Webinar Recap: M&A Insights From the Waste and Recycling Industry

Waste Advantage Magazine hosted a panel discussion on acquisitions in the sector.

Thursday, June 2, 2016

As M&A activity in the waste and recycling industry continues at a robust pace, Waste Advantage Magazine convened a panel of experts from across the industry to discuss deal-making trends. The May 17 webinar, "Mergers & Acquisitions Insights From the Waste and Recycling Industry," featured a cross-section of perspectives from investment banking, private equity, and industry participants. The panel comprised Joe Cassin, vice president of business development at Waste Management; Brian D'Amico, managing partner of Summer Street Capital Partners; Alan Handley, CEO of Lakeshore Recycling Systems; and Brad Page, head of environmental services investment banking at William Blair.

Waste Industry Sees Continued Strong M&A

The panel noted that the current M&A market in waste and recycling is strong, backed by favorable market conditions and the solid financial performance of publicly traded waste companies. William Blair's Brad Page noted that the Big Three—Waste Management, Republic Services, and Waste Connections—have significantly outperformed the broader market in recent years. Over the past three years, shares of the Big Three are up 40% to 85%, while the S&P 500 is up 25% over the same time frame.

The M&A market for the waste sector has been very consistent, averaging approximately 200 transactions annually over the past five years, with consistent aggregate dollar values. Deal-making activity has gotten off to a fast start in 2016, highlighted by Waste Connections' $2.7 billion combination with Canada's Progressive Waste, which was announced in January. In terms of the broader M&A market, 2016 started off slowly as the S&P fell more than 10% over the first six weeks of the year. Since the mid-February lows, equity markets have bounced back, credit markets have loosened considerably, and the current M&A environment remains healthy and stable.

Page said there are three major considerations that go into M&A activity in the waste sector. The first is a focus on the buyer's strategic rationale—whether the transaction opens up new markets, complements existing markets, or delivers new service offerings for the acquirer. As Page put it, whether an acquirer has the requisite strategic rationale can often be determined by asking, "Does 1 + 1 = 3?"

Second is the growth and health of the business being acquired. A company with good contracts in place and strong assets that do not require a significant capital infusion will generally make an attractive acquisition target. Last, and perhaps most important, is the business's management team. Although it can be difficult to quantify, buyers want to be confident that they can look forward to a smooth transition and a solid post-acquisition relationship with existing management, Page said.

Waste & Recycling M&A

Deciding When to Buy or Sell

From the owner's perspective, determining when a business is ready to sell requires careful consideration of several factors. It is important to ensure that contracts are secure with favorable terms, revenue streams are diverse and trending positive, and the fleet is in good condition. It is also important to pay attention to conditions in the larger market. Currently, interest rates are low, capital is available, and public companies are trading at 52-week highs. Buyers are active, and the timing is generally favorable to consider an exit.

In addition to these business and market conditions, the owners' collective mindset is equally important when deciding whether to pursue a sale. "Alignment of the ownership group is absolutely critical," said Summer Street Capital's Brian D'Amico. Lack of alignment can lead to a confusing process that negatively affects value by giving the impression of instability. Page agreed, adding that a failure to unify around a single vision early in the process can leave unanswered questions that can hurt valuation.

Lakeshore Recycling System's Alan Handley offered his perspective on what types of companies make attractive acquisitions. Lakeshore, which has been a very active acquirer in the Chicago area and greater Midwest over the last several years, primarily looks for opportunities to increase its market saturation or extend its footprint into contiguous geographic areas. For tuck-in acquisitions, Lakeshore generally seeks out companies that are close geographically; add facets to existing services (such as compost, organics, or recycling); have a solid book of permanent work, yet strong relationships within temporary work; and feature a great management team. For platform acquisitions, Handley said there is a heavy concentration on collections and permanent work. "Lakeshore loves companies with strong management teams that may want to stay on and grow with us, but we are also OK if the owners want to exit," Handley said.

D'Amico said that private equity firms look at many of those same qualities when evaluating a potential acquisition. "For us as a buyer, a lot of times it comes down to the market dynamics, the geography that the business is in, and the quality of the team that's backing the company," D'Amico said. 

In response to a question about how large a company needs to be to attract acquisition attention, D'Amico and Handley agreed that while the type of transaction may differ depending on the size of the acquisition, in most geographies, there is a buyer for any size company. Ultimately, it depends on what the company can add to the acquirer's services and whether the acquirer is currently operating in the target company's market.

Handley said that Lakeshore seldom will decline to look at a potential acquisition opportunity just because of size. "It just depends on, from a strategic standpoint, is it accretive to my organization? Does it expand my footprint? Does it provide a product offering that I don't do today that I may want to get into?"

Evaluating How Much a Company Is Worth

Placing a value on a business requires considerable judgment and experience, as well as a detailed analysis of the company's financials and the macro trends affecting the industry. Page said that valuation is typically determined using two primary types of analyses: discounted cash flow analysis and analysis of comparable M&A transactions or of publicly traded company valuations. For waste and recycling acquisitions, EBITDA multiples typically range from 5 to 9 times; larger and healthier companies generally achieve higher multiples than smaller companies or those that are struggling.

Waste Management's Joe Cassin added that his company evaluates potential acquisition opportunities in terms of whether the investment would generate an adequate return over the life of the project. "While EBITDA is always something that we look at—we are curious to know whether it is accretive or dilutive to Waste Management's current EBITDA multiple—all of our models are based on an internal rate of return," Cassin said.

In any potential sale, preparation is key. Page advised sellers to get "battle ready" by performing the valuation work before reaching out to potential buyers to fully understand the key focuses of the business and to gather details to support the valuation. "As the seller, you control the timing of any process—until you launch the first outbound call," Page said.

Identifying Potential Buyers

When considering potential buyers, Cassin said it is important to start by determining your ultimate goal: "Is your goal to get cashed out? Do you want to continue on with a buyer post-closing? Or do you want to become part of a bigger organization and do a rollup?"

Once that determination has been made, Cassin advised to start by looking at competitors as potential buyers. Whether a competitor would be a good fit requires an examination of its track record of successful acquisitions as well as its reputation and corporate culture. It is important to identify exactly how a competitor would benefit from the acquisition and what synergies would exist.

The decision to sell to private equity or a private hauler depends in large part on the seller's post-acquisition goals. According to D'Amico, for a seller looking to exit the business and obtain a strategic multiple, a private hauler is likely the better option. On the other hand, if the seller's goal in the sale is to stay with the organization and build something larger over time, a private equity buyer may be the better fit, particularly in markets where a private equity firm is looking for a new platform acquisition.

In response to a question about who makes the first offer in the sale process, Page advised sellers to determine an initial "reserve price"—a basic idea of the appropriate value for the company—before contacting buyers. A seller needs to be comfortable walking away if buyers cannot reach this reserve price. When reaching out to buyers, Page said that William Blair will ask potential bidders to submit an "indication of interest," a document that outlines the buyer's thoughts about price as well as the terms and structure of a potential deal. 

Cassin fielded a question about what information a seller will be expected to provide in an acquisition. He said Waste Management's "wish list" includes a review of financial, operational, human resources, and contract details. D'Amico added that he might also request volume history and an understanding of the disposal environment.

Creating a Roadmap for Success

Page encouraged business owners in the waste and recycling industry who are considering a sale to be disciplined in developing a plan. Think about what deal structure, payment terms, and timing are best for the business and its owners, and focus on building the right transaction team. Acknowledge that a sale is an opportunity to recognize a financial reward for all the hard work that went into building the business and to find a partner for the next chapter of the business, Page said.

Download report PDF

In addition to the topics discussed in this article, the Waste Advantage panel also answered questions on a wide range of specific topics about the M&A process, including:

  • Typical length of noncompete clauses
  • Outlook for plastics recycling and related M&A
  • Valuing hard assets in a sale process
  • EBITDA determinations: free cash flow vs. revenue stream
  • Valuations in medical waste M&A
  • Considerations when landfills and transfer stations are part of the sale
  • Outlook for Canadian M&A market
  • Triggers of anti-trust scrutiny

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