Republic Services and Allied Waste have completed their much-publicized merger. Now comes the heavy lifting.
The stock market isn't a source of much optimism lately. But upon completion of Republic Services' merger with Allied Waste Industries in early December, the FBR Group of Arlington, Va., immediately upgraded its rating of Republic shares to "outperform." FBR believes the combined company, which retains the name "Republic Services" but is based in Phoenix as Allied was, is positioned to move up to a target stock price of $35 per share. That's approximately the same price that shares of the old Republic commanded before last year's broad economic meltdown.
Republic Services is now the second largest waste company in the United States, with approximate annual revenues of $9 billion and $2.7 billion in earnings before interest, taxes, depreciation and amortization (EBITDA), according to FBR. The firm also agrees with Republic's contention that the merger will generate $150 million in business efficiencies. FBR based its target price on an assumed long-term revenue growth rate of 4.5 percent and average EBITDA margins of just under 30 percent.
In the four weeks following the merger's completion, Republic's stock price rose from just under $22 to about $25, an increase of about 15 percent — not bad given the terrible economy and stock market environment. Of course, stock performance depends on business performance, which is up to the company and its leaders.
"Our view is that we will continue to evolve and professionalize the business," says Don Slager, president and chief operating officer of Republic Services and former executive vice president and chief operating officer of Allied Waste. "We have a stronger footprint, and we picked the best managers from each company, so we have a stronger management team."
Slager says that after the initial integration work, management will begin to focus on the evolution of the industry and the growing emphasis on landfill diversion.
Mergers can fail for any number of reasons. For example, the strengths of each company not complementing each other, the people not getting along, and the financial philosophies not matching. However, FBR stands behind its prediction that this merged company will outperform the rest of the industry.
Each side stands to benefit by the merger, as long as the integration goes well. Republic will triple in size, going from a $3 billion company to a $9.2 billion company. Allied will benefit from the combined balance sheet, which will show a better debt ratio.
"Republic Services grew by expanding across the Sunbelt," Slager says. "Allied wanted to get back into those markets, which for a variety of reasons we had exited."
The combined company has laid out a basic, step-by-step approach designed to keep the business up and running while the integration proceeds. "We aren't looking to transform the company in year one," Slager says. "We have to complete the basic integration. The first couple weeks of the integration were about communication."
During December and early January, managers from branches around the country met with employees, customers, community leaders and regulators. The goal, Slager says, was to put a new face on the company.
The integration plan calls for a number of intermediate goals. Offices in markets without a Republic-Allied overlap will have an easier time. The issues for those offices involve bringing the offices up to speed with new business processes.
But in areas with overlapping offices — such as Dallas — the offices must merge. That means deciding which office to retain or whether a new office is necessary. It also requires combining routes to prevent trucks from passing each other on the street, as trucks from competing companies often do. The new office also must consolidate information technology platforms, and billing and payroll systems.
Republic Services is sending out specialized teams to handle the basic integration jobs. A giant project management chart takes up an entire wall in the war room at the company's Phoenix headquarters and summarizes the basic integration tasks, showing when integration teams will arrive and what they will do. "We've done this for each of our 17 overlapping markets," Slager says. "We've been careful to give ourselves enough time to do it right, while being sure to do it fast enough to realize the financial benefits."