Shares of waste collection, transfer, and disposal service provider Waste Connections
While $1.3 billion seems pricey for a company that takes in $300 million per year in revenue, R360 operates in a high-margin business. Founder and CEO Ron Mittelstaedt claimed in a statement that he expects R360 will add 4% to the company's operating profit (measured as earnings before interest, taxes, depreciation, and amortization). This could accelerate as Waste Connections leverages its scale to help grow R360's business.
Waste Connections has grown from a start-up in the late 1990s to America's third-largest waste disposal business, behind only Waste Management
The two companies do seem like a good fit. Waste Connections has pursued a growth strategy of staying out of the way of Waste Management and Republic Services, instead moving into less competitive markets like municipal solid waste disposal in smaller cities, suburbs, and rural areas where the national operators don't venture. R360 is one of the largest operators in the E&P business, which is highly regulated and sufficiently small that it remains relatively uncompetitive, something Waste Connections likes very much.
Further, R360's business activities, concentrated near areas with high output of oil and gas from unconventional sources, complement Waste Connections' existing infrastructure, particularly in Oklahoma and Texas. This offers the opportunity to gain efficiency through combining operations. In the trash business, getting high density along transportation routes is critical to maintaining strong profit margins, so adding additional volume along routes that Waste Connections already maintains should be all to the good. The R360 acquisition might also offer some synergy with Waste Connections' existing E&P waste processing facility in Louisiana.
The move comes after Waste Connections issued 12 million shares early this year, raising nearly $400 million in cash. Many analysts believed Waste Connections amassed the cash pile in order to bid for assets sold by Veolia Environnement
Waste Connections avoided Veolia's misfortune specifically by making a point of avoiding competitive urban markets. The company had hoped that Waste Management or Republic Services would buy up the assets en masse, and then draw out value by breaking up the organization and selling off operations in smaller markets that the national operators weren't interested in. Instead, Highstar Capital bought up the entire operation and kept it intact, leaving Waste Connections with a hoard of cash on its books. The R360 acquisition seems like a good way to deploy this capital.
Waste Connections will have to finance the remainder of the acquisition with debt, but despite its acquisitive history, the company has a strong balance sheet, with earnings covering interest expenses nearly 11 times. The added risk comes from R360's strong exposure to oil and gas prices, the volatility of which can affect pricing for waste disposal. Volumes of municipal solid waste have been largely flat or down in Waste Connections' core markets, as the recession hit booming suburbs and secondary cities hardest, so the company will come to rely more on the E&P segment for growth. This leaves the company more exposed to the commodity cycle than traditional trash haulers.
While Waste Connections has proven adept at managing acquisitions previously, this will get harder as the company gets bigger. Investors looking for the stability and reliability of solid dividend payers like Waste Management might want to stay away. Instead, the Motley Fool has assembled a free report on nine dividend stocks to own for the long haul. This report is only available for a limited time, so get your free copy now.
Daniel Ferry owns shares of Waste Management and Veolia. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management, Republic Services, and Veolia Environnement. Motley Fool newsletter services have recommended creating a write covered strangle position in Waste Management. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.