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.

Hazardous waste disposal company Stericycle has a different kind of hazard to contend with -- a new shareholder in the form of Jana Partners.

The Barry Rosenstein-led fund on Monday revealed its first-quarter positions, which included a 2.9 percent stake in the $8.1 billion medical waste management company. The fund hasn't named Stericycle as an activist target, but if it does, there's a chance it could press for sale  rather than a breakup of the business or a return of capital to shareholders. And even if Jana doesn't turn activist, the stock -- which recently hit a three-year low -- doesn't look like a bad bet. 

Room to Run
Wall Street analysts believe Stericycle could rally roughly 25 percent over the next year.
Source: Bloomberg

If Stericycle were to be pressured into exploring a sale, Waste Management could be a potential buyer. Stifel analysts reckon a tie-up between the two would be "compelling" and deliver some $100 million in synergies. Factoring in those cost savings, a deal representing a 25 percent premium to Stericycle's current price would be immediately accretive to Waste Management's earnings per share, regardless of the transaction's cash-and-stock mix, according to data compiled by Bloomberg. It helps that Waste Management CEO David Steiner and CFO James Fish said on an April earnings call that the company could go after a big acquisition if it was strategic and reasonably priced.

While Stericycle is arguably more reasonably priced after tumbling 20 percent this year amid underwhelming earnings, it only somewhat fits the bill of a "must-own" business. For one, it's more focused on hazardous and medical waste than Waste Management, although its slightly wider profit margins and faster revenue growth may appeal to the larger company. 

Better Together?
A combined Waste Management-Stericycle would have annual Ebitda of roughly $4.6 billion in 2016.
Source: Bloomberg

There's also another obstacle that's familiar to anyone who's been following M&A: antitrust regulators. They may block any deal by Waste Management, which as a $27 billion behemoth, is focusing on deals worth between $100 million and $200 million that likely wouldn't run afoul of competition requirements. 

Even without a takeover offer in hand, if Stericycle can deliver on revised guidance, its shares should rally, which would lift its fiscal 2016 P/E multiple -- currently 19.8 -- toward its rivals, which trade anywhere between 22 and 33 times earnings.

Other garbage collectors and processors have delivered index-beating returns. Waste Connections and Progressive Waste Solutions, which agreed to an all-stock deal in January, have seen their shares rise 58 percent and 36 percent, respectively, in the past two years. The industry's two biggest players, Waste Management and Republic Services, have also gained roughly 40 percent. All four trounced the S&P 500's 10 percent gain in the same period.

Stericycle declined in that time, in part because synergies from its $2.3 billion deal for document destruction company, Shred-It International, haven't yet been realized. Meeting its earnings forecasts could help reassure investors that the company is getting back on track. Whether that will be enough to satisfy Jana remains to be seen. But it'd be a start.

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

  1. The firm scored a win at PetSmart, which was ultimately sold to a private equity consortium. 

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