Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

As the adage goes, one man's trash can be another's treasure. Canadian garbage company Progressive Waste Solutions, which according to Bloomberg News is exploring a sale, will be hoping potential suitors agree with that saying, literally. 

A weakening Canadian dollar and higher costs caused the recycling and waste collector's U.S.-listed stock to fall 21.7 percent in 2015, meaning it finished the year trading at just 7.5 times its earnings before interest, tax, depreciation and amortization, or Ebitda. By that measure, it's one of the cheapest waste-management companies in North America.

Bargain Scraps
Some waste management companies are cheaper than others
Source: Bloomberg

Still, exploring a sale (or as the company calls it, a review of strategic alternatives with the objective of enhancing shareholder value), makes sense. Progressive Waste Solutions' stock is 25 percent below its December 2014 all-time high of $30.97, and any takeover offer would likely exceed that, if an average premium of 25 percent or more is applied. A takeout at such a level -- or for more than $3.1 billion -- would also exceed most analysts' expectations for the stock in the next 12 months: the average price target is $28.15, according to data compiled by Bloomberg.

Trash Talk
Progressive Waste Solutions' underperformance makes it more interesting to rivals as takeover bait
Source: Bloomberg

Logical buyers include Waste Connections and Republic Services, both of which can afford a 25 percent premium and still have a deal be accretive to their earnings even before factoring in any cost savings should the transaction partly be funded with cash.

Both, however, may be hesitant to take on more debt than they already have , and Republic Services has said that while it's focused on growing via acquisition, those will probably total just $100 million a year.

Another company, Waste Management, is arguably even more likely to sit this one out: its stock has lagged most competitors (except Progressive Waste Solutions), it's focused on smaller acquisitions, and as the industry behemoth, antitrust hurdles provide an obstacle. 

Infrastructure-focused investors such as Macquarie Infrastructure & Real Assets and private-equity firms like Blackstone and KKR (which have bought waste-management companies previously) could also be enticed to deploy a fraction of their money piles on Progressive Waste Solutions, whose robust cash flows are supportive of a heavier debt load. The Canadian outfit is also more profitable, and has fewer obligations, than private equity-backed ADS Waste Holdings, which has filed to go public.

A sale would also provide Progressive Waste Solutions' shareholders, including Sentry Select Capital and Blue Harbour Group, which describes itself as a "friendly activist", with a decent payoff. Both Sentry and Blue Harbour are long-time investors, building their current stakes in the garbage firm from 2011 and 2012 respectively, Bloomberg data show.

Progressive Waste Solutions' shares will probably rally today (they gained 6 percent in after-hours trade Monday), but for equity holders, the best may be yet to come. At least one buyer is sure to spot treasure.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In 2008, industry leader Waste Management withdrew its hostile bid for Republic Services on the basis that the planned all-cash deal would have risked its financial position. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net