in a large number of transactions
across a wide spectrum of industries
Private equity firms are investment companies or funds with lots of cash. When they buy a company, they might put down 40 to 50 percent of the purchase price in cash and borrow the rest. Infusions of cash from these investors can supercharge a waste firm's growth over a period of years, after which the investors can sell the company for a large profit.
Private equity's interest in the waste management industry is not new. Following the industry's consolidation phase in the late 1990s, equity firms started buying in. It was a short-lived foray, however.
“When [Houston-based] Waste Management began struggling to integrate all of its acquisitions, it scared off a lot of the private equity dollars,” says Brian D'Amico, a managing partner with Summer Street Capital Partners, a Buffalo, N.Y.-based private equity firm.
However, the investors began coming back to look for waste industry acquisitions in 2004 and 2005, says Craig L. Farlie, a partner with Fort Lauderdale, Fla.-based Farlie, Turner & Co., a middle-market investment banking firm that represents companies being sold into the private equity or other markets.
Farlie was previously the vice president of corporate development for Fort Lauderdale, Fla.-based Republic Services and bought many of the companies that Republic consolidated into its operations. In fact, many principals of investment companies that are active in the waste industry have substantial hands-on experience in the solid waste sector.
What are private equity companies looking for? “Predictable income and cash flow streams,” Farlie says. “They also like businesses that are recession-resistant.”
To get a sense of a waste firm's cash flow, private equity firms first look at earnings before interest, taxes, depreciation and amortization (EBITDA), Farlie says. “Then they subtract capital spending from EBITDA,” he adds. “To buy a company, they will pay some multiple of the cash flow stream plus any outstanding loans on the balance sheet.”
“Suppose a private equity firm buys a company for $300 million, a number that includes $50 million in debt, and that the company's EBITDA minus capital spending for the year totals $30 million,” Farlie says. “In this case, the private equity firm paid a multiple of 10 for the acquisition.”
A multiple of 10 is probably at the high end. Industry observers say some firms might support multiples of eight to 10, but most acquisitions are in the range of two to five.
THE SMALLER GUY
A notable private equity acquisition of a waste company occurred in October 2007 when Raleigh, N.C.-based Waste Industries USA announced that it would go private during the first half of 2008. An investor group led by Lonnie C. Poole Jr., the company's chairman and founder; Jim W. Perry, the company's president and CEO; and financial partners Macquarie Infrastructure Partners and Goldman Sachs is paying $38 per share for the shares not currently owned by members of the investor group. The total equity value of the transaction will be about $544 million.
Among the larger regional waste companies in the industry, Waste Industries netted $23.7 million on $339.6 million in revenues during 2007. Poole says going private means getting bigger. “We firmly believe that going private is the most attractive path available for the company, our shareholders, employees, customers, vendors and the communities which we serve,” he said in a prepared statement announcing the transaction. “Transitioning to a private company will provide the company with the level of investment necessary to further develop its business while at the same time delivering what we believe is an attractive premium to shareholders.”
The Waste Industries transaction is a bit unusual, however. Most of the private equity investors active in the waste industry today focus on smaller firms. Still, the goal for the investors is the same: buy a company, expand it and sell it.
“Most of the private equity activity in the waste industry today is in the private, middle market,” D'Amico says. “Transactions typically range from $10 million to $150 million.”
Private equity investors have been particularly active in the Northeast and the Southeast, D'Amico adds. In the Northeast, densely populated communities are producing larger waste streams every year. In the Southeast, populations are growing as people continue to pour into the region, again resulting in growing waste streams.
In early 2004, Summer Street and Ironwood Capital of Avon, Conn., and Boston invested in Interstate Waste Services of Sloatsburg, N.Y. “We provided capital that enabled the existing owners and management team to grow the business aggressively by buying other companies,” D'Amico says. “While we have a non-disclosure agreement about actual growth, I can say that the company went from small- to middle-market size.
By November 2006, nearly three years after the acquisition, Interstate had made five major acquisitions, including both collection and disposal assets. It operated in 21 densely populated municipalities in northern New Jersey and the lower Hudson Valley region of New York. Interstate had become one of the largest independent municipal solid waste companies in the country.
So, Summer Street and Ironwood sold their interests to AIG Highstar Capital II, a private equity fund sponsored by AIG Global Investment Group. The terms were not disclosed, but there is little doubt that Interstate's significant growth produced a sizeable profit on the original investment.
Meanwhile, Chicago-based WHI Capital Partners is executing its waste industry investment strategy in the Southeast. “Our thesis is to put together a vertically integrated company, with collection, hauling and landfill assets, in a growing secondary market where the 800-pound gorillas have not put down a significant footprint,” says Adam Schecter, managing partner with WHI.
In February 2006, WHI bought and integrated two waste companies that met the firm's investment criteria. Based in the Florida panhandle, the new company became Emerald Waste. “This was our platform company,” Schecter says. “Since then, we have closed on four other add-on acquisitions. Individually, these were small companies, under $5 million in operating income at the time of acquisition.”
With its six acquisitions, Emerald now operates across the panhandle — from Tallahassee to Pensacola to Fort Walton — and into Alabama and Mississippi. The consolidated company ranks as either the largest or second-largest collection company, and construction and demolition landfill owner in every county in which it operates.
In light of the apparent national economic slump, WHI's regional focus looks prescient. “There was a slump in residential construction here,” Schecter says. “But the market is starting to come back significantly now, particularly on the commercial side. A new international airport has just broken ground. Disney, Busch Gardens, and Mutual of Omaha's Wild Kingdom have all bought acreage for new theme parks. We're bullish about the market coming back strong here over the next year or two.”
WHI looks to hold Emerald for up to another five years. “For the size companies we buy, it takes three to seven years to bake the investment,” Schecter says. “We're now entering our third year and still looking for add-on acquisitions.”
The goal, he says, is to get to an internal rate of return (IRR) of at least 25 percent. “We hope to do better on all of our deals, including Emerald,” Schecter adds. “But when we get into a deal, we want to achieve at least that hurdle rate.”
ARE YOU A TARGET?
What does a target waste company look like to an investor? Private equity firms generally start by developing a geographical strategy. Summer Street invested in Interstate with a strategy based on tapping growing waste streams in the densely populated Northeastern states of New Jersey and New York. Similarly, WHI was looking for a growing region and found the Florida panhandle.
Next comes the search for a platform investment — the first acquisition — a company capable of supporting a growth plan and integrating other acquisitions. “If you are looking for a platform investment, then you want a company with a strong position in the regional market,” D'Amico says. “You want this company to own at least some control over disposal — at least a transfer station and ideally a landfill. Good targets generate strong, free cash flow. Finally, it is important that the company have a strong management team.”
The investors acquire larger or smaller neighboring companies to build up the customer base, disposal capabilities and route densities. If your waste firm fits one of the above descriptions, don't be surprised if a private equity firm comes knocking on your door.
Michael Fickes is a contributing writer based in Cockeysville, Md