Wheeling and dealing

The waste hauling sector has a long history of merger and acquisition (M&A) activity, often demonstrating a pattern of consolidation followed closely by a flurry of startups—many times by the same people who had just sold their prior companies a few years earlier.

This year has seen a steady stream of M&A transactions, with some occurring on the hauling side of the business and several others taking place in the recyclables processing sector.

The M&A activity in 2017 was not characterized by any one method or strategy. Rather, some of it was driven by companies or venture capitalists with a stated consolidation purpose, while other transactions were between two companies that saw a unique opportunity because of timing and fit.

PUBLIC DISPLAYS

Measured in dollars and cents or in geographic reach, one of the biggest transactions of 2017 was the acquisition of material recovery facility (MRF) operator ReCommunity, Charlotte, North Carolina, by Phoenix-based Republic Services Inc.

Announced in late August, the acquisition put 26 MRFs in 14 states in Republic’s hand, which already was operating 60 MRFs. The acquisition, valued at $165 million, included certain tax benefits valued at approximately $50 million, Republic reported in its Q3 earnings results.

The national waste hauling, recycling and landfill operations firm said in the reported results the acquisition was part of its Blue Planet strategy, which includes a goal of adding an additional 150,000 tons or more of recycling capacity by 2018.

The nation’s largest waste and recycling firm, Waste Management (WM), Houston, also grew via acquisition in 2017. In September, WM purchased Keep It Clean Disposal, a hauling company in St. Joseph, Missouri, with a reported 1,300 commercial and 6,000 residential accounts.

That purchase can be considered a “tuck-in” acquisition with WM’s much larger purchase of the former Deffenbaugh Industries, a hauling and recycling firm in Kansas City, Missouri, acquired in a transaction finalized in 2015.

In a mid-2017 interview with Waste Today sister publication Recycling Today, WM CEO Jim Fish said regarding the firm’s acquisition strategy, “It is a goal of ours to continue to improve our recycling business and add to our recycling business, [and] we will continue to do that particularly where we have a shortage of recycling assets.”

Beyond the high-profile ReCommunity deal, however, those two large waste and recycling firms were relatively quiet on the M&A front in 2017. Making a steadier stream of news were several other publicly listed firms and capital funds that have chosen to focus on waste and recycling.

LOOKING TO BUY

Casella Waste Systems Inc., Rutland, Vermont, reported a 6.6 percent revenue increase in the first half of 2017 and cited several factors including the “acquisition of two hauling companies.”

Waste Connections Inc. (WCI), with corporate offices in Toronto and Texas, concentrated on following up on its 2016 acquisition of Canada-based Progressive Waste Solutions (subsequently rebranded as Waste Connections of Canada), but also likely engaged in acquisitions without fanfare.

While being interviewed by Waste Today in early 2017, WCI CEO Ronald Mittelstaedt said, “We have grown through acquisitions, mostly of private companies, over the last 19-plus years. We’ve done 450 to 470 private company acquisitions. We’ve only done one public-to-public transaction ever [and] that was in 2016 when we acquired Progressive Waste Solutions.”

On WCI’s website, the company invites hauling firms throughout North America to contact it if they are “thinking of selling” their companies. “We offer competitive valuations, ongoing employment opportunities as part of a dynamically growing public company, creative structures to accommodate your tax and estate needs and [a] fast, confidential and easy transaction,” WCI says.

WCI’s M&A activity in 2017 got off to a strong start with its early January announcement that it had acquired Illinois-based Groot Industries.

“We have bank clients doing smaller tuck-in acquisitions on a monthly basis that are not made public. These levels remained fairly solid in 2017, despite smaller players expecting the lofty valuations that are reserved for larger companies.” – Joseph Ursuy

Waste Corp. of America (WCA), based in Houston and led by former WM CEO Bill Caesar, also has made M&A news with its purchases of three waste hauling firms, two in Missouri and one in Florida.

WCA notes it has been owned since 2012 by Macquarie Infrastructure Partners II (MIP II), a fund managed by a division of the Macquarie Group, which is focused on investments in the U.S. and Canada and that manages publicly traded entities, private equity-backed consolidators and privately held family operations.

KEEPING IT QUIET

Hidden Harbor Capital Partners, Fort Lauderdale, Florida, another investment fund active in the waste sector, announced buying Stella Environmental Holdings Inc., a division of Action Resources based in Houston, in August.

Hidden Harbor describes itself as “an operationally focused private equity firm specializing in control investments in lower-middle-market companies.” Stella Environmental provides transfer station management and municipal waste logistics services to haulers and solid waste districts in several states.

In early October, Hidden Harbor and Stella announced the purchase of Rackleff Enterprises, a Georgia-based company that manages and operates seven municipal solid waste (MSW) transfer stations in the southeastern U.S.

When that transaction was announced, the executives behind it indicated they plan to remain active on the M&A side. “Stella is eager to partner with Hidden Harbor, which will bring the resources and capital to continue our strong record of performance and support our next phase of growth,” Stella CEO Wilfred Roth said.

The press release issued by Hidden Harbor and Stella on the Rackleff acquisition is an exception when it comes to M&A activity in the waste sector.

“I would say that in sheer number of transactions, the vast majority of solid waste acquisitions are not made public,” Joseph G. Ursuy, senior vice president and manager of the Environmental Services Department at Detroit-based Comerica Bank, says.

The lack of fanfare in 2017 did not mean a lack of activity, Ursuy says. “We have bank clients doing smaller tuck-in acquisitions on a monthly basis that are not made public,” he comments. “These levels remained fairly solid in 2017, despite smaller players expecting the lofty valuations that are reserved for larger companies.”

As Ursuy indicates, for M&A activity to flourish, sellers must be convinced they are getting a fair price for their firms, while it is the duty of buyers and their bankers not to overpay.

CAPITAL CONDITIONS

For struggling small-business owners, it may be difficult to contemplate, but there have been public companies and private equity funds building up large cash war chests through much of this decade.

Having a strong cash position is a positive, but at some point, boards of directors and fund managers must figure out how to best invest. Investing in the waste sector may not be the most glamorous choice, but Ursuy says aspects of the industry appeal to investors.

“Private equity has been very involved in the solid waste management industry for the past 15 years,” Ursuy says. “Many of those firms are valued, long-term clients [of Comerica Bank].”

Its Environmental Services Department has established links with private equity firms because “the waste industry provides an essential service, has high barriers [to entry], is capital intensive and has visible growth avenues via acquisitions and new contracts,” Ursuy says.

These factors have helped guide money into the sector throughout 2017.

In October, Littlejohn & Co. LLC of Connecticut agreed to buy Strategic Materials Inc. (SMI), a glass recycler in North America, from Willis Stein & Partners, Northbrook, Illinois, and London-based Vision Capital.

Considerations and risks can arise when recycling operations are part of the potential acquisition.

Fluctuating secondary commodity prices should be factored in when determining the future profitability of acquired waste sector assets. Increased fuel costs and landfill closures can quickly change the expense picture for haulers.

Regulatory or legislative aspects to consider (including contracts, mandates and subsidies) can make a once-promising acquisition problematic.

But with proper due diligence, a growth-through-acquisition strategy can work, Ursuy says. “Financial buyers often see success when they buy right (on price, geography and growth opportunities) and build out a platform in partnership with a strong industry leader.”

The larger financial sector conditions are in place for waste sector M&A activity to move forward in 2018, according to Ursuy. “The market is full of liquidity right now, stock valuations of public company buyers are robust and financial buyers have record amounts of liquidity to put to work,” he states.

The author is an editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.