Effram Kaplan addresses attendees at Waste Today’s Corporate Growth Conference in November 2021.
Photo courtesy of Mark Campbell Productions

With a surplus of capital floating around for waste and environmental services businesses, analysts are expecting merger and acquisition (M&A) activity that mirrors what the industry has seen in the past. The overall outlook for the industry is positive, but some pandemic-related challenges are expected.

According to reports from the Environmental Business Journal, the solid waste market is heavily consolidated, with a total market size of $76 billion. The public sector makes up 59.6 percent of this market, while the private sector makes up 21.7 percent and government waste services represent 18.8 percent. 

Since the start of this year, transactions in the industry have been lively. Meridian Waste in Charlotte, North Carolina, kicked off 2022 with two acquisitions. Atlas Organics, based in Spartanburg, South Carolina, also was acquired by Generate Capital.

Late in 2021, Morton Grove, Illinois-based LRS acquired Johnson County Refuse, North Liberty, Iowa. By December 2021, LRS had made 18 acquisitions during the year. Leck Waste expanded in late 2021, as well, venturing into a new market with the purchase of Kutztown, Pennsylvania-based Clifford Hill Sanitation Services.

Larger firms like GFL Environmental Services continued to make transactions following several years of notable acquisitions, including the purchase of substantially all the divestiture assets arising from Waste Management’s acquisition of Advanced Disposal.

Business valuation

The solid waste management market is growing faster than it was five years ago, said Effram Kaplan, managing director at Cleveland-based Brown, Gibbons, Lang & Co., speaking at Waste Today’s Corporate Growth Conference Nov. 4, 2021, in Chicago. While this growth is a positive sign, it can necessitate something of a balancing act when valuing businesses in the sector.

Kaplan discussed the tailwinds and capital market drivers affecting the environmental services market. He said a valuation disconnection exists among public solid waste, environmental services and special waste businesses. Because of this, some transactions have been indicative of opportunities for investors. 

“There is no doubt there is a difference in public markets to think about where solid waste, environmental services and special waste is traded from a valuation perspective,” Kaplan said.

Several factors are contributing to the growth of the market overall, he said. Kaplan said the growth and flexibility of available financing products, the flood of capital into private markets and enhanced specialization all have played roles in driving the market forward. 

“I’ve never seen landfill values be as attractive as they are today,” he said in November. “Landfills are not going away. The population is growing, and there is a need to put the waste somewhere. Yes, there is anaerobic digestion; yes, there are material recovery facilities; yes, there are alternative ways to process waste; but what you see is [companies working to preserve and create landfill space].”

Kaplan said regulation and government intervention are prevalent in the environmental services and waste market. He said companies such as Waste Management, Republic Services and GFL all have had to divest some of their assets after recent acquisitions in the market.

Kaplan also said new regulations will play a role in how businesses in the market are valued. The Securities and Exchange Commission announced plans to finalize mandatory climate reporting by the end of 2021. Other factors include the ESG (Environmental, Social and Governance) Disclosure Act of 2021, which will require companies to incorporate ESG metrics into shareholder presentations and set mandatory reporting metrics.

The economy

Also at Waste Today’s Corporate Growth Conference, analyst Michael E. Hoffman, a managing director at Stifel in Baltimore, provided a view of how macroeconomic factors have translated into specific impacts on the waste and environmental services sectors. When he spoke in November, U.S. inflation rates had hit a three-decade high, and the consumer price index (CPI) increased 6.2 percent in October 2021 compared with the previous year. While these pricing spikes are expected to continue alongside rising demand for core goods, Hoffman expressed a positive outlook for the solid waste industry’s ability to overcome cost increases.

“So, the state of garbage is [actually] really good right now. Is there inflation in the marketplace? Absolutely. Can the industry price through inflation? Absolutely,” Hoffman said. “I think garbage can price through inflation. It’s about conviction as an operator, not [whether] you can do it or not. In fact, [we’ve] seen through the third-quarter [2021] earnings season that was happening, mostly. And even where it doesn’t look like it was happening as effectively, it was clearly happening. [Companies] just needed to pick up the pace.”

Given the solid waste industry’s affinity for inflation, which Hoffman said supports better core and reported prices, sales in 2022 are expected to benefit more from inflation than cost increases. In addition, CPI is anticipated to average 4.4 percent growth in 2021 versus an original expectation of 2 percent.

Volume trends

In terms of volume, Hoffman said the industry reported better numbers than expected throughout the third quarter.

The original FY21 guidance forecast had volume growth ranging from 0.5 percent to 2.5 percent. However, in the first half of 2021, volumes trended 135 basis points better than the February fiscal year outlook average volume growth of 1.4 percent.

While the pace is expected to ease, Hoffman believes it will still run at above a long-term industry growth rate of 1 percent.

“Doing year-over-year comparisons is a little bit meaningless because of the weirdness of [2020], but you see the patterns,” he said. “Negative in Q1, really high in Q2, and then everyone was thinking we were going to settle into some normalcy somewhere between [Q1] and [Q2], and we ended up better than that. Why? Because all of us have found opportunities to get in the car, get out and go somewhere, and pretty much every time we do that, we create a trash event.”

These volume trends have been supported by new business formations and an above-average merger and acquisition cycle, Hoffman noted.

“There’s clear evidence of new business formation, and with that new business formation, there’s also existing commercial business that’s starting to see positive service intervals. So, the two of those are measured as volume when you look at it from the reporting standpoint,” Hoffman said.

As for M&A, he said this cycle is the strongest he’s seen. During the Corporate Growth Conference, he estimated that public companies in the waste and recycling industry could spend $3 billion on M&A by the end of 2021.

Weakened link

Supply chain disruptions also have taken a toll on solid waste operations. When addressing the shortage of semiconductors, Hoffman said capacity to meet demand requirements is not projected to catch up until 2022. He added that it will be 2023 before the demand backlog is back to “normal.”

In explaining how the microchip situation came to be, Hoffman said, “Two things happened. We all went to work from home, so there was this massive buying of computers as a sort of incremental volume pressure on the need for chips. And then two events happened. As the economy started to recover and auto production started to come back, and there’s still this demand and this new source of demand at a higher level, that put pressure on the microcontroller.

“[We also] had a fire in Japan that took out 5 percent of the world’s capacity in making these, and then in February you had the Texas storms that disrupted the chipmaking in that marketplace for about three weeks,” he added.

Given the circumstances, Hoffman encouraged those on the equipment side of waste hauling operations to be cognizant of current wait times.

“[2022] is sold out a year … to get a truck. You should be thinking about your ordering for 2023 now, or you’re not going to get trucks or whatever else you’re ordering that has microcontrollers,” he said.

Kamczyc is the digital editor for the Recycling Today Media Group, Rathmell is the conference producer for Recycling Today Media Group and Rischar is assistant editor of Waste Today.