August 01, 2016
Waste Company Mergers And Acquisitions Continue To Thrive
Merger and acquisitions (M&A) professionals have enjoyed tremendous success these days within the waste industry.
The catalyst – from low profit margins to generational transfers to low volume sales – have many waste management companies looking to sell and others are looking to expand their business portfolios.
So what are these experts seeing in terms of the M&A activity within the waste management and recycling arena?
Simply put, it’s active. In fact, even in this unpredictable market, more and more companies are looking to expand their horizons while others are looking for a way out.
Aaron Witalec, managing director of UHY Corporate Finance, said the biggest trend that they have seen in the waste management industry tends to be great news for owners of privately-held middle-market waste management companies. UHY was the lead investment banker on the sale of Canton Waste to Rizzo Environmental Services that closed in 2015.
“Not only have the larger consolidators continued their roll-up strategy, but private equity has also entered the space and is now focusing on smaller deals compared to what they have focused on previously,” Witalec said. “Competition for deals has driven private equity interest towards smaller waste management companies that may not even enter the field of visibility of the larger consolidators.”
Michael Pfeffer, managing partner with Post Capital Partners said the waste industry has historically been a capital intensive industry due in large part to the Subtitle D requirements for landfills designed to protect the environment (i.e., double liners, leachate and gas collection systems, financial assurance for closure and post closure, etc.).
“Limited growth in both waste volumes and pricing due to continual increase in recycling and reuse – in large part through regulations – and the slow growth economy have put pressure on waste companies to seek growth through M&A activities,” Pfeffer said. “Acquisitions of waste collection businesses that feed landfills provide a captive source of volume growth and potential pricing power depending on market density. Additionally, the increased scale provides opportunities for operating efficiencies and lower capital costs.”
One of the largest recent transactions in the industry was Waste Connections’ acquisition of Progressive Waste Solutions earlier this year. “Although the deal was structured as a merger it was an acquisition,” Pfeffer said. “There will be a transition period where the combined company streamlines the operations and divests of non-core operations. The impact on an independent company will depend on the specific regional market. It may create opportunity if the area is determined to be non-core or it may substantially increase competition.”
Small independent companies need to assess their ability to compete long term in a consolidating industry. Pfeffer said, depending on the market dynamics, independents will have less access to debt at higher costs than larger companies and potentially higher operating costs.
Independents should be evaluating a variety of alternatives including selling to another waste company; partnering with a private equity firm to provide some liquidity to the business owner while providing capital and expertise to grow the business through acquisition; or do nothing.
“This is realistically only a short term option because the industry is changing,” Pfeffer said.
According to Witalec, waste management company owners and operators need to be aware of the M&A climate shifts within the industry. The reason being that many privately-owned companies are being approached by the larger consolidators.
“First, a business owner needs to truly understand what their long-term plan for the business is,” Witalec said. “If the timing might be right for the business owner to entertain a potential sale of their business, several important factors need to be considered.” For instance, the key factors that UHY has seen in the marketplace that make an attractive acquisition target include secure contracts with favorable pricing terms and options to extend, multiple recurring revenue streams that are growing, and an up-to-date fleet with no deferred capital expenditures.
Witalec recommends that business owners put themselves in the buyer’s shoes. A business owner should be able to effectively convey the strategic value of their business to potential acquirers. Will the potential acquisition open up new markets? Will it be complementary to existing markets? Will the acquired company enable the combined organization to deliver new or unique service offerings?
“The answers to each of these questions are likely to differ among varying acquirers,” Witalec said. “Owners should also focus on taking the uncertainty out of their business. This is especially important in contract negotiations in the months leading up to a potential sale. And a management team is extremely important in making a company an attractive acquisition target. If a sale of the business is on the horizon, the owner should focus on getting a full management team in-place that is capable of running the company post-close. Waste management deals with the richest valuations are typically deals that have the most impressive management team.”
Antitrust issues can have a significant impact on both the timing and outcome of M&A deals in the waste management industry. In fact, the waste management industry has a long history of antitrust enforcement of M&A transactions.
“Anti-trust issues can and do surface in M&A transactions of any size, and even where the geographic impact is limited to a single local area,” Daniel Hemli, partner at Bracewell, an international law firm in Houston. “This is especially relevant in the waste management industry, in which many companies serve customers within a small geographic radius such as a metropolitan area or county.”
In 2015, for example, the U.S. Department of Justice Antitrust Division (DOJ) required Waste Management Inc. to divest small container commercial waste collection routes in 3 local geographic areas in Kansas and Arkansas as a condition to its $405 million acquisition of Deffenbaugh Disposal Inc.
“The two federal antitrust agencies, the DOJ and the Federal Trade Commission, are being extremely aggressive in investigating and challenging M&A transactions that may be harmful to competition, and recently have brought a string of lawsuits opposing M&A deals, large and small, in a variety of industries,” Hemli said. “Several of these challenges were resolved through settlements, some are still pending, and other transactions were blocked or abandoned. Even for transactions that are reviewed and ultimately cleared, merger investigations are taking longer to complete.”
Hemli stresses that waste management companies need to be cognizant of these trends and issues when contemplating M&A transactions.
“Companies can take a number of preventative measures to reduce the risk of an investigation or challenge and to avoid unnecessary delays,” Hemli said.
•Perform an antitrust risk assessment early and irrespective of deal size, especially in a strategic combination of competitors (even if the merging companies compete in only one local area, for example, in waste collection or disposal). Often, parties will be able to rule out any serious antitrust issues with minimal time and expense, but an upfront assessment will help avoid unpleasant surprises down the road.
•Determine if a filing is required under the Hart-Scott-Rodino Act (HSR Act), which requires many M&A deals valued above a specific dollar amount (currently $78.2 million, adjusted annually) to be reported to the DOJ and FTC prior to closing.
•Exercise care when creating internal business documents, including emails, since the content and phrasing of such documents can carry substantial weight in an antitrust review.
•Do not assume that just because a deal is too small to be reportable under the HSR Act that it is automatically immune from investigation or challenge, because that is not the case. The DOJ and FTC can challenge any M&A transaction that affects U.S. commerce, even years after closing, and they have actively pursued non HSR-reportable deals in recent years.
“Have a plan for keeping customers informed about a transaction and educating them on its benefits, in order to avoid or minimize customer complaints to an antitrust agency,” Hemli said.
On the Horizon
Witalec said the deal environment for middle-market privately-held companies will continue to flourish throughout the foreseeable future.
“As mentioned previously, competition for deals combined with baby boomers needing to monetize what is likely to be their most significant asset will be the two main drivers,” Witalec said. “However, much larger deals are more likely to be impacted by fluctuations in both the equity and the debt markets, which can have a significant impact on EBITDA multiples, enterprise value, and financing availability and alternatives. The key metrics that may drive these fluctuations are interest rates and the value of the U.S. dollar compared to foreign currencies.”
Pfeffer anticipates that the M&A activity in the industry will continue given the high amounts of contracted revenue, strong operating cash flow dynamics, the recession resistant nature of the sector, the ability to easily integrate tuck-in acquisitions, a highly fragmented landscape of businesses, and strong ROI on capital investments.
“Independents will need to either sell or grow through acquisition to survive,” Pfeffer said. “They should make sure they have a clear understanding of their specific market dynamics and be realistic about their own personal situation to determine which path to pursue.”