When the numbers add up

Backers of the new federal tax law touted its ability to boost corporate investment and expansion activity as a reason to support the measure. Owners of several waste and recycling companies seem to have used their tax savings windfall to grow their companies via merger and acquisition (M&A) strategies.

Waste and recycling industry veterans are thoroughly familiar with the ongoing and dynamic presence of M&A activity in this sector. In the past two decades, juggernauts such as Browning-Ferris Industries (BFI), Allied Waste, USA Waste, Waste Management Inc. (WM) and Republic Services have arrived on (and in some cases, departed from) the scene.

These large companies tend to have “war chests” set aside to grow through acquisition, and in some cases (such as Allied Waste and Republic Services in 2008), choose to be part of a larger merger in an effort to capture greater market share.

As the year draws to a close, 2018 has seen examples of both types of M&A activity, as owners and managers of waste companies large and small had a lot of options at their disposal buoyed by a steady economic climate.

The fundamental things apply

Executives and their financial support teams charged with acquisition activities maintain an understanding that paying more for a company than what it’s valued at is often a flashing red light to avoid the deal.

Speaking at Waste Today’s 2018 Capital Markets Conference held this October in Chicago, Effram Kaplan of the Cleveland-based private investment bank Brown Gibbons Lang & Co. (BGL), said valuations of companies in the environmental services field for 2018 were “not out of whack.”

The increased buying activity among national-scale solid waste companies, however, could be moving valuations, based on price-to-earnings (P/E) ratios, up into territories where buyers need to carefully consider whether the price is right, Kaplan added. He told conference attendees that while the industry still held some M&A opportunities, challenges also abound in the sector.

The due diligence involved in buying a waste company can go well beyond calculating the P/E ratio or a revenue multiple. When buying a waste company that owns one or more landfills, the potential environmental liabilities that go along with the transaction can serve as a deal breaker. Additionally, when investing in a company that engages in recycling activities, executives must also consider unstable commodity pricing.

Speaking at a different session at the Capital Markets Conference, Seth Cunningham, project manager of Kansas City, Missouri-based consulting firm Burns & McDonnell, said there are several factors affecting pricing for recyclables at the moment. He included contamination in residentially collected material as “a big cost” that is affecting the market.

Despite the caution signals that can appear on the road to M&A transactions, 2018 has seen a steady amount of activity in the waste and recycling sector.

In an interview with Waste Today editor Adam Redling published in the September/October 2018 edition of the magazine, Scott Sergeant of Los Angeles-based advisory firm Houlihan Lokey described the current M&A market for sellers as “very strong, both generally across all industries and in the environmental/waste sectors. This is driven by an abundance of private equity capital, healthy corporate balance sheets, strong credit markets and the economy in general.” (The full interview is in an article titled “Navigating the M&A waters” starting on page 56 of our September/October issue.)

In that same interview, Sergeant said economic cycles can be less influential in waste sector transactions compared to those in many other industries. “The [waste] sector is a relatively safe place to invest because the demand for these services does not go away—they are critical to the operation of all businesses and governments.”

He added a caveat, however, stating that “from either buyer or seller perspectives, the timing of economic cycles is always a factor, as is the target company’s exposure to cyclicality.” Sergeant’s observation would indicate that larger waste firms saw 2018 as an opportune time to continue growing via acquisition, but the same conditions will not last indefinitely.

War chests and rainy days

The largest national and regional waste companies do not announce each acquisition they make, although there are enough press releases issued and media discoveries of non-announced deals to paint a picture of M&A activity in a given year.

Some transactions are high-profile enough to receive immediate attention, and when two public companies merge, there are regulatory requirements to make the deal transparent for shareholders.

One fourth quarter transaction of suitable scale was the merger between Toronto-based GFL Environmental Inc. with Raleigh, North Carolina-based Waste Industries. The latter firm was deemed by GLF to have “an [estimated] enterprise value of U.S. $2.825 billion.”

Post-merger GFL describes itself as “the largest private environmental services company in North America, with operations in all Canadian provinces, except Prince Edward Island, and in 20 states in the United States.” The Waste Industries assets added non-hazardous solid waste collection, transfer, recycling and disposal services in North Carolina, South Carolina, Georgia, Colorado, Tennessee, Virginia, Maryland, Pennsylvania and Delaware to the existing GFL portfolio.

Many other 2018 transactions followed the model of larger national and regional firms acquiring smaller companies to grow their market share in specific metro areas, states or regions.

In the fourth quarter alone, Rutland, Vermont-based Casella Waste Systems Inc. announced the acquisition of three hauling firms in the state of New York and another in Maine.

Waste Corporation of America (WCA), based in Houston, also has announced several acquisitions throughout 2018, including haulers in Florida, Kentucky, Missouri and Texas.

Two of the big heavyweights in the U.S. market, WM and Republic Services, routinely solicit inquiries from smaller waste companies ready to sell their companies.

On a page of its website labeled “Acquisitions and divestitures,” WM states it is “interested in growing through strategic acquisitions.” The company adds, “Throughout our history, we have acquired thousands of companies, and our acquisition team is continually evaluating new opportunities. We have the experience to evaluate a company, close a transaction and quickly integrate the acquired business into Waste Management. If you are considering selling your business, give us a call.”

Toronto-based Waste Connections Inc. similarly hosts a web page soliciting inquiries from business owners preparing to sell their companies, indicating North America’s largest waste firms continue to possess cash reserves, or “war chests,” ready to acquire companies that fit into their strategic growth models.

For smaller waste and recycling company owners, knowing their larger competitors are willing to gain market share through acquisition can serve as a reason to leave the industry if they determine that selling the business is the best course of action.

Isn’t that special?

By both waste (and recycling) volume and dollars spent and earned, the municipal solid waste (MSW) and commercial hauling service sectors have shown themselves to be the kingpins in the North American environmental services market.

Existing alongside these sizable sectors, however, are a variety of niche, specialty and sometimes hazardous waste markets that have attracted the attention of investors attempting to build companies with national scale.

In his presentation at the Capital Markets Conference, Kaplan said such specialty waste segments are still relatively fragmented, providing the opportunity for investors to use M&A activity to build companies of a larger scale.

At some point, larger firms such as WM or Republic Services may turn more of their attention to these niche sectors, but as of now, much of the M&A activity in the hazardous and medical waste segments is attracting a different pool of buyers. The waste-to-energy (WTE) sector also has its own roster of players, although the large MSW companies sometimes cross over into this territory.

Among the buyers on the specialty waste side this past year was Fort Worth, Texas-based TAS Environmental Services, which acquired two fellow Texas specialty waste firms in August and now operates 13 locations. The company engages in industrial environmental services, emergency and spill response, wastewater disposal, transportation, box rental and terminal services.

In the WTE sector, New Jersey-based Covanta Environmental Solutions has been active on the acquisition front as well in 2018. In September, the company completed the acquisition of two WTE facilities in Florida, while in February, it added to its non-WTE portfolio by acquiring a Canadian firm that operates recycling material recovery facilities (MRFs) in Ontario.

WTE plant operator Wheelabrator Technologies, based in New Hampshire, was itself acquired by a subsidiary of the Australia-based financing firm the Macquarie Group.

Fewer publicly announced transactions took place in the medical waste handling sector in 2018 compared to the year before, although in the northeastern U.S., Connecticut-based Pathacura and New York-based Red Bags merged operations.

The pace of waste- and recycling-related M&A activity kept many company executives, along with the bankers, accountants and attorneys with whom they consult, busy in 2018. However, in his interview with Waste Today, Sergeant says there is no guarantee that same pace of activity will stay constant in 2019.

“It is hard to predict what the environment will be a year from now, but it is unlikely to be any better than it is currently,” he says.

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