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Waste Connections (NYSE: WCN) and Veolia Environmental, the US’s seventh and fourth largest garbage disposal companies, are likely buyers of pieces to be divested from the waste industry’s largest merger in a decade, industry sources told mergermarket.
Florida-based Republic Services – the third largest player in waste – rejected an unsolicited USD 6.2bn takeover bid from Houston-based industry leader Waste Management on 18 July, in favor of its inked deal to acquire Arizona-based Allied Waste, the second largest player.
A Republic/Allied Waste merger would most likely spawn divestitures of landfill, transfer stations and hauling operations in Atlanta, Georgia, but also California, Texas and the Carolinas, where both companies have overlap, according to a Republic insider. Republic has operations in 21 states, with a strong foundation in the Sunbelt states of California, Texas, Florida and the Carolinas. Allied has a much larger national footprint across 38 states, but is absent in Florida, meaning the Sunshine state will likely not see divestitures, said the insider. No divestitures are anticipated in the New England and upstate New York areas either because Republic is absent from those markets, according to the insider.
A Waste Management/Republic combination would likely lead to the disposal of the same assets that Waste Management was forced to sell to Republic following its 1998 merger with USA Waste, according to Waste Management’s 14 July press release. Those assets stretch from New York to California in almost every market that both companies operate today, according to the insider. Such a merger would likely lead to divestitures of USD 900m of annualized revenues, an industry analyst estimated.
An industry banker said a number of landfill assets would need to be divested from any merger with Republic because that is what local municipalities are most sensitive about. Smaller independent waste companies are likely now to seek financing to buy chunks of resulting divestitures, but with landfill assets worth 10x to 12x cash flow, few can get financing for that kind of price, the banker added.
However, a second banker said landfill pricing is down given the credit crunch, and that deals priced in 2007 saw much different numbers than those that would be done today.
While other industries have to struggle to make acquisitions work, the execution risk on these deals is fairly low, said the second banker. As such, it makes sense for these businesses to grow though acquisition for route consolidation, to internalize waste streams, or reduce overhead expenses.
Waste Connections, the listed California-based solid waste company, believes it is well positioned for any potential divestitures that come out of either combination, said CFO Worthing Jackman, who declined further comment. The analyst added that Waste Connections is clearly geared up for buys, noting its roughly USD 500m in capacity and its ability to add another USD 300m if necessary.
Wisconsin-based Veolia Environmental Services North America, a unit of France-based Veolia Environnement, is also expected to be interested in pieces, according to the second industry banker. Veolia’s focus is the upper Midwest/Mid-South, and it could look at pieces there or in a new region, said the banker. Veolia did not return calls for comment.
Private equity-owned Waste Industries, the 16th largest garbage disposal company, is seen as a plausible buyer in the Mid-South and the Carolinas, according to the second banker and the insider.
Other potentially interested parties could include listed BFI Canada, which is based in Toronto but has most of its operations in the US, and Vermont-based Casella Waste, which does not have quite as many resources to do deals but could look for pieces in the Northeast, the second banker said. Listed Boca Raton-based Waste Services could be a good candidate for anything that came up in Florida, although the company does not currently have the necessary liquidity, the second banker added. Waste Services had negative free cash flow (USD -3.1m) and a total debt to EBITDA ratio of 3.6x at the end of the first quarter.
A number of medium-sized waste businesses that are now owned by private equity funds could also look at picking up pieces, such as DLJ-owned Kansas City-based Deffenbaugh, which is focused on the Midwest, or Investcorp’s Virginia-based waste company EnviroSolutions, which is focused on the Mid-Atlantic and Northeast, said the second banker. EnviroSolutions’ General Counsel Charles Fromm said the USD 200m revenues company is looking to grow and would be interested in looking at buying any eventual divestitures.
A spokesperson for New Jersey-based Covanta Holding, the fifth largest player in waste, said the combinations remained too uncertain for the company to comment on its interest in any potential divestitures.
Spokespeople for Casella, Waste Services, Waste Industries, and Deffenbaugh did not return calls or could not be reached for comment.
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