Description

Laidlaw Incorporated (“LINC”) is currently in the process of emerging from a restructuring process, which will result in a net reduction of approximately $2.9 billion of total indebtedness. The new Laidlaw equity is currently trading in the when-issued market (Ticker: LALWV) at $8.00 per share. Such a price equates to a valuation of 3.9x 2004 EBITDA (FY ended August; as per the restructuring plan) and 6.1x 2004 FCF. Applying an EBITDA multiple of 5.0-5.5x would translate to a stock price of $13.25-$16.00.

LINC will emerge with a new management team, more appropriate balance sheet, and a focus on execution as opposed to acquisition (a major piece of the plan revolves around cutting out low margin bus services contracts and yield management in Greyhound).

Laidlaw’s balance sheet problems began in 1997-1999 as it went on an acquisition spree, which started with the purchase of American Medical Response Inc. (“AMR”) for approximately $1.3 billion. AMR is a leading provider of emergency and non-emergency ambulance services in the United States. Then, in September 1997, the Company acquired all of the outstanding shares of EmCare Holdings Inc. in a transaction valued at approximately $400 million. EmCare is a leading provider of emergency management services to hospital-based emergency departments.

In April 1998, pursuant to an exchange offer for cash and stock, the Company's subsidiary, Laidlaw Environmental Services, Inc., acquired all of the outstanding shares of Safety-Kleen Corp. in a transaction valued at approximately $2.2 billion. As a result of the transaction, the Company's ownership of Laidlaw Environmental Services, Inc., which was renamed Safety-Kleen Corp., was reduced to approximately 35% from approximately 67% prior to the transaction.

Then, in March 1999, the Company acquired all of the outstanding shares ofcommon stock of Greyhound Lines, Inc. in a transaction valued at approximately $800 million. Greyhound is the only nation wide provider of scheduled inter-city bus transportation services in the United States.

Due to a number of issues, including but not limited to, poor performance in both its healthcare services division (reimbursement issues with Medicare and Medicaid) and Safety-Kleen (including accounting irregularities) – all compounded by significant financial leverage - Laidlaw filed for Chap. 11 bankruptcy protection in June 2001.


REORGANIZED BUSINESS:

Laidlaw is organized under three reportable segments: contract bus services, Greyhound and healthcare services. The Company provides contract bus services, consisting of school bus transportation throughout the United States and Canada and municipal and paratransit bus transportation within the United States. The Company's Greyhound
segment provides inter-city and tourism bus transportation throughout North America. The Company's healthcare services segment provides healthcare transportation services and emergency management services in the United States.

CONTRACT BUS SERVICES

The Company operates school buses and special education vehicles,
primarily under the name Laidlaw Transit, in the United States and Canada.

The Company is the largest school bus operator in North America. It has
contracts with 63 school boards and districts in Canada and with 1,064 in the United States, as well as various other educational institutions, providing transportation for approximately two million students each day. In Canada, contracts are generally negotiated and renewed annually. In the United States, contracts generally extend for three to five years, with options on the part of the boards to extend the contracts or to solicit new bids. Rates are usually established on a per-diem basis and vary with the number of buses and pupils and the length of each route. The Company also uses its school bus fleet for charter purposes.

The Company also provides services to municipal transit customers
through 134 contracts in the United States and Canada. The Company is the largest operator of paratransit services in the United States providing access to transportation for mobility-impaired individuals.

GREYHOUND

The Company acquired Greyhound Lines, Inc. during fiscal 1999 and had
previously acquired Greyhound Canada Transportation Corp. in October 1997. Greyhound is the only nationwide provider of scheduled inter-city bus transportation services in the United States. Greyhound serves the value-oriented customer by offering scheduled passenger service which connects rural and urban markets throughout the United States and Canada.

Greyhound also provides package express service, charter bus service and, in many terminals, food service. In addition, the Company provides scheduled services under private contract and package tours to major tourist regions in the United States and Canada.

HEALTHCARE SERVICES

The Company provides healthcare transportation services, primarily
under the name American Medical Response, and emergency management services, primarily under the EmCare name.

HEALTHCARE TRANSPORTATION SERVICES - American Medical Response

The Company is the largest provider of healthcare transportation
services in the United States, operating from locations in 37 states. These services consist of critical care transportation services, non-emergency ambulance and transfer services and emergency response services. The Company provides approximately 3.7 million transports annually. The Company has approximately 150 agreements with municipal or county public safety agencies to provide performance-based contracts for 9-1-1 response and over 4,000 contractual agreements with healthcare facilities. It also provides joint training, shared staffing and stationing arrangements and contracted dispatching. The Company also provides comprehensive on site medical care and transport services for all types of special events.

EMERGENCY MANAGEMENT SERVICES - EmCare

The Company also provides emergency management services to hospital
based emergency departments. The Company recruits physicians, as well as specially trained physician extenders, evaluates their credentials, and arranges for the provision of their services to hospital based emergency departments and free standing treatment centers. The Company also assists in such operational areas as staff co-ordination, quality assurance, departmental accreditation, billing, recordkeeping, third party payment, risk management services and other administrative services. The Company has approximately 250 contracts for the management of emergency departments and provides emergency services in 39 states to approximately 4.1 million patients annually.

PROJECTED FINANCIALS:

Because of the volatility of performance in each of the business segments, I thought the most “fair” way to project the future success in the businesses is to use the projections in the Plan of Reorganization.

Approximately 59%, 19% and 22% of LINC’s Fiscal 2004 gross profit is projected to come from Contract Bus Services, Greyhound and Healthcare Services, respectively.

Projections for the fiscal year ended August 31, 2004 are as follows:

Contract Bus Revenues: $1.8 billion
Greyhound Revenues: $1.3 billion
Healthcare Revenues: 1.5 billion
TOTAL REVENUES: $4.7 billion

Gross Margins:
Contract Bus: 17.5%
Greyhound: 7.4%
Healthcare: 7.8%
TOTAL GROSS PROFIT: $536.2 million

EBITDA: $529.2 million
EBIT: $256.7 million

Cash from Operations: $464.3 million
CapEx: $321.9 million
Free Cash Flow: $142.4 million

(FULL FINANCIALS CAN BE FOUND IN THE PLAN OF REORGANIZATION)

Valuing the businesses is a very arbitrary and possibly controversial task, so I will attempt to oversimplify it by providing a few data points:

· As part of the restructuring plan, LINC was required to commit new common stock valued at $50 million. A total of 3.777 million shares of stock were placed into the pension plan, implying a value of $13.25/share.

· Precedent transactions in the bus services division have ranged from approximately 7-9x EBITDA. Assuming the Contract Bus division is worth the low end of that range, the division is worth $2.1 billion ($300mm EBITDA), which is almost exactly the entire enterprise value of LINC at current stock prices.

CURRENT VALUATION:

Stock Price: $8.00
Shares Outstanding (inc. options): 108.8 million
EQUITY VALUE: $870 million

Debt: $1.4 billion
Cash: $0.2 billion
ENTERPRISE VALUE: $2.066 billion

EV / 2004 Revenues: 0.44x
EV / 2004 EBITDA: 3.9x
P/E: 9.6x
P/FCF: 6.1x

RISKS:
-- The transportation businesses are capital intensive, with unionized workers
-- Greyhound is dependent on leisure travel and economically sensitive
-- History of poor operating performance
-- Levered balance sheet (over 2.0x Debt/EBITDA)
-- Budgetary pressures by municipalities may lead to pricing pressure in bus services
-- Reimbursement and pricing pressures in healthcare services
-- Rising costs (healthcare, fuel, labor, etc.)

CATALYSTS:
-- Appropriate valuation
-- Investor awareness and analyst coverage
-- Trading on a major market as opposed to the when-issued market
-- Hopefully hitting the numbers in their Plan of Reorganization
-- Increased profitability and execution in each of their businesses

Catalyst

-- Appropriate valuation
-- Investor awareness and analyst coverage
-- Trading on a major market as opposed to the when-issued market
-- Hopefully hitting the numbers in their Plan of Reorganization
-- Increased profitability and execution in each of their businesses