MARKET REPORT: Allied-BFI: Another Mighty Match

While murmurings about Allied Waste Industries Inc.'s merger with Browning-Ferris Industries (BFI) have been minimal, the silence is telling.

Since the March 8 announcement that Allied Waste, Scottsdale, Ariz., plans to acquire BFI, Houston, many private waste management companies have refused to speculate what the consolidation will mean to the industry.

For example, Republic Services Inc., Fort Lauderdale, Fla., the industry's new No. 3 company, has declined to speculate about the merger's effects, citing "quiet time" requirements of its own upcoming public offering.

Likewise, Superior Services Inc., Milwaukee, executives have had "nothing to say about it." And, Waste Management Inc., Houston, refuses to return repeated phone calls to answer questions.

Joseph Fusco, vice president of communications with Casella Waste Systems, Rutland, Vt., will say that he expects the merger to have little effect on them, given that neither company has significant operations in Casella's northeastern U.S. markets.

In fact, Fusco predicts "business as usual" throughout most of the waste industry.

"Waste management is a local business," he says. "I don't think what happens in headquarter offices in Houston or Scottsdale alters the competitive landscape that always has existed at the local level.

"Consolidation has been a fact of life for some time now in our industry," Fusco adds. "Among the goals we all have is enhancing shareholder value. To the extent that Allied and BFI believe they can do that together explains the merger."

The groundwork for the Allied-BFI union actually was laid with the combination of Waste Management and USA Waste in July 1998, according to Dorothy Beeler, director of public relations for BFI.

"With the combination of Waste Management and USA Waste, it became clear that the best way to compete in the waste industry was with a larger and more integrated organization," she says. "Allied recognized this challenge, as did we."

Eventually, Allied made BFI an unsolicited - but serious - offer, and the two struck a deal.

The merger will create a good marriage because each company serves complementary rather than competitive markets, Beeler says. "There is very little geographic overlap."

When viewed in the context of a rapidly consolidating industry, Allied's acquisition of BFI is nothing new, says Bruce Parker, president and CEO of the Environmental Industry Associations, Washington, D.C.

"It's not a bigger deal than USA Waste and Waste Management," he says. "It is the logical culmination of the kind of consolidation that we've seen for the past year and a half.

"Consolidation brings more efficiency in terms of service," he continues. "It also allows vertical integration. In other words, you control cash flow by controlling garbage. You pick it up, process it and dispose of it in your own facilities. Internalized costs is where the growth factor is."

Meanwhile, public sector operators are worried that the $9.1 billion transaction will hurt their ability to compete with private operations.

"I have a personal and professional bias against landfills being owned and operated by the private sector," says John Hadfield, executive director of the Southeastern Public Service Authority, Chesapeake, Va.

According to Hadfield, privately owned landfills have a tendency to stifle competition among waste management haulers because the situation allows landfill owners to control rates and give their own hauling operations better deals.

"If landfills were like grocery stores with one on every corner, it wouldn't be a problem," he says. "But landfills today are so big that it's not like that. In Virginia, for example, there are seven major landfills. Following the Allied-BFI merger, we'll be down to just two owners: Allied-BFI and Waste Management."

The Southeastern Public Service Authority operates its own small landfill, which does business with BFI, the second largest hauler in southeastern Virginia. "We've attracted BFI's business and business from other haulers by providing economic incentives in the form of low tipping fees," Hadfield says.

However, "press reports indicate that the merged Allied-BFI wants to maximize the amount of waste it puts into its own landfills," he notes. "To the extent that the new company bypasses our facilities for its own landfills, that could have an adverse effect on our operations."

John Skinner, executive director and CEO of the Silver Spring, Md.-based Solid Waste Association of North America, wouldn't comment on the specifics of the Allied-BFI merger, but he agrees that the trend does not bode well for the public sector.

"I am concerned that the trend toward increased consolidation in the industry could adversely affect the level of competition in the field," he says. "Municipal governments purchasing solid waste services may find fewer service providers, with fewer options and higher prices."

Nevertheless, Leone Young, a waste management industry analyst with Solomon/Smith Barney, New York, believes the Allied-BFI merger will be good for the industry.

"It puts another management team in place at a large company and a team more focused on pricing and pricing discipline rather than market share gains," she says. "This change of focus is positive for the profitability of the industry."