Texas-Sized Deal

WCA Waste Corp. should soon have a new owner: Investment firm Macquarie Infrastructure Partners II (MIP II) has agreed to buy the Houston-based hauler for approximately $526 million.

Under the agreement, MIP II, which also owns Waste Industries USA Inc., will acquire all of the outstanding common stock of WCA for $6.50 per share in cash, redeem all Series A preferred stock and either partially or completely refinance WCA’s existing credit facilities.

The price is a premium of more than 30 percent over WCA’s closing stock price on December 20, the companies said in a news release.

WCA ranked 18th in the 2011 Waste Age 100, with 2010 revenue of  $230 million and 1,286 employees. The company operates 25 landfills, 29 transfer stations and 29 collection operations. It serves approximately 450,000 customers in 14 states in the Southeast and Midwest United States.

“We are excited about the company that we have built to date and are pleased to be partnering with MIP II as we enter into our next phase of growth,” said Tom J. Fatjo Jr., WCA’s chairman and CEO. “Macquarie Group has a demonstrated track record in the waste-management sector. Our employees and customers will benefit from their operational knowledge and should not see any impact on day-to-day services. Our investors will also benefit as this transaction provides an excellent opportunity to realize value.”

“The acquisition of WCA represents an attractive opportunity for Macquarie Infrastructure Partners II,” said Christopher Leslie, MIP II CEO. “This acquisition will leverage our existing industry knowledge and help us to expand and diversify MIP II’s North American portfolio.”

WCA’s board of directors has approved the deal, and pending other approvals, the parties expect to complete the transaction in the first quarter of 2012.

MIP II will finance the deal through a combination of shareholder capital and new underwritten credit facilities.

Michael Hoffman, director of research for Memphis, Tenn.-based Wunderlich Securities Inc., called the deal “great for shareholders.” In an interview, Hoffman says that Macquarie saw that cash flow for WCA was improving.

“The overlap for them is pretty compelling in the Carolinas and Tennessee,’ he says, and the buyers like what WCA is doing in Houston. “It’s just a guess on my part, but I think they’re indifferent about Ohio.”

After the sale was announced, New York-based law firm Faruqi & Faruqi LLP said it was investigating whether the deal undervalues the company. Hoffman was skeptical.

"I can’t see where any amount of shareholders would say no to this transaction that could derail it.” Hoffman says he sees very little regulatory risk.

But he also says that completing the sale might not be the end of the story. “I wouldn’t be surprised to see a second-tier divestiture on the backside.”

As Macquarie also owns Waste Industries, the deal does result in some significant overlap.

Hoffman says he could see the Ohio landfill being sold because it’s somewhat isolated and doesn’t generate enough volume, although it’s a good operation. With the WCA assets in New Mexico and Colorado, Macquarie “could find a buyer for those pretty quickly.”

He says divesting the Texas operations is a reach, but the Houston market offers a lot of opportunity.  It’s probably a $75 million business but should be a $125 million to $150 million business. The Florida business, a new region to Macquarie, wouldn’t be highly likely to sell but could end up on the list. “Central Florida – that’s the best place for incremental consolidation.”

A logical buyer for WCA assets would be Vaughan, Ontario-based Progressive Waste Solutions Ltd. “If assets come up for sale, [Progressive] should be in that mix,” Hoffman says. If Progressive keeps its New York City operations – which Hoffman believes is not a good idea because it’s such a challenging market – the company would need “a long haul rail disposal solution, and this solves it.”

Private equity firms would be the only other logical buyer.  “No other public company would be remotely interested,” Hoffman says.