According to a report from the U.S.-based Waste Business Journal, IESI-BFC Ltd. has agreed to buy Waste Services Inc. for about $370 million in stock, creating the third-largest North American waste company with annual revenue of almost $1.5 billion. Under the definitive merger deal, Waste Services shareholders will get 0.5833 of a share of IESI-BFC for each share held, resulting in IESI-BFC issuing 27.8 million shares for about a 23 per cent stake in the combined company. The transaction, which is to be completed in the first quarter, represents a 7.2 percent premium to Waste Services’ share price and is subject to various conditions such as regulatory and shareholder approvals.
Industry Drivers and Declining Volumes
The merger can be seen as a direct response to a long term industry trend towards privatization and the need to control larger volumes of waste to feed ever larger but fewer more dispersed landfills. The economy is galvanizing waste companies to expand economies of scale, streamline operations and increase market share as a means to protect pricing amid declining waste volumes. Waste Business Journal data reveals that even residential waste volumes declined beginning in 2007 while commercial and especially construction waste volume declined by nearly 20 per cent in 2008. Spending on U.S. construction projects has fallen on a year-over-year basis in every month starting in November 2007, according to Commerce Department data. U.S. construction spending, adjusted for seasonal variations, fell 12 percent from a year earlier in September, following a 12 percent drop in August and a 13 percent decline in July.
Still, most companies have managed to hold the line on pricing and even win increases of 4 to 6 per cent year over year. The companies understand that one way to deal with turbulent economic times amidst rising fuel, labor and equipment costs is to streamline operations and vertically integrate their markets. Rising costs have focused company managers on disciplined price increases especially now that the industry is more consolidated, more attentive to return on invested capital, more rational about valuing existing landfill capacity and mindful of lessons in the past when pricing was sacrificed.
Further Industry Consolidation
These longer term trends are likely to lead to even further industry consolidation. Late last year, Republic Services Inc. and Allied Waste Industries Inc. completed a $6.7 billion merger in December to create North America’s second-largest garbage hauler after Waste Management Inc. Shortly after that in February of this year, Waste Connections agreed to buy nearly $313 million in assets divested from Republic as a condition of its merger with Allied.
The New Company
IESI-BFC Chief Executive Officer Keith Carrigan will lead the combined company, which will have more than 6,000 employees and be headquartered in Toronto, will continue to trade under the “BIN” symbol in New York and Toronto. The combined business will have annual pro forma revenue of about $1.5 billion and residential customers in 11 U.S. states, the District of Columbia and six Canadian provinces.
Waste Services largest shareholders, Westbury (Bermuda) Ltd., which owns about 12.6 million shares, and Kelso & Company, L.P., owner of about 2.9 million shares, have agreed to vote in favor of the arrangement.
The newly-formed company will use excess free cash flow to fund organic growth, maintain IESI-BFC’s regular quarterly dividend payments, finance accretive strategic acquisitions and reduce debt. The company also plans to use part of its available credit capacity of US$435 million to fund the transaction, and will increase the size of its Canadian revolving credit facility to about C$450 million from C$305 million. In its third-quarter earnings release late last month, IESI-BFC said it was well-positioned for organic growth and growth through acquisitions.