Introduction

A private equity fund sought to acquire an industrial shipyard with over 130 years in industrial operations. The objectives were to expand operations, stimulate growth and attract new industrial tenants. However, as with most acquisitions in industrial operations, a comprehensive assessment of financial, environmental and operational risks was essential before proceeding.

This case study outlines the process and outcomes of the due diligence conducted by A&M's ESG Advisory Services team to evaluate the environmental, health and safety (EHS) aspects of the acquisition.

Challenges and Objectives

Given the scale and inherent risks involved in the acquisition, securing approval from lenders and meeting investor expectations was crucial. The central objectives included:

  1. Determining the feasibility of the opportunity.
  2. Identifying potential risks and potential capital improvements associated with the acquisition.
  3. Exploring viable investment alternatives or mitigation strategies if required.

Lenders and Due Diligence

Lenders stipulated the requirement for a comprehensive due diligence process encompassing EHS, alongside the conventional operational and financial evaluations.

The decision to engage A&M's Advisory team was based on our deep technical and operational expertise and our ability to provide a fully integrated approach (EHS, operational and financial). This approach streamlined the discovery process, highlighted operational and EHS risks and the associated impacts on the financial balance sheet, as well as minimized the need for an excess of client communications throughout the process.

Scope of Services

A&M ESG Advisory Services team was tasked with providing the following services in the engagement:

  • Identifying potential material operational EHS risks or liabilities associated with the target company and proposed transaction.
  • Evaluating liabilities connected to known and potential site contamination, including sediment contamination in the adjacent bay.
  • Reviewing investment plans to assess if construction activities would heighten environmental exposure.
  • Assessing permitting requirements for construction and new tenants.

Outcomes

  1. Health and Safety (H&S) Concerns:
    Significant H&S concerns were identified, tied to a history of poor performance, numerous incidents/fatalities, ongoing agency inspections and substantial capital requirements for repairing two dry docks. These issues could have notable financial implications, for addressing problems or covering fines/legal expenses. Repairing the dry docks is critical to prevent potential business disruption, considerable environmental damage and the need for costly dock replacement.
  2. Sediment Contamination Risk:
    A significant risk was identified concerning the ongoing open cleanup of bay sediment contamination by the target company, potentially incurring significant monetary spend due to the complex and costly nature of bay sediment remediation. Additionally, construction activities had the potential to disturb areas of contamination throughout the shipyard property, resulting in higher soil removal and disposal costs and potential agency involvement.
  3. Risk Mitigation:
    The team collaborated with A&M's Operational and Financial Diligence teams to assess potential investment options with lower intrusion and contamination risk, and to develop methods for risk mitigation such as indemnity, price reduction, escrow and insurance. These options involved creating less intrusive construction plans and utilizing existing infrastructure instead of moving forward with new construction. The team identified areas on the property with lower contamination risk for potential new structures.

    The proposed mitigation strategies encompassed obtaining seller indemnity for property contamination, deducting remediation costs from the purchase price, setting up an escrow for potential remedies and acquiring environmental insurance to cover past contamination cleanup expenses.

    Given that all teams were part of A&M, we ensured a seamless diligence process through consistent communication, facilitating synthesis of findings and enhancing the client's understanding of risks. External ESG Due Diligence teams wouldn't have integrated findings in the same way, underscoring the efficiency of our approach.
  4. Environmental Permits:
    Environmental permits required for both construction and future tenant operations were assessed and outlined. A permit matrix detailing the necessary permits, responsible agencies and associated timelines was provided.

Conclusion

Our private equity fund client chose not to proceed with the acquisition, due to a combination of poor financial performance, ESG/EHS material risks and significant capital requirements for operational improvements. A&M's integrated due diligence approach provided a holistic view and interconnectivity of the EHS material risks of the acquisition, reducing the due diligence timeline compared to all the workstreams being handled independently.

Originally published by 19 March, 2024

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