million with operating income of $4.2 million and a margin of 20.4%. It's possible that revenue could top $100 million in 2008, especially if it makes another purchase. With zero debt and $263 million in cash, it's not likely the stock will be $10 for much longer. (Be sure to read Understanding Pro-Forma Earnings to learn a bit more about interpreting these figures.)

To The Victors Go The Spoils
On November 17, 2007, Heckmann went public selling 54,116,800 units at $8 each with net proceeds of $428 million placed in trust until it made an acquisition of at least $320 million (80% of net assets), which it did seven months later. As a founding shareholder, Richard Heckmann received 13,152,746 founders units for which he paid a little under $66,000. Each unit comprised one common share and one warrant to buy another common share for $6.00. In addition, prior to its IPO, Heckmann bought 2 million warrants at $1 each, also exercisable at $6 a share. With shares currently trading in the $10 range, you are looking at unrealized returns of $190 million from an investment of just $2 million. Experience doesn't come cheap I guess.

Bottom Line
I owned K2 when Richard Heckmann was CEO. Personally, I thought he did a reasonable job in an extremely competitive industry. Selling to behemoths like Wal-Mart (NYSE:WMT) and Dick's Sporting Goods (NYSE:DKS) can't be easy. His latest ambition is to be a global player in the water business and China is the jumping-off point. This is a smart choice considering the market is much less developed. Personally, I don't have a problem with the stock. My only concern is that Heckmann takes using other people's money to the extreme. Perhaps he has seen the film after all.

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