Goldman, Macquarie Take Out Waste Industries
Waste Industries USA (WWIN) said Dec. 18 it has signed a definitive merger agreement that will take the company private, with a group of investors led by its management in a deal with a total equity value of roughly $544 million.
The investor group is led by Lonnie Poole Jr., Waste Industries' founder and chairman, and Jim Perry, its president and chief executive, and also includes financial partners Macquarie Infrastructure Partners and Goldman Sachs (GS). The group will buy all the outstanding shares of the Raleigh (N.C.) company that it doesn't already own—about 49%—for $38 per share in cash. Poole, Perry and Poole's two sons own a combined equity stake of roughly 51%.
Waste Industries received the investor group's initial offer to go private on Oct. 22, but after negotiations the price rose from $36.75 to $38 per share, which was deemed fair to the company and its public shareholders by a special committee of the board's independent directors, with advice from independent financial and legal advisers, the company said in a release.
The $38 price represents a 33% premium to the stock's closing price of $28.47 on the last trading day before the Oct. 22 offer.
The shares traded 21.8% higher at $36.15 on Dec. 18, just 25¢ off their 52-week peak.
"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," Poole said in a statement. "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."
He also said the company would be able to grow faster and more efficiently with the aid of "the extensive resources and expertise" provided by the investor group.
Being taken private will give the company "a longer time horizon, so they're not being held accountable for quarter to quarter results that Wall Street is looking for," said Brian Butler, an equity analyst at Friedman Billings Ramsey (FBR) in Arlington, Va. "They can make larger, longer-term investments without getting beat up from a valuation perspective." (FBR provides investment banking services to Waste Industries and makes a market in the company's securities.)
It may take as long as three to five years to develop an asset such as a landfill and that will have an adverse impact on near-term financial results, which generally doesn't meet with approval from near-term focused Wall Street analysts, Butler said. Goldman Sachs and Macquarie, if they understand the investments and the opportunities to create value, are more likely not to beat the company up with demands each quarter, he added.
Another reason for buying the outstanding shares is how inexpensively priced they are right now, Butler said. By being willing to pay $38 per share, the financial partners are probably willing to pay a slight premium—a valuation of eight times 2008 earnings before interest, taxes, depreciation, and amortization, vs. the group's average multiple of 7.1 times 2008 EBITDA—because they see the longer term economics of the business, beyond the next recession, as fairly strong, he said.
The company isn't likely to receive a competing offer at a higher price from another investor, said Paul Kleinschmidt, an equity analyst at Argus Research. By getting the price up $1.25 from the original offer, the company's management has fulfilled its fiduciary responsibility to the public shareholders, he added.
The low valuations in the waste management sector are based on investors' fears that the slowdown in housing will spill over into some of the companies' other lines of business, Kleinschmidt said.
"Commercial construction has been robust and has propped up their business in terms of volume and strength of pricing, but people are wondering if the other shoe is going to drop," he said.
Investing in infrastructure has become so competitive that companies like Macquarie are starting to look at less traditional assets that still qualify as essential community assets, including waste management companies, which continue to throw off cash even during economic downturns and provide revenue growth that keeps pace with inflation, said Josh Duitz, an infrastructure analyst at Alpine Woods Capital Investors in New York.
"Garbage is not going to move much with the economy, so it's resilient," he said. "You have a captive customer, a stable revenue stream that's going to grow with [the consumer price index]."
Waste volumes tend to grow at 1% to 2% per year and waste management firms can get price increases of around 3% to 4% each year, which makes for stable cash flow, he added.
Companies that invest in infrastructure typically look for assets or businesses that are akin to monopolies and aren't exposed to much competition. Owning landfills generally presents a high barrier to entry for would-be rivals "because no one wants a garbage dump in their backyard," Duitz said.
Macquarie has been investing in infrastructure assets such as toll roads and bridges through private equity vehicles for several years and also has established some structures available to retail investors in the U.S., such as its Macquarie Infrastructure Co. (MIC), which trades on the New York Stock Exchange.