Is the Feeding Frenzy Over?

Michael Fickes

The major publicly traded waste companies are digesting their catch, but what are their next moves?

"I would use a simple analogy to describe merger and acquisition activity in the U.S.," says Ronald J. Mittelstaedt, president and CEO of Waste Connections Inc., Folsom, Calif. "West of the Mississippi, the game is in the second quarter. East of the Mississippi, the game is at the two-minute warning in the fourth quarter, if not basically over.

"The industry in the eastern part of the country has basically consolidated under a few national companies," Mittelstaedt continues. "In the West, the market remains fragmented among numerous private companies and open to consolidation."

Merger and acquisition activity in the waste management market during 2000 supports Mittelstaedt's contention.

The most aggressive buyers of the year have been Waste Connections and Casella Waste, Rutland, Vt.

Waste Connections will end the year having paid approximately $190 million for some 33 to 35 acquisitions.

Casella spent approximately $195.7 million to acquire 39 companies during its fiscal 2000 year. Those purchases include one large company: waste processor KTI in December 1999.

While Casella's activity seems to conflict with Mittelstaedt's theory that the game is over in the East, it's important to note that Casella's acquisition strategy aims mostly at tuck-in purchases contiguous to its core markets in the non-urban Northeast and pointedly avoids competition with any of the big three national companies: Allied Waste Industries, Scottsdale, Ariz.; Republic Services Inc., Ft. Lauderdale, Fla.; and Waste Management Inc., Houston.

Always selective, Republic Services has spent the year seeking small tuck-in acquisitions that would add approximately $80 million in revenues to the company's balance sheet. According to company spokesman Will Flower, Republic is on track to reach that goal.

As for the big two, Allied Waste and Waste Management, 2000 has not been a year for acquisition growth but a year of nipping here and tucking-in there. Both companies have spent the year tailoring their massive portfolios of operating companies to better fit with their respective company strategies.

Superior Services Inc., Milwaukee, has flown under the radar since its 1999 acquisition by Vivendi. While less public about its activities this year, Superior continued to acquire collection, transfer, recycling, and disposal assets during 2000.

Waste Industries, too, continued to build revenues via acquisition, which added approximately $18.5 million to the company's annualized revenues.

Perhaps the most interesting acquisition activity of the year occurred in the medical wastes niche market.

Stericycle Inc., Lake Forest, Ill., acquired Allied-Browning-Ferris Industries' (BFI) medical waste business and emerged as the sole national provider of medical waste collection and treatment services.

Here's a look at the details of what each of these eight waste management companies have done in 2000, with a nod toward what you can expect from the next year.

Allied Waste Industries Inc. Scottsdale, Ariz. Since Allied Waste bought BFI in July 1999, this industry giant has focused on shaping the expanded company to fit Allied's traditional business model.

"BFI had some components that were inconsistent with our operating strategy," says Michael Burnett, Allied's director of investor relations. "Right out of the gate, we decided to stick to our operating philosophy. For example, we operate in the United States only. BFI had an equity interest in a French company (SITA S.A.). We sold that interest the day we closed the BFI acquisition," he says.

BFI also owned operations in Canada. Allied completed the sale of all those assets in July of this year.

"Secondly, we handle collection, transfer and other operations related to municipal solid waste," Burnett continues. "BFI owned medical waste operations. We don't do that. So we sold those assets to Stericycle."

Similarly, Allied sold BFI Gas Services Inc., which owned 15 operating plants, with four plants under construction, thus beginning Allied's exit from the incineration business.

Several Allied sales in the past year, however, have been mandated by the U.S. Department of Justice in overseeing the merger. For example, the Justice Department ruled that the merged company must divest its Denver assets consisting of the Denver Regional Landfill, the Jordan Road transfer station and approximately 20 commercial collection routes. Waste Connections purchased these assets in 1999.

Last but not least, Allied management has reviewed the profitability and the potential profitability of each of its operations.

The analyses have led to further asset sales. "Some operations weren't quite meeting our goals," Burnett says. "And government mandates have prevented us from making tuck-in acquisitions to get them where we want them to be. We've sold those assets, along with others, that simply couldn't meet our minimum operating requirements.

"Our goal was to generate $1.6 billion from asset sales. We've generated $1.3 billion of that. The remainder will come through the final divestiture of BFI's waste-to-energy business."

Burnett notes that the mandated and noncore divestitures made immediately after the merger aimed to pay down debt related to the merger - about $7.7 billion in cash plus approximately $1.9 billion in debt assumed from BFI.

Since then, the company's strategy has evolved. Going forward, debt service coverage and debt pay-down will come from cash-flow and EBITDA. Divestitures will fund acquisitions.

"We're not in a growth mode anymore," Burnett says. "Our plan is to refine what we have by making tuck-in acquisitions. But we're not going to acquire debt to do this. We've put in place a self-funding market development program, in which any acquisitions that we make will be funded by proceeds from divesting other assets. In this program, we're looking at $1 million to $5 million tuck-in acquisitions that will add a layer of operational improvement [of internalization]."

Through early October 2000, the redefined Allied owned 350 collection companies, 152 transfer stations, 163 landfills and 87 recycling facilities. These operations serve approximately 10 million commercial, industrial and residential customers, and is expected to generate an estimated $5.8 billion in annual revenues this year.

Casella Waste Systems Inc. Rutland, Vt. Casella Waste Systems almost doubled its size in the fiscal year ended April 30. Revenues rose $154.7 million or 84.7 percent, from $182.6 million to $337.3 million on the strength of acquisitions, the most notable of which involved waste processor KTI and several mandated divestitures related to the merger of Allied Waste and BFI.

By comparison, Casella's revenues grew by $144 million, from $38.6 million to $182.6 million between 1995 and 1999.

Casella believes its fiscal year 2000 acquisitions will provide the company with two primary benefits: entry into new markets and an enhanced disposal capability.

According to Joe Fusco, a vice president with Casella, the KTI acquisition added important waste-to-energy disposal assets in Maine. "KTI's assets also boosted our recycling capabilities by providing us with a number of facilities in new areas," Fusco says. "But the main focus of that acquisition was its contribution to our disposal capabilities in our core Northeastern markets."

The acquisition of assets divested after the Allied-BFI combination has enabled Casella to enter the eastern Massachusetts market, which is contiguous to the company's core market in the Northeast.

As of July 31, 2000, the company's long-term debt stood at $465.4 million, which equals a debt to capitalization ratio of 62 percent. "That's a very manageable figure," Fusco says. "Our target is 55 percent, and we plan to reach that goal by repaying debt through cash flow and divestitures of non-core assets that came with the KTI acquisition.

Casella now operates collection, transfer, disposal and recycling facilities in nonurban Northeastern markets located in Maine, eastern Massachusetts, New Hampshire, New York, northern Pennsylvania, northern Rhode Island and Vermont.

The company also generates electricity under contracts with two majority-owned subsidiaries, Maine Energy Recovery Co. LP and Penobscot Energy Recovery Co. LP, and through its wholly owned subsidiary, Timber Energy Resource Inc.

According to Fusco, Casella's large acquisitions in fiscal year 2000 do not signal a material change in strategy.

"Our basic strategy is to focus on our core markets here in the Northeast," he says. "Our goal is to be the No. 1 or No. 2 service-provider in each of these markets."

As of July 21 of this year, the company owned and/or operated five Subtitle D landfills, two landfills permitted to accept construction and demolition (C&D) materials, 39 transfer stations, 40 recycling processing facilities, 39 solid and liquid waste collection divisions, 12 power generation facilities, 3 finished products processing facilities and a joint-venture operation producing cellulose insulation.

Republic Services Inc. Fort Lauderdale, Fla. Incorporated as an independent waste management company in 1998, Republic Services currently owns 161 collection companies in 22 states. Additionally, Republic owns or operates 80 transfer stations and 65 landfills. The company also operates a number of materials recovery or recycling facilities.

At the end of 1999, Republic reported revenues of approximately $1.839 billion and announced a goal of acquiring companies that would add approximately $80 million in annualized revenues during 2000.

"We're on target to achieve that goal," says Republic spokesman Will Flower.

During the first half of 2000, the company acquired a number of tuck-in operations for ap proximately $36 million.

Between January and June of this year, negotiations continued on a planned exchange of assets with Allied Waste Industries announced in July 1999. In June, the U.S. Department of Justice approved Republic acquiring 15 facilities and operations in eight markets. The operations located in Louisville, Ky.; Lakeland, Fla.; Macon, Ga.; Mt. Laurel, N.J.; Columbus, Ohio; Cranbury, N.J.;Anderson, Ind.; and Marlboro, N.J., include eight collection companies, four transfer stations, two recycling facilities and one landfill.

In the exchange, Allied acquired Republic Services facilities in Nashville, Clarksville and Memphis, Tenn.; Norfolk, Va.; Augusta, Ga.; Ft. Walton Beach, Fla.; Albany, N.Y.; El Centro, Calif.; and Mt. Vernon, Ind.

In a separate transaction, Republic entered the Northern California market early this year by acquiring Allied's Vasco Road Landfill in Livermore, Calif.

Flower explains the somewhat modest level of Republic acquisitions are reflective of the companies selective purchasing approach. "We only move forward on opportunities that fit with our promise to deliver shareholder value," he says. "We look at specific marketplaces and review potential acquisitions [considering] how they will benefit our existing operations. For example, we want to make sure that we have landfills nearby that will allow us to internalize the waste flow from the acquisition of a collection operation.

"Geography also is important to the extent that we tend to focus our acquisition interest in high growth areas," he continues. "Typically this has meant the Sunbelt, which has outpaced economic growth in the rest of the country for a number of years."

By the same token, Republic's acquisition interests are not limited to the Sunbelt. "There are areas near Chicago that are growing at a fast economic pace," Flower adds. "As a result, we have made acquisitions in suburban Chicago, northwest of the city. Indianapolis also has been growing rapidly, and we have put together some excellent acquisitions of well-managed companies there."

Stericycle Inc. Lake Forest, Ill. Once a niche player among publicly traded waste management companies, Stericycle moved into the limelight this year, reaching 10th place on Fortune magazine's annual list of the 100 fastest growing companies in the country.

Stericycle led the Fortune list in earnings per share growth with a three-year annual rate of 760 percent.

Founded in 1989, Stericycle now ranks as the largest regulated medical waste management company in North America, on the strength of an acquisition program launched in 1993. With the acquisition of Allied-BFI's medical waste business last year, the company stands alone as the sole nationwide provider of medical waste services.

Revenue estimates exceed $310 million for 2000.

"Internal growth and an expanding market have served us well," says Mark Miller, Stericycle's president and CEO. "Our customers, including doctors, hospitals, clinics, labs, nursing homes, pharmaceutical companies, and other health care and health care research organizations are legally liable for their potentially infectious medical waste, so it is in their best interest to select a provider with proven credentials."

The company currently serves more than 240,000 customers through a network of 128 collection/transfer facilities and 33 waste treatment facilities.

Services include extensive documentation of all collection and treatment activities according to federal, state and local requirements. According to Miller, the company will continue to grow through a strategy that combines internal growth and acquisitions.

"In the acquisitions area, we look at tuck-ins," he says. "We're interested in companies with customer services in a geographical area that we already serve. By increasing our geographical density, we can leverage our infrastructure and continue to grow internally by adding new accounts. "If a company services an area that we are not in, we might consider an acquisition if it made sense economically. We also are growing internationally through a program that licenses our patented technology and by selling equipment to international entities."

Superior Services Inc. Milwaukee Superior Services currently ranks as one of the five largest providers of solid waste services in the United States. The company serves approximately 974,000 residential, commercial, municipal and industrial customers in an 11 state region that includes Alabama, Florida, Georgia, Illinois, Michigan, Minnesota, Missouri, New Jersey, Pennsylvania, West Virginia and Wisconsin.

In June 1999, the company became a subsidiary of Vivendi, a leading communications and utility company in Europe. But joining Vivendi largely has not altered Superior Services strategy to grow internally and through acquisition.

"Superior Services, the solid waste unit of Onyx North America (a subsidiary of Vivendi Environment) continues its focus on strong internal growth, combined with expansion into new geographic market areas and into new lines of business that will complement our units specializing in hazardous waste, industrial services, and waste-to-energy services," says Michael Foley, director of corporate communications for Onyx North America Corp.

"Working with our sister Vivendi companies, we fully expect to be the market's first choice for a one-stop source of environmental services."

Since being acquired by Vivendi, Superior has added 12 collection companies, eight transfer stations, four recycling plants and two company owned or operated landfills to its portfolio.

Company operations now include 61 hauling businesses, 28 transfer stations, 19 recycling centers and 25 landfills.

Additional integrated waste services provided by Superior include the redemption and disposal of contaminated soils and similar materials; wastewater biosolids management; full container consumer product recycling; and temporary storage and transportation of special waste.

Superior no longer breaks out its annualized revenues, but it did report 1999 revenues of $390.8 million.

Waste Connections Inc. Folsom, Calif. Four-year-old Waste Connections Inc. continued its aggressive acquisition charge during 2000.

Through September of this year, the company had closed on 24 acquisitions and added annualized revenues of approximately $80 million. "We should close on a total of 33 to 35 acquisitions by the end of this year and add about $100 million in revenues," says Ronald J. Mittelstaedt, president and CEO.

Despite the torrid acquisitions pace, activity this year declined slightly from the preceding year. In 1998, Waste Connections acquired 48 companies. Last year, it added 51 businesses.

Acquisition spending this year will decline as well. The company estimates its 2000 acquisitions will cost approximately $190 million vs. $233.7 million in 1999.

Among the company's 2000 acquisitions were several divestitures, including collection assets in Omaha, Neb., which added approximately $9 million in annualized revenues, and a franchised collection operation in north central Oregon with approximately $2 million in annualized revenues.

"We also acquired all of Allied's operations in Kansas," Mittelstaedt says. "The big operation there is a collection and transfer station in Wichita and a large landfill in western Kansas."

This activity continues Waste Connections' basic strategy: grow through acquisitions in non-urban markets west of the Mississippi.

As of Oct. 2, 2000, Waste Connections purchased 61 collection operations, 25 transfer stations, 21 landfills and 18 recycling facilities. The company serves approximately 700,000 commercial, industrial and residential customer in 15 states including California, Colorado, Idaho, Iowa, Kansas, Minnesota, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming.

According to the company's chief financial officer Steve Bouck, Waste Connections' operations will generate total revenues of approximately $300 million in 2000.

Mittelstaedt plans to continue growing via acquisitions. "Clearly the largest part of our growth will come through acquisitions," he says. "This year, for example, acquisitions will account for 80 percent of our growth. This will be true for the indefinite future."

Mittelstaedt also plans to remain focused on the western United States. "Opportunities in the West are more suited to nonurban markets, which are more fragmented," he says. "The markets in the East have largely consolidated and are controlled by large national companies. In the West, you're dealing with a lot of small, private companies."

Waste Industries Inc. Raleigh, N.C. Waste Industries logged revenues of $214.7 million for 1999 calendar year, up from approximately $170 million in 1998. Through the three quarters of 2000, the company generated revenues of nearly $177 million.

The company operates in the seven southeastern states of Alabama, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia serving 360,000 residential, commercial and industrial customers across the region.

During the first nine months of this year, Waste Industries completed seven acquisitions, which added approximately $18.5 million in annualized revenue to the books. Three of these acquisitions brought landfill disposal assets to the company's portfolio. The most notable acquisition of the year was an asset swap with Allied, which occurred in the second quarter of 2000. In this transaction, Waste Industries acquired the Sampson County Landfill in eastern North Carolina and sold its waste collection operations in Ooltewah, Tenn., and Dalton, Ga. The new landfill is expected to generate annualized revenues of approximately $10.8 million.

By September, Waste Industries' assets included 41 collection operations, 23 transfer stations, 100 drop-off centers, eight recycling plants and nine landfills.

Waste Management Inc. Houston With annualized revenues hovering around $13 billion, Waste Management Inc. has spent the past year executing a strategy aimed at paying down debt and refocusing the company's energy on core North American markets.

In August 1999, the company's board of directors adopted a strategic plan calling for the disposal of nonstrategic and underperforming assets, including international operations outside of North America, noncore assets, and up to 10 percent of the company's North American solid waste portfolio.

Key to this strategy is using proceeds from asset sales for debt repayment, stock repurchases and selected tuck-in acquisitions.

Recent Securities and Exchange (SEC) filings by Waste Management describe the company's goal in this strategy as restoring a disciplined capital allocation philosophy that focuses on profits as opposed to growth.

Through Sept. 29, the divestiture strategy yielded $2.4 billion in total announced sales agreements.

These agreements include the sale of four major international assets. In September, Waste Management agreed to sell its operations in Sweden to Miljoservice Sverige AB for approximately $191 million. September also brought the sale of the company's waste service operations in the United Kingdom to Severn Trent Plc for approximately $570 million.

At the end of August 2000, the company announced the sale of its operations in Hong Kong and a hazardous waste facility in Mexico to Onyx for approximately $250 million.

In July 2000, Waste Management sold its waste services assets in Denmark, Slovakia and the Czech Republic to Marius Pedersen Holding A/S for approximately $120 million.

Year 2000 transactions also have included a number of sales and acquisitions designed to rationalize the company's North America operations.

In September, Waste Management sold nine waste collection businesses, 11 landfills and seven transfer stations in the central southwest to Waste Corp. of America for about $105 million.

Between January and August, the company disposed of 14 hauling companies, four transfer stations and 10 landfills in $191 million worth of transactions with Allied. These transactions followed 1999 purchases by Waste Management from Allied of a number of Canadian solid waste operations worth $75 million.

Such activity illustrates WMI's strategy of using sales proceeds to purchase selected tuck-in operations while amassing cash to pay down debt. A company spokesperson declined to comment on the details of its debt pay-down strategy.

According to Bill Cornwell, director of communications for Waste Management, the company's portfolio currently includes 1,400 collection facilities, more than 300 transfer stations, more than 300 landfills and 160 recycling facilities serving approximately 31 million residential, industrial and commercial customers.