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April 2007
The operations of Republic Services, Inc. are attractive to private-equity firms, according to Leone Young of Citicorp Inc.

Private equity may target solid waste sector 

“The solid-waste industry is a perfect target for private-equity firms,” said Bruce Parker, president and chief executive officer of the National Solid Wastes Management Association, a trade group in Washington DC representing solid waste companies.

Private-equity firms, which have been on a buying spree across multiple industry sectors, have been searching for acquisitions in the solid-waste industry for years, Parker said. “The reason is because there is so much money available that the private-equity firms need to put it to use and the solid-waste industry generates a lot of cash.”

Pricing is up across the industry, which might force private-equity firms to overpay in many instances, Parker said. But private-equity investors are willing to get less return on investment than customary because they still make money, he said.

The best targets for private-equity firms are solid-waste companies with operations in growth areas, such as the South and South-Central, Parker said.

The plan: finance a solid-waste company in a market area where a company is able to improve pricing, rout density and productivity through multiple tuck-in acquisitions. The private-equity firms would buy smaller companies that feed into the company’s landfill and route structure, bringing down administrative expenses.

The private-equity firms would then grow the company and eventually sell it after around five years. The other option is to take the company public. “This is the model that private-equity firms generally use,” Parker said. “Even if they initially overpaid for the solid-waste company, they can double or triple earnings when they exit the market.”

Leone Young, an analyst at Citicorp Inc. in New York, said buyout activity is rising and investors are starting to ask whether solid-waste companies might be candidates for leverage buyouts, where debt is used to acquire public companies.

Young conducted a theoretical analysis of the major solid-waste companies and developed a number of leverage-buyout scenarios. She said that the solid-waste company’s cash flows could support take-out multiples of 8.5 to 10-times cash flows.

While it would be possible to buy out Houston-based Waste Management Inc., the nation’s largest solid-waste company, or Phoenix-based Allied Waste Industries Inc., the nation’s second largest, Young said the more likely candidate would be Fort Lauderdale, Florida-based Republic Services Inc., the nation’s third largest solid-waste company.

Young said Republic’s lower debt leverage and high free cash flow, plus the company’s smaller size would be viewed as more attractive by private-equity firms.

Both Allied Waste and Waste Management declined to comment.

Tod Holmes, chief financial officer, of Republic Services said: “As a matter of policy, Republic does not comment on acquisition activity.” However, he said that the limited amount of buyout activity so far involves smaller solid-waste companies.

One of the smaller solid-waste companies recently sold was Interstate Waste Services Inc., in Sloatsburg, New York. It operates in 21 municipalities in New Jersey and New York. The private-equity firm, Summer Street Capital Partners, sold Interstate Waste to another private-equity firm, AIG Highstar Capital II LP, in December.

Summer Street partnered with yet another private-equity firm, Ironwood Capital, in 2004 to support Interstate Waste’s acquisition of collection and disposal assets from Waste Management. Since then, Interstate Waste has completed 5 acquisitions and has grown revenue by nearly 400 percent. Acquisition prices were not disclosed.

Holmes also noted that the 1999 take over of Houston-based solid-waste company Browning-Ferris Industries Inc., by Allied Waste was similar to a leverage buyout. Two private-equity firms provided some of the financing for the $9.1 billion acquisition.

Holmes said investors have not expressed any concerns about private equity, nor is his company enacting any measures to protect itself from a leverage buyout.

Corey Greendale, an analyst with First Analyst Corp. in Chicago, said that in the long-term it might be tricky to make a leverage buyout work in the solid-waste sector. He said the acquisition of BFI by Allied Waste did not work out as well as initially planned.

Greendale said that the solid-waste industry, however, has a lot of characteristics that private equity looks for in an investment, particularly reliable, free cash flow. He said solid-waste companies tend to be recession resistant, with only a relatively small piece of the business that is sensitive to the ups and downs of the economic cycle.

“Put those things together, combined with the fact that the valuations are not at the high end of what private equity would pay for and it certainly is plausible,” Greendale said, referring to the possibility of a private-equity firm buying one of the majors.

The takeover of TXU, a Dallas-based energy company, by a private-equity firm for $45 billion has fueled buyout speculation, Greendale said. The TXU deal breaks by $6 billion the previous record buyout, which was for Chicago-based Equity Office Properties, less than 3 weeks before the TXU deal was announced.

“At some point there has to be a limit. But I think now we are within the parameters where certainly if you can take out TXU, you can take out one of the waste companies,” Greendale said. He noted that the total enterprise value of Waste Management is about $26 billion, well below the value of the TXU deal.

Stewart Scharf, an analyst at Standard & Poor’s Corp. in New York, said the solid-waste industry remains fragmented, despite a lot of consolidation during the 1990’s. He said that the large haulers are still seeking tuck-in acquisitions and asset swaps.

Scharf described the state of the solid-waste market as a “sellers market.” He said that Waste Management and Allied Waste have been selling under-performing assets, some of which have been purchased by private-equity firms, over the past few years.

“Although publicly-traded haulers make up more than 50 percent of the market, there are still nearly 4,000 private waste companies in the United States that could be targets of private-equity firms as well,” Scharf said. He said that solid waste is a steady business and somewhat recession-resistant. Plus, haulers generate a lot of cash.

“Judging by the enormous size of recent private deals in other industries, and the amount of money flowing into private investments, anything is fair game,” Scharf said.

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