Analysis of the Veolia ES Solid Waste Sale

Highstar Capital’s purchase of Veolia ES Solid Waste Inc. creates the largest privately held waste and recycling company in the United States, but the owner might be looking to go public next year, according to one industry analyst.

The purchase might also unleash some more acquisitions pent up waiting to see what happened with the long-planned sale of the U.S. solid waste operations of Chicago-based Veolia Environmental Services North America Corp. (VESNA), says Michael Hoffman, director of research with the Memphis, Tenn.-based Wunderlich Securities Inc., in an interview.

He says the New York-based Highstar eventually should consider what he calls an “exit strategy” with the purchase. If it were ultimately sold again, the only possible buyers would be The Woodlands, Texas-based Waste Connections Inc. and the Vaughan, Ontario-based Progressive Waste Solutions Ltd., and he called that “pretty remote.”

But going public is another matter. “If you put all this together and have an eye toward the public market, then you have to be a really disciplined player in the game,” he says. “You can’t be rash on price cutting to get share, you want to be disciplined about tuck-ins (smaller acquisitions). What you want is for the public perception of the garbage industry to get better and the valuations to improve.”

And another big but disciplined player benefits the industry. “It helps bring incremental discipline to the marketplace,” he says.

Hoffman said he believes that Charlie Appleby, CEO of Jacksonville, Fla.-based Advanced Disposal Services Inc., another Highstar solid waste operation, may run the Veolia business as well, along with Highstar’s third waste business, Interstate Waste Services Inc. in Basking Ridge, N.J. “He’s a very good operator, so it makes a lot of sense.”

On timing for going public, Hoffman says even with low growth in the economy and the presidential election, the business environment should become stable enough and valuations should improve enough that it might make sense to access the public market in the second half of 2013.

With the Veolia deal done Waste Connections might be ready to resume making acquisitions, and other sellers that have waited on the sidelines might emerge. But Hoffman cautioned sellers from getting too excited about what appears to be a high selling multiple of 8.3 on the Veolia deal.  First, it might not be as generous as it appears because of fees and charges, and the nature of this being an integrated deal. And it may even slow down acquisitions if sellers look to get what they believe Veolia got and the buyers, particularly the big public companies, remain disciplined and don’t chase bids.

With the Veolia deal Hoffman doesn’t see a lot of potential for immediate divestments. The Pennsylvania operations are somewhat isolated from the other businesses in the central and western part of the state and might be the only sell-off target. “Otherwise, everything just stays,” he says.

Hoffman doesn’t believe the big companies will change their acquisition strategy as a result of the Highstar Veolia buy. And he doesn’t believe any of them were serious candidates for Veolia because they don’t have the leverage that private equity firms can bring to a deal like this.

“The good news is, it isn’t just a vanilla private equity guy that would lever the heck out of the business and then drive incremental cash through bad behavior in the market,” Hoffman says. “These guys are operators. My question is, is there an exit strategy. And if it’s public market you’ve got to be disciplined. That’s good for everybody.”