Pursuing The 'American' Dream

One of North America's fastest-growing, regional solid waste companies, Burr Ridge, Ill.-based American Disposal Services Inc. was incorporated in November 1995. Currently, the company owns five solid waste landfills and owns, operates or has exclusive contracts to receive waste from nine transfer stations across five regional markets.

American Disposal's landfills and transfer stations are supported by its collection operations, which serve more than 105,000 residential, commercial and industrial customers. Since January 1993, it has acquired 31 solid waste businesses, including four solid waste landfills, 26 solid waste collection companies and one transfer station.

Editor/Publisher Bill Wolpin recently interviewed President Rich DeYoung; VP and Chief Operating Officer Rich Kogler; VP Engineering John McDonnell and Controller Larry Conrath.

WW: What factors in today's marketplace convinced you to create American Disposal?

Rich DeYoung: It was a consolidating industry, and we saw an opportunity in the secondary markets where consolidation hadn't occurred. We thought that consolidation in those markets would best be suited for a smaller company, not so much a BFI or a Waste Management.

Secondary markets wouldn't play well with the bigger companies, because it isn't where they need to grow. Their goal is to grow 20 percent a year, and a 5- to 10-billion dollar company can't grow enough in secondary markets to affect stock prices. For a start-up company, though, it's a great place to get market share, make deals and grow at 50 to 80 percent, which is our goal.

John McDonnell: Our timing coincided with Subtitle D. In the secondary markets, an opportunity was created where smaller landfills were faced with whether to try to remain in business for the long haul or to get out. We saw a lot of them getting out. This helped our business plan which is focusing on consolidating some of the secondary markets.

WW: What information did you use to convince your initial investors?

RD: We used information from a specific marketplace. We began in Southwest Missouri where Arkansas, Oklahoma and Kansas meet, and we were able to convince the investors in late 1992 that there was an opportunity to make approximately 15 acquisitions in that small marketplace, and build a 20- to 25-million-dollar revenue company. We were able to show them that there were a lot of independents there that hadn't been consolidated, and if we were able to do that, we'd have a nice nucleus to start a company. By the way, we closed on 14 of those initial acquisitions we identified.

WW: What have you learned from the independent operators you've acquired?

RD: You learn from his mistakes as well as from the smart things he's done. For example, some independents have not had a price increase in years. One had not had an increase for six years, which is phenomenal to me. You also see innovative equipment uses.

Rich Kogler: We have tried to avoid the one-size-fits-all mentality. Every owner that I've dealt with has some innovative and money-generating ideas about how to address his market, and we incorporate those. They know their market and how to treat their people and customers. Most of the innovation is market-specific; you can't take some corporate manual and make it work in every part of the country.

Larry Conrath: We all came from a large company where a great amount of capital was expanded in order to make the day-to-day operations work effectively. You learn a lot from the smaller guys in the secondary markets on how to stretch the dollar and generate the cash flow with limited resources.

WW: What will distinguish you in this competitive marketplace?

RD: We will get our edge by gaining market share in secondary markets. If you get market share, you get returns on those investments, and obviously have some market leverage.

What's going to differentiate us - and we've done this since '93 - is we will stay focused on our business strategy. Every time we do an acquisition, we're going to internalize the waste. We're not going to chase anybody in the country that's for sale; we're staying focused in the Midwest and the eastern part of the country.

I don't try to differentiate myself from Waste Management and BFI because they're in a different league. However, if you look at Allied, USA Waste, United, Superior and Republic, the other mid-cap companies of which we're the smallest right now, the one thing we have in our favor is we have stayed focused and have not veered off our business plan.

WW: How many solid waste companies are you targeting to purchase?

RD: On an annual basis, eight to 12 a year, but that's conservative. This year, we'll have completed about 19 acquisitions. In the future, you'll see us do as few as eight to as many as 25, but forget the number of acquisitions because it depends on their size.

WW: Are you seeking to acquire in any particular type of operation?

RD: We're focusing on collection companies in markets we're currently in to continue to build out those marketplaces. Also we're targeting one to two new markets a year. We added Rhode Island last year, which was a new market for us. Within our existing markets, however, we've targeted 75 percent growth a year for the next three years.

WW: Profile a waste company you would be interested in buying.

RK: I can tell you about the acquisitions we've done in the last six months - they range from a guy that has two truck routes to a guy that's doing $10 million a year. In the future, you'll see us complete deals as small as a couple hundred thousand and as large as $45 million. There are a couple of larger deals we're looking at, but those are more along the lines of a merger.

WW: Describe your criteria for buying companies and for determining its operating efficiency.

RD: It's really no different from anybody else. All the public companies are doing acquisitions with purchase prices ranging somewhere between three and five times cash flow.

On a tuck in acquisition where there's virtually no competition for that acquisition, you're going to buy it in the range of three times cash flow. On a landfill or larger hauling company or something that's not being auctioned, you're going to be in the range of five times cash flow. Sometimes, you get lucky and buy something less than three times. Going outside the top of the range happens occasionally, say, if you're trying to get a big landfill and integrate it with a big hauling company all at the same time, you might see it go as high as six times.

WW: If I am interested in selling my company, why should I choose you over other potential buyers?

RD: As an independent owner, you should determine what's going on in your marketplace and what best suits your needs. If you're just looking for the highest price and to get out of town, you should auction your business.

If you're looking forward to a long-term relationship, and you want to work with people who want to work together, you've got a chance to sell to my company and enjoy working here.

JM: I think it's a simpler process with us because the potential seller deals with an acquisitions person from our office. Rich Kogler and I get involved in terms of due diligence, along with Larry Conrath and Ann Straw, our attorney. It's within a small circle of people where the decisions are made; it doesn't go up to a board or a regional manager. So, we can work more quickly.

WW: How do you see American Disposal growing in the '90s as compared to how other large, integrated solid waste management companies developed a couple decades ago?

RD: I'm not sure comparatively, but I seeus growing at a rate of 75 percent a year.How does it compare to the '70s or '80s? Obviously, the opportunities are less than what they were, but there's still a huge percent of the market - over 50 percent - that is not consolidated yet.

There's plenty of room for consolidation for a company like us that's well-financed and well-structured.

WW: Are there any mistakes that were made by earlier companies that you wish to avoid?

RD: Yes. When we put our business plan together in '92, we mapped out how we would avoid these mistakes. This was important in convincing our original financial investors.

For example, one company had too many green field sites - or "field of dreams": a build-it-they-will-come site. We've seen companies put a lot of money in property, permitting and time - sometimes as much as $20 million - and they have a site in the middle of nowhere waiting for garbage. It's a joke.

Back in the mid-'80s when there was a so-called "garbage capacity crisis," people thought the best thing they could do to build shareholder value was to build capacity, but that was a mistake. All it did was lever the companies up too high which was their death.

Another mistake we saw was too aggressive accounting. So, basically, we're not going to make a mistake on our books, and we're not going to own any green field sites that just don't have volume to back it up.

Finally, something that goes back to our training at Waste Management together. We've all been involved in good and bad sites in our careers - some of which were inherited by acquisition and ended up being bad sites environmentally, and obviously costly.

When John McDonnell started this company with me in '93, we both stressed "let's not make any environmental mistakes." We can't afford it: If we buy the wrong site or get a site that's got an environmental problem, it will be the death of this company before we get it off the ground.

WW: Are there any other differences in this new area of solid waste consolidations that you see differently than those of the past?

LC: I see regional development of companies, as opposed to large corporations, and I think that the midcaps will decide regionally where they want their presence.

WW: Do you see others joining in the fray in the mid-level size companies?

RD: You always get a new one now and then, because Superior is not that old and we're not that old. Who knows, there might be a new one popping up that I don't know about.

Overall, if you look over the last couple of years, the midcap level has actually shrunk significantly. In fact, I can think of four or five right now that have gone down in the last year because of acquisitions from Republic, USA Waste or the Allied/ Laidlaw combination. If you look at the midcap from a year ago to right now, I think you've got about five that are missing.

WW: What do you think will be happening either quantitatively or qualitatively in terms of the independent private contractors in the next decade?

RD: I think you'll see the independents continue to shrink. Half the market still hasn't been consolidated, but obviously there are companies such as ours that continue the consolidation trend.

But there are some quality independents out there - and have been for years. I think there will continue to be. There's still room in the marketplace for a local independent that can build a solid company. If they want to stay in business, they can.

For more information about American Disposal Service, Inc., contact Rich Kogler at (630) 655-1105.

Service area: 5 regions:

Region 1: Northwest Arkansas, Southwest Missouri,Southeast Kansas, Northeast Oklahoma.

Region 2: West Central Ohio.

Region 3: Northwest Pennsylvania.

Region 4: Rhode Island and Southwest Massachusetts

Region 5: Chicago and North Central Illinois

Services provided: recycling; construction and demolition debris removal and recycling; commercial, residential and industrial waste collection; waste transfer; waste disposal.

Cities/states served: 9 states, 25 major and secondary cities.

Number of employees: more than 450 total

Landfills owned and operated: 5 owned: Wheatland, Scammon, Kan.; Livingston, Pontiac, Ill.; Wyandot, Carey, Ohio; Clarion, Leeper, Penn.; Macalester, Okla.

Collection customers: More than 105,000 in all lines of business.

Transfer stations: 4 owned, 5 under contract.

Refuse trucks: More than 380 vehicles including FEL, REL, R/O, tractor trailer and transfer trailers, recycling collection trucks: use Mack, Ford with Leach and PakMor and Heil bodies.

Containers used: Front load and rear load containers, 64- and 90-gallon Toters for residential.

Major processing equipment used at transfer stations: East trailers, Caterpillar loaders.

Type and number of major landfill equipment pieces: Caterpillar 826c and/or Rex 3-70 compactors.

Scales: FEL scales on trucks.

Software systems: SoftPak.