Mr. Phillip B. Rooney
Dear Mr. Rooney:
My colleagues Bob Holmes and John Higgins and I are very grateful for
the time and attention that you and your colleagues gave us, first at the
meeting on May 3, and then at the Annual Meeting. Thank you. You
have moved rapidly in addressing our governance concerns, as
demonstrated by the substantial changes you announced at the Annual
Meeting. As you know, we included suggestions for further governance
improvements in our letter of May 15. This letter will focus on
corporate business and financial issues. Based on our discussions with
you and after performing an analysis of available company information,
we have undertaken to respond to your questions in the form of a
specific plan for WMX, which we would propose for Board
consideration.
President and Chief Executive Officer
WMX Technologies, Inc.
3003 Butterfield Road
Oak Brook, IL 60521
It is LENS' strongly held belief that most companies which have achieved superior returns for their owners have done so by focusing on their core businesses, and that excessive diversification more often than not has led eventually to dispersion of management's attention, and to reduced returns. When excess diversification has been financed by borrowed money, reduced returns over the longer term are all but inevitable.
LENS believes that the "core" waste collection and processing businesses of WMX will continue to grow at rates exceeding those of the company as a whole; moreover, we believe that profit margins in these core businesses are higher than those for the company as a whole. We view these core operations as regional businesses, and while we can comprehend local and regional economies of scale, we do not see that sheer size necessarily produces higher profitability.
Accordingly, we believe that WMX can produce better returns for its owners by selling or spinning off its non-core businesses, and returning to its core domestic waste management business. In addition, we believe that a reduction in the debt ratio to a level reflecting American industry generally will lead by itself to higher valuation of the shares by investors. Finally, we support management's curtailment of acquisitions in the interest of debt reduction. At the same time, we support regional add-on acquisitions which create economies of scale, though we would prefer to see these paid for with equity rather than cash.
Based on our analysis of publicly available information, we have designed a restructuring plan for the company that is more radical than the company's current strategy. Future success, in our view, will require a definitive re-focus so that WMX returns to the profitable development of a coherent and discrete core domestic business where its experience, market position, and expertise give it the opportunity for continuing competitive advantage. To get to this point from where WMX is at present will require significant change. The business objective of this plan is the creation of value for shareholders by:
Focusing the attention and energies of the Board and management on WMX's core North American waste management business comprised of Waste Management Inc. (WMI) and Chemical Waste Management (CWM).
Limiting capital expenditures and acquisitions, but within reason so that the company retains the means for growth.
Restoring the company's financial strength by utilizing operating cash flow and non-core assets to reduce debt as soon as prudently possible. WMX's core business is necessarily capital intensive. Achieving the lowest possible cost of capital is, therefore, a prime component of a long term strategy.
* Distributing to shareholders, or selling, the following unrelated or marginally performing businesses: Rust International and its affiliates, Wheelabrator Technologies (WTI) and its affiliates, Waste Management International (WME), and ServiceMaster L.P.
Increasing the realization on assets and sales.
Resuming earnings growth.
All of these points are directed toward gaining better recognition in the marketplace of the company's strengths and potential, and of its commitment to serve shareholders.
1.Re-focus of the core operations of the company, comprised of WMI and CWM, into a unified North American waste management business. This would start with internal consolidations, overhead reductions, and more carefully managed working (operating) capital expansion (Tables 4 - 7). We assume that the financial benefits generated by these actions are somewhat offset by the currently competitive pricing environment.
2.Capital expenditures and acquisitions would be cut significantly, and retained at that lower level. We have projected forward into 1997 and 1998 management's stated goal of $1.1 billion in capital expenditures (the 1998 figure becomes $750 million after the restructuring). We have also limited annual acquisitions to $200 million, which is comparable to the 1995 figure, but significantly lower than the figures of 1991 - 1993.
3.We have assumed aggressive debt pay-downs from operating cash flows of $500 million, $500 million, and $200 million in 1996, 1997 and 1998, respectively. Dividends would be held flat at the current $0.64 per share, at least until after the distribution of a special dividend in 1997 (Table 6b). We have not made any assumptions regarding changes in shares outstanding, although we are aware that the Board has authorized the repurchase of up to 25 million shares.
4.Rust would be sold in segments over the balance of 1996 and through 1997 (Tables 8 and 11). In 1996, the company would complete the sale of discontinued assets to Raytheon, and sell the remaining discontinued assets to third parties. Rust would sell its 12% holding of WME, OHM Corp., and NSC Corp., the former probably in a joint underwritten secondary offering together with WTI's shares of WME. Following these steps, the company would repay debt owed to WMX, and pay a partial liquidating dividend to shareholders, WMX and WTI. In 1997, it would sell the environmental engineering and industrial service businesses, probably in separate transactions. Rust would pay a final liquidating dividend at the end of 1997.
5.WTI (Tables 9 and 11) would sell its 12% holding of WME for an estimated $495 million in the 3rd Quarter of 1996, probably in an underwritten secondary offering. It would receive two liquidating dividends from its 40% Rust ownership, totaling $637 million, one in 1996 and one in 1997. During the 1996-1997 period it would repay debt of $250 million and pay special dividends to shareholders totaling $1.15 billion.
6.WMX would sell its 19% interest in ServiceMaster L.P. in 1996 (Table 6a). These shares would be sold to the public for an anticipated price of $628 million, and would be used to pay down debt.
7.In 1996, WMX would use the proceeds from Rust, WTI, and ServiceMaster to repay $1.6 billion of its long term debt, reducing the pro-forma debt ratio to about 43.2% (Table 6a). In 1997, it would use the proceeds from the Rust and WTI dividends to reduce its debt ratio further to about 40.5%, and pay a special dividend to its shareholders of $1.0 billion (Table 6b).
8.At the end of 1997, WMX would distribute to shareholders its 58% holding of WTI and its 56% holding of WME.