Waste Management Inc.’s purchase of Deffenbaugh Disposal Inc. was a smart purchase for the industry’s largest hauler and helps it recoup a chunk of income it lost when it sold Wheelabrator Technologies Inc. (WTI) earlier this year, according to a leading industry analyst.
“This is a good deal for them,” says Michael E. Hoffman, managing director, institutional equity research for St. Louis-based Stifel, Nicolaus & Co. Inc., in an interview with Waste360. “To the degree that it’s always been their intention to find a way to replace the Wheelabrator EBITDA (earnings before interest, taxes, depreciation and amortization) and now they’ve replaced a quarter of it.
“It’s a fully integrated model with many customers, and it’s a contingent market business. It’s not overlapping,” Hoffman says.
Houston-based Waste Management agreed to buy Kansas City, Kan.-based Deffenbaugh in early October for an undisclosed amount. Hoffman didn’t want to get into specific numbers with the deal, as Stifel served as exclusive financial advisor to Deffenbaugh in the transaction. The purchase price for Deffenbaugh has been reported as being about $405 million.
For some time there’s been speculation that Deffenbaugh would be sold. Hoffman says he wasn’t surprised that Waste Management ended up being the buyer. “ I think if they hadn’t sold Wheelabrator, they wouldn’t have shown up. Because they’re the buyer of last resort at this juncture. Virtually everybody else walked away.
“Most of the other buyers needed a step up in the tax basis. And the seller wasn’t really going to do that because they didn’t get a step up on a tax basis when they bought it six or seven years ago. So it was highly unlikely you’re going to get a step-up. Waste Connections or Progressive or even Macquarie or Advanced Disposal, all of them are going to need a step up on the tax basis to make it work for them. So they walked away. And I think the price ended up coming down some.”
Hoffman says that he believes Waste Management will incorporate what he calls the new Waste Management way of doing things. “This is a business that was somewhat capital starved. So does Deffenbaugh lend itself to a CNG fleet conversion? Waste Management can fund that; Deffenbaugh probably couldn’t.”
Waste Management also might add computers to Deffenbaugh trucks and incorporate the new acquisition in its service delivery optimization program.
Also, Waste Management usually changes the truck colors of a new acquisition immediately. Hoffman believes it may be more gradual with Deffenbaugh. “I’ll bet that in six months we’ll still see Deffenbaugh vehicles on the road. In fact I’ll say in two years we may still see that.”
Geographically the Deffenbaugh purchase is a good fit as well for Waste Management. “It improves their position in that particular region,” Hoffman says. “They had no exposure there. If I start looking at the white space on a map – and there isn’t a whole lot of white space on Waste Management’s map – that was a piece of white space.”
Hoffman does see Waste Management eventually replacing the other three-quarters of EBITDA it lost with the Wheelabrator sale. Waste Management sold Wheelabrator to private equity firm Energy Capital Partners (ECP) for $1.94 billion in late July. “But I think they’re going to be disciplined about it.” And in the meantime Waste Management is going to buy back some of its stock.
When Waste Management does make acquisitions, it won’t necessarily be only in the traditional waste and recycling business. “I think they’ve got their eye on the E&P (exploration and production) waste market, they have their eyes on the hazardous waste market.
“There’s nothing to buy to help them in coal ash. If coal ash becomes a reality, this is mostly about Waste Management, Republic, Waste Connections, they’re your subject matter experts on managing a Subtitle D landfill. So does the coal-fired utility industry outsource that to the subject matter experts?”