Solid waste sector poised for growth
Brian R. Hook
As waste collection volumes continue
to track the overall growth of the economy, solid-waste companies
are shunning the big mergers and acquisitions of the past and
focusing more on operations and even some divestitures to boost
Waste Connections Inc., with
operations in 23 states, is looking to expand by both organic
growth and smaller acquisitions. Worthing Jackman, chief financial
officer of the Folsom, California-based company, said Waste Connections
typically looks to acquire private solid-waste operations. He
described most of the buying as “tuck-in acquisitions.”
The potential acquisitions tend
to record anywhere from $500,000 to $1.5 million in revenues a
year. He said that Waste Connections sometimes acquires operations
with between $10 million to $25 million in annual revenues. These
companies tend to have franchise or exclusivity agreements and
provide 100 percent of the service in a defined territory. These
types of solid-waste operations are usually located on the West
“Organic growth has been
accelerating. We’re getting big enough that organic growth
is providing about the same amount of top-line growth as acquisition
growth,” Jackman said. Waste Connections reported revenues
of $721.9 million in 2005 up from $624.5 million in 2004. Net
income increased to $83.9 from $72.3 million in 2004.
Waste Connection expects revenues
to range between $795 million and $805 million this year. Waste
Connections targets secondary and suburban markets that have strong
demographic growth trends and where competitive barriers to entry
can be developed. Most of its operations are currently on the
West Coast and in the South.
“Our belief is that this
is a local business. Every local market has different characteristics,”
Jackman said. Waste Connections plans to spend $90 million on
capital expenditures throughout this year. “We focus on
a decentralized operating structure where we empower our local
management team to run the business,” Jackman said.
Volume growth across the waste
sector continues to track the gross domestic product at most solid-waste
companies, said John Skinner, executive director and chief executive
officer of the Solid Waste Association of North America. The trade
association for the solid-waste industry is based in Silver Spring,
Maryland. Skinner said that regional developments give some solid-waste
companies more volume growth.
“If there is a population
influx into an area, then your volumes are going to increase greater
than the average across the country,” Skinner said. Other
factors helping to determine volumes include new home construction,
which impacts construction and demolition debris waste. Hurricanes
and other natural disasters also affect volumes.
The National Association for
Business Economics is predicting real GDP growth of 4.5 percent
in the first quarter of this year. The NABE expects the economy
to shake off the effects of last year’s hurricanes and surging
oil prices. For all of 2006, the association for economists in
Washington D.C. expects GDP growth of 3.3 percent.
Skinner said he does not expect
to see any major mergers or acquisitions. He said that he was
told that there is $2 billion worth of acquisitions that are being
considered by the major solid-waste companies. “But they
are selective and just adding on,” he said.
“The other thing that you’re
seeing is the larger companies are willing to divest themselves
of accounts that are not returning what they would like to see,”
Skinner said. “That’s going to create some opportunities
for your smaller companies to fill in.”
Waste Management Inc. announced
plans to divest under-performing or non-strategic operations representing
over $500 million in annual revenues. “These operations
consist primarily of collection businesses and transfer stations,”
said Lynn Brown, vice president of corporate communications at
the Houston-based solid-waste company.
“Improving the quality
of our assets has been one of our top priorities. We have been
studying our under-performing business operations with the objective
to either fix or sell them,” Brown said. The reviews were
based on a number of financial and operation criteria and how
the operating units fit into the company’s business model,
“We will also be looking
for opportunities to reinvest the divestiture proceeds to grow
our business in areas with higher markets,” Brown said.
“We do make acquisitions from time to time to improve our
efficiencies – usually in the collection area.”
Waste Management, which is the
largest solid-waste company with operations across the country,
reported revenues of $13 billion in 2005 compared to $12.5 billion
in 2004. Net income increased to $1.2 billion from $939 million
during 2004. It expects to see continued growth in 2006 and is
planning $1.45 billion in capital expenditures.
Stewart Scharf, an equity analyst
Standard & Poor’s Equity Research Services in New York,
said most of the solid-waste companies that he tracks are focusing
on pricing. He said the companies are using hedging programs to
offset rising fuel costs. The companies are also adding fuel surcharges.
“Some are willing to sacrifice market share in a certain
region if it means that they can raise the price a little bit
more,” he said.
Scharf said Republic Service
Inc. is a bit of a standout in the solid-waste sector when it
comes to pricing. “They’ve been able to implement
more pricing initiatives, generally improving their overall margins
and generating a lot free cash flow,” he said.
Fort Lauderdale, Florida-based
Republic Services is still looking for operations to acquire,
according to Will Flower, vice president of communications at
the company. “However, if seller expectations are too high
or if a company does not fit our very disciplined business model,
we simply choose not to do the acquisition,” he said.
Flower said the company’s
acquisitions started to slow in 2000 and 2001. “We really
focused on letting the dust settle and started to derive value
from the companies that we had purchased over the last several
years,” Flower said. Revenues at Republic Services for 2005
totaled $2.8 billion compared to $2.7 billion in 2004. Net income
totaled $253.7 million compared to $237.9 million in 2004. The
company is targeting internal growth this year of 5 percent. It
is also planning on spending $315 million on capital expenditures.
Allied Waste Industries Inc.,
which recently announced plans to move its corporate headquarters
to Phoenix from its current location in North Scottsdale, Arizona,
expects to spend $700 million on capital expenditures this year.
It is the second largest waste-management company after Waste
Management. It has operations in 37 states.
Revenues at Allied Waste totaled
$5.7 billion in 2005, up from $5.5 billion in 2004. Net income
increased to $151.8 million compared to $27.7 million in 2004.