Waste Connections to Buy Progressive Waste, Move to Canada

  • Texas hauler plans to join dozens of U.S. firms moving abroad
  • Corporate tax rate to drop to 27% from 40%, companies said

Waste Connections Inc. agreed to buy Ontario-based Progressive Waste Solutions Ltd. in an all-stock deal that will enable the U.S. garbage-hauling company to move its tax domicile to Canada in the latest so-called inversion deal.

The Texas company plans to join dozens of U.S. companies that have reincorporated in lower-tax countries since 2012 to trim the taxes they pay. The new company will have an estimated effective tax rate of about 27 percent, management said on the call. That’s down from the 40 percent rate that Waste Connections has now.

“One of the reasons that we structured it in the way that we did is it maximized the benefits of the existing structures,” Waste Connections Chief Executive Officer Ronald J. Mittelstaedt said on a conference call Tuesday. “We sort of achieved the best of both companies’ tax situation.”

Waste Connections will follow companies like Burger King Worldwide Inc., which acquired Tim Hortons Inc. in 2014 and relocated to its headquarters to Canada to take advantage of the country’s lower corporate tax rate.

Informal Talks

The two garbage haulers have had informal discussions for about five years about whether a transaction of this nature would make sense, Mittelstaedt said. The rising cost issues that dragged on Progressive Waste’s shares in the latter half of the year provided a catalyst for the deal, he said.

“This was really something that was an evolutionary issue that came together,” he said.

Waste Connections will own about 70 percent of the combined entity once the transaction is completed, according to a statement. The deal, targeted for completion in the second quarter, is structured as a reverse merger, in which the Canadian company is the acquirer.

Progressive Waste rose 11 percent to C$37.38 at the close in Toronto, its largest one-day gain since 2002, giving the company a market value of C$4.1 billion ($2.8 billion). Waste Connections increased 7.4 percent to $54.75 in New York, the most in a day since September 2012, making the hauler worth $6.7 billion.

Garbage Removal

Progressive Waste, based in the Toronto suburb of Vaughan, handles garbage removal for more than 4 million customers in Canada and the U.S. The company said this month that JPMorgan Chase & Co. had been hired to advise on strategic alternatives after cutting its profit forecast because of rising costs.

“We believe combining with Waste Connections makes compelling strategic and financial sense,” said Joseph Quarin, Progressive Waste’s CEO, on the call.

The companies said the new company will operate under the Waste Connection name and will have its corporate headquarters in Woodlands, Texas. It will be domiciled in Canada and have an operating headquarters in the Toronto area.

Waste Connections and Progressive Waste said they expected the transaction to offer about $50 million a year in cost savings two years after closing.

Investor Blue Harbour Group, which has filed as an activist at Progressive Waste since July 2013 and is one of its biggest shareholders, welcomed Tuesday’s deal and said earlier steps it encouraged, including the sale of Progressive’s Long Island assets and cash flow and balance sheet improvements, helped position the company for such a transaction. Blue Harbour typically agitates for shareholder-rewarding changes behind the scenes.

Reverse Merger

In order for the combined company to be based in Canada, Progressive Waste will issue 2.076843 of its shares for each Waste Connections share. Progressive Waste then will do a reverse stock split, with 0.4815 of a share for each existing share. The deal value for Progressive Waste holders is about 16 percent above the 20-day average stock price before the company’s Jan. 4 announcement that it was considering alternatives.

Chris Murray, an Toronto-based analyst with AltaCorp Capital, said he expected the transaction to be well received by investors, in part because Waste Connections trades at a higher multiple than Progressive Waste.

“The combined company should be able to leverage proven management teams and complementary footprints to create a solid wastes services leader in North America. We believe the all-stock transaction affords BIN shareholders the ability to participate in the capture of synergies as well as an improvement in trading multiples,” he said in a note to clients, referring to Progressive Waste by its ticker symbol, BIN.

The combined company will trade on the New York Stock Exchange and the Toronto Stock Exchange.

Morgan Stanley was lead financial adviser to Waste Connections along with Stifel, Nicolaus & Co., Bank of America Corp., and Wells Fargo & Co. Locke Lord LLP and Bennett Jones LLP served as legal counsel.

JP Morgan Chase & Co. advised Progressive Waste with Stikeman Elliott LLP and Weil, Gotshal & Manges LLP providing legal counsel. BMO Capital Markets provided a fairness opinion.

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