For Toronto-based IESI-BFC Ltd., the past decade has been a time of spectacular growth. In 2001, the year of the company’s initial public offering, IESI-BFC brought in $150.7 million in revenue. By 2010, the firm’s annual revenue had mushroomed to $1.43 billion (editor’s note: unless otherwise noted, dollar amounts are in U.S. dollars).
IESI-BFC has achieved this revenue spike by combining an aggressive pursuit of acquisitions with an emphasis on internal growth. And in part because of an economy that finally appears to be improving, company officials say IESI is poised to continue its potent revenue growth.
Taking Advantage of the Recession
In 2008, IESI-BFC, which provides collection services and owns and operates landfills, transfer stations and recycling facilities, completed eight relatively small acquisitions totaling $44 million. The company typically takes a more aggressive approach to acquisitions. Not this year, however. Company executives pulled back, watched and pondered as business conditions in the United States deteriorated. Fortunately, the Canadian economy did not fall apart to the same extent as the U.S. economy. In 2009, the company made just six acquisitions totaling about $27 million.
Noting that the recession was driving down waste company valuations, IESI-BFC used the downtime to carry out a bit of fiscal maintenance work. “In early 2009, we reset our balance sheet and lowered our leverage,” says Keith Carrigan, IESI-BFC’s chief executive officer.
The company was positioning itself to take advantage of low valuations. The recession had reduced interest rates as well as the value of waste industry companies across North America. A waste company with a healthy balance sheet would be able to buy good companies that had been weakened, but not crippled, by the recession.
Specifically, IESI-BFC raised $93 million (Canadian) in equity and paid off enough debt to reduce its long-term debt-to-earnings before income tax depreciation and amortization (EBITDA) ratio from around 3.0 to 2.22. Analysts say that lenders hesitate to lend to companies with long-term debt-to-EBITDA ratios of 3.0 and above.
A Big Deal
The newly engineered IESI-BFC balance sheet wasn’t just for show. In November 2009, the company announced a major $370 million all-stock deal to acquire Burlington, Ontario-based Waste Services Inc. (WSI), a company that brought in $435 million in revenue in 2009.
IESI-BFC completed the acquisition in July 2010, projecting synergies that would add $25 million to $30 million to EBITDA over the course of the next year. “We actually achieved more than [that] by the end of 2010,” says Chaya Cooperberg, director of investor relations and corporate communications for IESI-BFC. “On a run-rate basis, we added $32 million.”
The increase in pretax earnings will come from savings created by combining corporate headquarters, consolidating on the New York Stock Exchange, and combining information technology systems and auditing costs. In the field, branch offices in close proximity to each other will consolidate.
“In addition, internalization will be significant,” Carrigan says. “WSI routes will be sending a lot more material to our landfills, and that will give us the ability to increase prices.”
Third-party haulers tend to hold down prices at landfills, because a landfill owner knows that higher tipping fees may drive those haulers to competitive landfills. But a landfill owner that can increase tonnage delivered to its own landfill by its own hauling operation can raise the price of its collection operations to cover higher disposal rates. Then if the third-party haulers go elsewhere, the impact is lessened because higher-priced internalized waste replaces the lost lower-priced business.
The WSI acquisition was IESI-BFC’s largest of many during 2010. Over the course of the year, the company acquired roughly a dozen tuck-ins, bringing its total acquisition spending for the year to nearly $700 million.
One of the dozen was larger than the typical small tuck-in. At the end of the year, IESI-BFC announced its purchase of the solid waste assets of St. Louis-based Fred Weber Inc., a diversified company with substantial commercial and roll-off waste business in Missouri. IESI-BFC paid $159 million for those assets, which include one of the largest privately owned landfills in the United States.
The Organic Difference
Over the years, consolidating waste companies have typically focused on acquisition for growth. After reaching a critical mass, those companies then begin to foster internal growth by raising prices and volumes. The shift can be difficult. Customers used to flat prices object to increases. And small competitors always are on the hunt for new business. If the local unit of an acquiring company doesn’t pitch adjacent customers, another company will.
However, a distinguishing feature of IESI-BFC has been its consistent drive for organic or internal growth alongside acquisition growth. The corporate level of IESI-BFC seeks to grow the company through acquisitions, but it also trains the general managers of local branches to manage for growth.
“Every local market is different,” Carrigan says. “We know that a strategy in one market isn’t necessarily good in another, and we train our managers about all of the strategic options they have. Every manager decides on the strategy for each line of business based on population growth, density, weather, geography and other considerations.”
The goals always are the same, Carrigan adds: raise prices, raise volumes and raise productivity in each market.
The drive for internal growth at the local level helps inform acquisition efforts at the corporate level. When looking for acquisitions, the company’s merger and acquisition personnel look for markets with high population density, high population growth and positive economic growth — markets that can raise prices and volumes while allowing for productivity increases.
“We’re not in a lot of older urban markets because they aren’t growing,” Carrigan says. “Nor are we in rural areas. To move prices and volumes ahead annually and to improve productivity and internalization, we need growing urban and suburban markets. These are the market characteristics we look for. We have built the company around this bottom-up model from day one.”
Between 2005 and 2009, the company added $687 million in revenue from acquisitions and $138 million in revenue from internal growth. The company’s internal revenue growth in 2010 worked out to 6.7 percent, the highest rate of any public company in the non-hazardous solid waste sector, Cooperberg says. By comparison, Houston-based Waste Management reported a rate of internal growth of 3.5 percent for last year.
This combination of growth through acquisition and through operations enabled IESI-BFC to power through the recession. As the economy began to show signs of recovery in 2010, IESI-BFC, thanks in large part to its acquisition of WSI, increased revenues by 41.8 percent, from just over $1 billion in 2009 to $1.43 billion. EBITDA rose 42.5 percent to $413.8 million, and free cash flow grew a whopping 67.6 percent to $191.3 million. IESI-BFC ended 2010 with 113 collection operations, 58 transfer stations, 39 recycling facilities and 29 landfills.
The firm has an optimistic outlook for this year as well. Excluding the effects of additional acquisitions on revenues and profits, Carrigan projects revenue growth of 25.9 percent, EBITDA growth of 32.9 percent, and free cash flow growth of 41.1 percent.
Furthermore, the firm says its aggressive ways will continue this year. “We plan to continue acquiring in 2011,” Carrigan says.
Michael Fickes is a Westminster, Md.-based contributing writer.