Whether because of growth opportunities or a perceived lack of exposure to the worst impacts of economic cycles, waste services companies seem to have remained in good stead with investors in 2020. This is despite the fact that 2020 will long be remembered as a year of extreme volatility caused by a global pandemic.
While backing those responsible for the proper handling of waste (including medical waste) during a pandemic represents a potential sensible play in the eyes of some investors, the overarching desire by corporations and some governments to divert municipal solid waste (MSW) from landfills has served to attract investors looking to put their money to work in a sector poised for growth.
The combination of reliability and the potential emergence of disruptive recycling or waste-to-energy technology has helped keep merger and acquisition (M&A) activity vibrant in the waste sector, despite all that COVID-19 and the economic downturn have thrown at the economy.
A lot to overcome
The double-digit decline in GDP that hit the world’s developed economies in the second quarter had an abrupt and widespread impact on M&A activity.
According to Vancouver, Canada-based Canaccord Genuity, the second quarter “represented the lowest level of global M&A activity in 16 years, [with] a year-over-year decline of 62 percent.”
Investors did not remain on the sidelines for long, according to the firm, with the third quarter seeing transaction values increase by 160 percent compared to the previous quarter and, perhaps more remarkably, by 33 percent year over year.
An early October online article by Industrial Equipment News referred to the third quarter as entailing a “$1 trillion rebound” in M&A activity in the United States, calling it an “80 percent surge from the second quarter’s $555.9 billion” level, creating M&A’s “strongest third quarter by deal value in more than a decade.”
An analyst quoted by the publication commented that “a lot of that has to do with pent-up demand and a lot of conversations happening in the spring.” Another said the downturn and subsequent recovery gave potential buyers enough time to “understand a little bit of what the pandemic meant to business models” of companies they were considering purchasing.
That pause was true not just for fund managers seeking companies to buy, but also for most larger corporations that do some acquiring of their own—including in the waste sector.
“COVID-19 did result in our team taking a brief pause (45 to 60 days) on our M&A activity, as the business adjusted to the new environment,” states Bob Cappadona, chief operations officer of the North American Environmental Solutions and Services business unit of France-based Veolia.
After that roughly two-month pause, says Cappadona, “Our M&A evaluation process resumed to pre-pandemic levels.”
That return to research and investing is likely not a surprise to Effram E. Kaplan, managing director and a principal of investment bank Brown, Gibbons, Lang, & Co. (BGL). While there can be “some importance” tied to the timing of a transaction, Kaplan says, “Management teams must remain hyper-focused on developing and adhering to a strategic plan. Vision and execution are critical when assessing value.”
As 2020 turns to 2021, public health and economic issues have been joined by the likelihood of considerable gridlock at the federal government level. Although reasons to shy away from M&A activity continue to exist, the pattern of investors thus far has been to keep seeking opportunities.
Announced acquisitions in the waste and recycling sector in 2020 ranged in size. One of the largest got its start well before 2020 or COVID-19 was a factor—the $4.6 billion acquisition of Florida-based Advanced Disposal by Houston-based Waste Management Inc. (WM).
The acquisition was announced in April 2019, but then faced a lengthy delay in part because the United States Department of Justice (DOJ) insisted some Advanced Disposal assets would have to be divested to a buyer other than WM to maintain competition in some regions.
Upon the deal getting final approval in late October, WM President and CEO Jim Fish remarked, “We are excited to reach the finish line on this compelling acquisition, and I would like to welcome the Advanced Disposal team members to the WM family. The acquisition expands Waste Management’s reach and positions us for significant earnings and cash flow growth.”
Among the moves made to receive the DOJ’s approval, Canada-based GFL Environmental Inc. paid WM $835 million to acquire 32 collection operations (involving more than 375 trucks), 36 transfer stations and 18 landfills in several U.S. states.
Another large deal involved the purchase of Texas-based WCA Waste Corp. by GFL Environmental. That $1.2 billion deal was finalized in early October.
Other acquisitions announced in the third quarter included:
- Vermont-based Casella Waste acquiring Pinto Trucking in the Buffalo, New York, market;
- Charlotte, North Carolina-based Meridian Waste adding a Missouri-based hauler to its portfolio;
- Houston-based Stella Environmental buying a North Carolina firm;
- Houston-based American AllWaste LLC acquiring Austin-based Walker Aero Enterprises LLC and its affiliated companies, which include JV Dirt & Loam, Daisy Works and Sheridan Environmental;
- Texas-based Quest Resource Holding Corp. adding the North Carolina firm Green Remedies Waste and Recycling Inc. to its portfolio; and
- Michigan-based Priority Waste adding a Detroit-area firm’s operations to its account base.
Smaller transactions can represent a hidden but significant part of the waste M&A landscape, according to Andy Schwartz, managing director and co-head of the waste and environmental services practice of St. Petersburg, Florida-based Raymond James.
“While many of us remain focused on the sizable, headline-worthy deals happening in the industry, there have been numerous smaller, under-the-radar transactions,” said Schwartz in a September interview with Waste Today.
Kaplan and Cappadona were among the panelists at the mid-October 2020 Corporate Growth Conference.
Heading into that event, Schwartz told Waste Today, “Large consolidators are consistently spending hundreds of millions of dollars on M&A annually, both pre-COVID and through the COVID pandemic. A lot of transactions are taking place, and multiples remain at historically elevated levels.”
Reached a couple of weeks after the event ended in early November, Kaplan said waste services have indeed gained the attention of capital markets participants, and part of the reason is greater familiarity with the sector.
Niches and knowledge
In addition to the market’s increasing familiarity with the waste and environmental sector—which Kaplan says BGL has been focused on developing—Kaplan indicates there is diversity within the waste and recycling sector that can garner M&A interest from investors with a wide variety of backgrounds and strategies.
Some aspects of recycling can be valued differently, and appeal to select investment strategies, says Kaplan. “Recycling is more aligned with commodities volatility, whereas waste-to-value is closer to a hybrid fee-based and commodity-based revenue model; value propositions vary here,” he comments. “In addition, there is an onset of investors, including those focused on infrastructure, that, while interested in revenue quality, also put an increasing level of value on hard assets.” (For more on recycling M&A activity, see the sidebar “Will green yield green?”)
However, as sustainability and carbon emissions reduction have become more important for accomplishing landfill diversion goals in waste, “There are business models that have been created to adhere to zero waste or waste minimization policies that can [garner] a fee-for-service business model outcome,” Kaplan remarks.
Some of these new opportunities and several existing ones can be considered as niche sectors of the waste industry. Here, says Kaplan, often there is room for consolidation.
"Acquirers are still active and looking to invest in M&A, and valuations remain high,” –Andy Schwartz, managing director, Raymond James
He points to liquid wastes, energy sector byproducts, and nonhazardous and hazardous waste streams emanating from the utility, industrial and infrastructure markets as those where additional consolidation is likely, creating “a great strategy for capital markets to access.”
Veolia’s Cappadona sees the same thing, saying, “We continue to be interested in growing our hazardous and special waste business, and plan to do that with internal investments and select acquisitions.”
In an analysis of the third quarter earnings report of industrial waste services company Clean Harbors, Norwell, Massachusetts, Michael E. Hoffman of Baltimore-based Stifel writes, “The U.S. industrial economy [continues] to recover. Factor in significant cost controls enacted in response to the pandemic, and Clean Harbors handily beats consensus.”
The firm’s positive earnings report, writes Hoffman, “was done the old-fashioned way—improving business fundamentals on a leaner cost structure to drive better incremental margins.”
Kaplan says BGL is “very optimistic about the markets,” in part because of what the firm sees as long-term trends in capital migrating from public to private markets and what it views as the increasing efficiency of the private capital markets.
BGL is seeing a steady stream of transactions “across the board” in the waste sector, he says, pointing to the involvement of middle-market investors. “The movement from public equity investing to private equity and debt continues to gain attractiveness,” states Kaplan.
Schwartz expresses the same optimism, telling Waste Today, “Overall, deals are still getting done, acquirers are still active and looking to invest in M&A, and valuations remain high.”