SEPTEMBER 2008

Republic Services to merge with Allied Waste
Republic Services rejects Waste Management’s second proposal
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Waste Management would rather not see Republic’s fleet begin servicing Allied Waste customers.

The number of major companies in the solid waste industry is about to shrink – whether number three, Republic Services Inc., merges with number two, Allied Waste Industries Inc., or number one, Waste Management Inc., acquires Republic Services.

Fort Lauderdale, Florida-based Republic Services, which announced merger plans with Phoenix-based Allied Waste in June, plans to complete its deal in the fourth quarter, creating a company with combined annual revenue of approximately $9 billion.

Both boards have approved the all-stock merger, with Allied shareholders set to receive 0.45 shares of Republic Services’ stock for each share of Allied Waste stock.

Republic Services will issue 198 million shares of stock to Allied Waste’s shareholders and will end up owning 52 percent of the combined company.

Houston-based Waste Management responded with a second, higher offer in August for $37 a share in cash, representing a premium of 32.6 percent premium over the closing price of Republic Services’ stock on July 11th, the day before the first proposal.

Republic Services turned down both offers and reaffirmed its intent to acquire Allied Waste. “Although we are always cognizant of our fiduciary duties, Republic Services has not put itself up for sale as a result of entering into a strategic merger with Allied Waste,” says Will Flower, vice president of communications at Republic Services.

“Republic Services continues to believe that the merger between Republic Services and Allied Waste will create significant value generating opportunities, including significant cost saving synergies, and is in the best interest of stockholders.”

Republic Services enacted what is commonly known a poison pill that when triggered allows shareholders to acquire additional shares below market price, increasing the number of shares outstanding and making a takeover prohibitively expensive.

Unless Waste Management offers more money to persuade Republic Services’ board to sell instead of merging with Allied Waste, the newly combined company would retain the name Republic Services and be led by James O’Connor, currently chairman and chief executive officer at Republic Services. It would be headquartered in Phoenix.

Republic Services expects to generate $150 million annually in synergies. It has already put together a team to identify possible savings. Republic Services and Allied Waste have also retained Deloitte Consulting LLP to advise the companies on synergies.

There are a lot of overlapping businesses between Republic Services and Allied Waste that could be combined, says Stewart Scharf, an analyst with Standard & Poor’s in New York. To hit the $150 million mark for the synergies, he says it is important for Republic Services to control costs while competing for pricing and market share.

“Republic Services has good growth potential,” he says, adding that the combined company could become a formidable, national competitor to Waste Management.

Solid-waste companies usually merge to gain either revenue growth or market share, says Bruce Parker, president and chief executive officer of the National Solid Wastes Management Association in Washington D.C. “Acquisitions have always been a basic and important part of the solid-waste industry’s business profile,” Parker says.

The industry’s leader, Waste Management, was created in a 1998 merger of USA Waste with the old Waste Management. Allied Waste moved from the number three spot to the second largest by merging with Browning Ferris Industries in 1999. Republic Services was spun out of Republic Industries in an initial public offering in 1998.

Solid-waste companies today are more focused on pricing discipline to maximize return on invested capital for shareholders, Parker says. This helps to generate free cash flow, and increases profit margins, what remains from sales after a company pays out the cost of goods sold.

Anti-trust issues are not expected to be a problem with either proposed deal. Both Republic Services and Waste Management filed a Hart-Scott-Rodino notification with the United States Department of Justice, activating a review of the proposed mergers.

If regulators follow historical precedent and focus on local instead of national market share, either deal has a high probability of clearing regulatory hurdles, says Brian Butler, an analyst with Friedman Billings Ramsey Group, Inc. in Arlington, Virginia.

Depending on the amount of divestitures required by regulators, a merger might create more opportunities for smaller haulers to acquire market share, Butler says.

“The primary motivation behind both of these deals is strategic,” Butler says. “Under either scenario the combined company will have increased control over landfill and transfer stations, which should reduce risk of a competitor lowering prices.”

Cultural issues between merged companies are also not expected to be a problem with either proposed deal, says Corey Greendale, an analyst with First Analysis Securities Corp. in Chicago, noting that a lot of industry executives have moved back and forth between the companies. “I think they are familiar with each other’s culture,” Greendale says.

In terms of finding synergies, however, it’s never easy, Greendale says.

“Synergies are always a part of the rationale for doing big acquisitions. Sometimes it works out and sometimes it doesn’t,” Greendale says, adding that half of the expected $150 million in synergies cited by Republic Services would come from selling, general and administrative expenses, which combines salaries, commissions, and travel expenses for executives, along with any advertising costs and payroll expenses.

Neither transaction, whether Republic Services merges with Allied Waste or Waste Management acquires Republic Services, has negative implications for the solid-waste industry, says Leone Young, an analyst with Citigroup Inc. in New York.

“We retain our positive stance on the group, given the positive industry and pricing dynamics that have been demonstrated,” Young writes in a note to clients. “Over the near term, however, as this process continues, we expect to see continued, significant volatility in any given name, depending on which punches are thrown and by whom.”