Lessons from a former star

terry-peabody_200The decision of Transpacific Industries chief Terry Peabody to retire on June 30 didn’t exactly make headlines throughout the business world, which is something of a reflection of his reduced profile.

Just three years ago, BRW magazine valued Peabody’s fortune at $1.44 billion, as the waste management giant Transpacific became a market darling on the back of its explosive, acquisition-fuelled growth.

But then the global financial crisis hit and the $2 billion of debt that Peabody used for his acquisition strategy acted like a millstone around the company’s neck. Transpacific’s share price crashed from above $10 to just above $1, slicing almost $1 billion off Peabody’s fortune in the process.

Peabody leaves the public company stage with a shrunken fortune and the fortunes of his once-mighty waste management empire at an all-time low.

But the fascinating story of how the US-born son of a former army engineer built three successful businesses out of other people’s cast-offs provides some terrific lessons for entrepreneurs in the art finding and exploiting opportunities.

Terry Peabody arrived in Australia in the 1960s to work on the Snowy Mountain Hydro Electric Scheme, pumping high-fluidity cement to stabilise the ground before construction began on the dams and tunnels.

It was here he spotted his first opportunity. A key ingredient in the cement was fly-ash, which helped to strengthen the cement and was being imported – at high cost – from Japan.

Peabody recognised fly-ash was a waste product from coal-fired power plants and approached the coal-fired power plants in New South Wales with a deal to buy the fly-ash they had been throwing away.

Convincing the cement sector to use fly-ash was a difficult process, but eventually Peabody built a fly-ash empire, with operations around Australia, in the United States and in the Philippines. He eventually sold several parts of the business before floating the Australian operation on the Australian Securities Exchange in 1986 in a company called Pozzolanic. It was acquired by Queensland Cement less than a year later. Peabody had made his first fortune.

LESSON: Like Richard Pratt, Peabody recognised that waste products from one industry could be turned into profit in another. Look outside your sector to spot opportunities.

While building Pozzolanic, Peabody had spotted another opportunity in the form of a Canadian truck business called Western Star. Peabody knew trucks from the fly-ash carting game, and he bought the Australian distribution rights to the brand in 1983. When Western Star struck trouble in 1991, he stepped in and bought the company outright, apparently as a defensive move. After quickly turning the business around he took the company public on the Toronto Stock Exchange in 1994, bolted on the MAN truck and bus brands and then sold the manufacturing operations to DaimlerChysler in 2000 for almost $1 billion. Fortune number two had been made.

LESSON: Strong brands retain their value and bringing a customer’s eye to a business can improve performance.

When selling Pozzolanic and Western Star, Peabody made two shrewd moves by not actually selling all of the parts of these businesses. From Pozzolanic he retained a group a liquid waste management businesses that didn’t quite fit the strategy of the acquirer, Queensland Concrete. When he sold Western Star to Daimler Chrysler, Peabody retained the Australian distribution rights, and the rights to a good chunk of the Asian region. These two businesses would form the basis of Transpacific, which came into existence in 1987.

LESSON: Value can be unlocked from within a group by separating out strong businesses.

It’s also worth pointing out that Peabody spotted waste management as a potential mega-industry more than 30 years before many others. The long-term trends underpinning the sector – increasing pressure for sustainable business practices, increasing government regulation, strong population growth, outsourcing – might be obvious now, but back in the early 1980s they were much harder to spot.

LESSON: Constantly question what your industry will look like in 10, 20 and 30 years times.

Peabody shot to prominence in 2005 after floating Transpacific in May 2005 at $2.40 a share. He went on an acquisition rampage, buying more than 47 separate companies in 2006-07, at a cost of about $2.6 billion. While there were a number of big-ticket acquisitions made along the way, many of the initial purchases were of small businesses formerly owned by family groups, particularly in regional areas.

What Peabody saw was an opportunity to dominate an extremely fragmented industry yet fast-growing sector and build a dominant brand. In the end, he took on too much debt to do so, but the strategy has worked in so much that Transpacific is now the largest provider of integrated waste management services in Australia and New Zealand.

LESSON: Corporatising a fragmented cottage industry can provide rapid growth.

One thing Peabody seems to have built into all his businesses is a model whereby he can clip the ticket at multiple stages. Take Transpacific’s waste business. First the industrial solutions business comes in and provides cleaning and maintenance services for a fee. Then the waste divisions come in and collect waste for a fee. The waste is taken for processing and sorting (using trucks and machinery purchased from Transpacific’s truck and recycling equipment divisions). Any commodities (paper, glass, scrap metals) are sold and the other waste is taken to landfill sites, which are of course open to other users for a fee. Then once the landfill sites life has ended, Transpacific’s “organics and remediation” division comes in and rehabilitates the site. Transpacific even tries to capture gas from the landfill site for energy generation.

LESSON: Make sure your product or service offering includes multiple opportunities for you to capture revenue.

The final lesson from Peabody is more a lesson in what not to do. In May 2006, Transpacific narrowly missed out on buying the Cleanaway waste management business from Brambles. The business had been valued at around $700 million, but private equity firm Kohlberg Kravis Roberts eventually snared the prize with a $900 million bid.

Obviously unimpressed with missing out, Peabody announced in May 2007 he had bought the business from KKR for a whopping $1.25 billion – almost double what some commentators thought it was worth. Peabody might have been determined to get his hands on Cleanaway, but the deal saddled Transpacific with too much debt at just the wrong time.

LESSON: It’s always dangerous to overpay for an asset, not matter how badly you want it – and particularly when you’re using debt to fund the deal.

The last two years have been tough for Terry Peabody. In June 2009, Transpacific’s situation had reached a point where he was forced to agree to an $800 million bailout led by private equity firm Warburg Pincus, and accept conditions whereby any major transactions had to be approved by Warburg.

For an aggressive, self-styled serial entrepreneur, this straight jacket must have really chafed and in many ways his retirement is not a surprise.

He leaves Transpacific at a difficult point in the company’s life. While it seems there is a big, integrated business there with a relatively strong market share the company’s reputation will take some time to rehabilitate. Its financial position remains weak, and there is still the nagging problem of a shareholder class action over alleged misleading conduct and breaches of continuous disclosure rules.

Still, you wonder if this will be the last of Peabody, who was not available to comment for this article. He still has interests in the wine industry, a construction materials business in the Philippines, and investments in Canada. And besides, serial entrepreneurs never really retire, as Peabody himself admitted in a 2005 interview.

“I love business. I’ve been at it since I was very young. I love what I do and I think if I retire I’d be terribly bored.”

Could there be one more great business left in the man who was once known as Australia’s golden garbo?


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