Republic Services to merge with Allied Waste
Republic Services rejects Waste
Management’s second proposal
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
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
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
“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
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
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
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
In terms of finding synergies, however, it’s never easy,
“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