|
A Note From The Editor:
For this month's edition of the Circular File, we were able to touch base with the CEO of Waste Management, David Steiner, in the wake of the company's game-changing acquisition of Oakleaf, the largest waste broker in North America.  |
The Transaction Itself
On July 28, Waste Management both announced and closed the Oakleaf Global Holdings transaction. Waste Management paid $425 million for Oakleaf, which has $580 million in annualized revenues. On a pro forma basis, assuming estimated incremental income from integrating the company of $80 million in annualized EBITDA, Waste Management paid roughly 5.3x EBITDA (and 0.73x sales). This is below average multiple levels of recent industry deals, though obviously the waste brokerage business is "asset light." Oakleaf has hundreds of national customers, largely in the retail and commercial property lines of business, and services those customers through a network of 2,500 third-party vendor haulers. Oakleaf estimates that its customers generate 5 million tons of waste annually. At least initially, the Oakleaf business will be left largely stand-alone, though combined with Waste Management's national accounts business.
Strategic Rationale Behind the Deal
First and foremost, Steiner noted, the transaction has the potential to bring significant incremental volume into the Waste Management post-collection network, and likely some additional collection work. Second, the transaction dovetails nicely with Waste Management's customer-focused growth strategy. Oakleaf's strength in the retail and commercial property lines of business—two of seven customer verticals Waste Management is focused on—gives the company a leg up on those verticals specifically and the customer-focused growth initiative in general. In the past year, a key marketing tool for Oakleaf has been its new branding initiative, "Intelligent Waste Management." Oakleaf had increasingly positioned itself as a "waste solutions provider" (along the lines of Waste Management's own marketing), helping customers to meet their increasingly ubiquitous sustainability/zero waste goals, programs and objectives. Unquestionably, given its investments over the past several years, Waste Management (the no. 1 company in the 2011 Waste Age 100) has the largest post-collection network of landfill alternatives—single stream recycling facilities (MRFs), composting operations, e-waste recovery programs and other organic diversion options. Oakleaf, and its third-party vendor hauler network, now have a much wider and larger array of those services to offer and sell, which are increasingly being demanded by the customer base. Waste Management, in turn, should be able to increase the throughput at these facilities, which is key to improving their profitability, which is currently below the company average.
Keeping the Vendor Hauler Network
Contrary to industry fears and assumptions, Steiner stressed that Waste Management's preferred strategy is to keep the vendor hauler network largely intact, or at least to the extent it can, by reaching mutually beneficial disposal agreements with the haulers. Steiner noted that although the thought process behind the deal initially was just to put Oakleaf's waste on its own trucks, management has decided the better course of action is to let the haulers keep the collection, and to maximize the post-collection volumes into its landfills and MRFs on EBIT neutral terms for the haulers. Steiner estimates that the upside potential from this tactic, given that Oakleaf is only a portion of these haulers' total customer base or waste stream, is 3x to 4x that of just putting the Oakleaf waste on its trucks, and at probably twice the profitability levels. Additionally, Waste Management is looking at lower levels of capital expenditure by going this route. The advantage to the hauler, as previously mentioned, is a wider array of services to offer and sell to all its customers and the opportunity to generate additional business—either from the aforementioned wider service offering or from new national accounts from Waste Management.
Early Integration Feedback
Waste Management has already reached out to all of Oakleaf's customers, whose main concern, surprisingly, was potential changes in their service, not price. There have been no customer defections, at least in these early days. Of bigger concern to company management was the vendor hauler reaction, which, according to Steiner, has been more positive than they had expected, with no
|
|
advertisement
 |
Industry Resources
|  |
advertisement
 |
advertisement
 |
|
|
haulers dropping the business. (Probably not that surprising, given the current economy!) Steiner's first priority is to see if Waste Management can get the nationals and large regional independents on board with new agreements before the retail customers enter the holiday sales season, in order to avoid any customer disruption. From there, Waste Management will work its way down to the smaller haulers. In order to avoid any disruption to the retail customers, full integration of the vendor hauler system into new agreements may take up to six months, versus the three months for which Steiner had originally hoped. On the other hand, Steiner now thinks that there will be some additional synergies from combining Oakleaf and Waste Management's national accounts business, which had not been assumed in the original $80 million assumption. Additionally, Oakleaf came with a strong pipeline of potential new accounts. Net/net, the company appears largely on track to deliver $80 million+ in incremental income as it enters 2012.
Pricing Impacts?
For a number of years, the investment thesis for the solid waste industry has been that its oligopoly structure (on the disposal side) would foster pricing power for the majors, given the barriers to entry, a la the railroads. Steiner admits that this transaction will not further that premise, at least in the near term. However, as disposal is expected to be offered EBIT neutral with whatever the hauler was already doing, the deal is not likely to undermine or cause deterioration in the overall structure, either. And, perhaps more important for industry pricing in general in the short term is Waste Management's decision to leave the vendor hauler network intact to the extent practicable. This keeps the haulers' cans utilized and not back on the street looking for a new home—at what would undoubtedly be at lower prices!
Read more analysis of Waste Management's acquisition of Oakleaf in the August issue of Waste Age. |
|
|
|
We Want to Hear From You
We would like your feedback, thoughts, suggestions, etc., as we create future issues of The Circular File. Please send questions or comments to rita.ugianskis@penton.com or lyoung74@comcast.net. Your input will be invaluable.
|
|
|
The Circular File joins Penton Media's portfolio of products designed to serve the needs of the entire solid waste and recycling industry:
A Part of Penton Media's Public Infrastructure Group
|
|
Add to Safe
Sender |
Subscribe |
View
Archive |
|
About Leone Young
|
|
|
|
