While the solid waste industry was once characterized by a frenzy of acquisition activity by numerous consolidators, today mergers and acquisitions can be described as more strategic and selective. The days of merely “rolling up” acquisitions over a wide geographic base largely are over. However, private equity investors, attracted in part by the sector’s relative stability, continue to play an active role in the industry’s transaction activity.
Investments by private equity firms can offer solid waste companies numerous benefits, such as money to acquire competitors, build new facilities or to invest in new technologies, as well as the chance to obtain better debt financing terms. Before it partners with a private equity firm, however, the owner of a waste company needs to carefully consider a range of issues, including how knowledgeable the equity firm is about the waste industry and whether there is a good fit between his/her company and the private equity firm.
Private Equity Overview
At a simplified level, private equity firms focus on three major activities: (a) raising capital from third-party investors (e.g., pension funds), (b) making active investments in privately held and publicly traded companies, and (c) exiting investments to return the capital and profits to investors. The private equity industry involves several segments, each focusing on different stages of a company’s life: venture capital firms provide early stage equity capital; turnaround private equity firms bet on the revival of struggling entities; growth equity firms assist companies in accelerating their strategic plans; and leveraged buyout funds acquire entire mature companies, generally by paying a significant portion of the purchase with debt. Each segment of private equity can play a role in the solid waste industry, and, in fact, private equity firms are active investors in the sector.
For example, in January 2011, Charterhouse Group purchased Red Bank, N.J.-based J&D Waste Management and renamed it RiverRoad Waste Solutions with the intention of expanding its landfill diversion, recycling and sustainability services. In 2010, Clairvest Group invested growth equity into Hudson Valley Waste Holding, and Summer Street Capital provided growth equity to Action Carting.
As the numerous transactions suggest, the solid waste industry is very attractive to private equity investors. In particular, equity investors gravitate to companies with proven and accomplished management teams, above-average safety records, diverse customer bases, predictable revenues, and a healthy cash flow margins and returns on capital.
Each investment made by a private equity firm must have a “thesis” or rationale that drives a waste firm’s strategy moving forward and to which all shareholders and executives subscribe. An example would be a leading regional solid waste company taking on an equity partner to help fund the acquisitions of nearby competitors (to create additional density and increase waste volume controlled) as well as other value-creating projects such as the development of new recycling or disposal facilities.
From the perspective of the owner and management team of a solid waste company, private equity can play an important role for both the company and its shareholders. Private equity firms can supply much needed equity to pursue aggressive growth in what is, for the most part, a capital-intensive industry. While the solid waste sector can access attractive debt financing from experienced industry lenders, an aggressive growth strategy typically requires more capital than lenders are comfortable providing. Further, to satisfy the growing need for succession planning within family enterprises, private equity firms can purchase shares (or membership interests) directly from retiring shareholders, and, if applicable, partner with remaining family members who are motivated to grow the business to new heights.
Private equity partnerships can provide other benefits to solid waste firm owners, such as:
• A confidential process — If the owner of a solid waste firm seeks to sell an interest to a private equity firm instead of another waste company, the owner does not allow a competitor the chance to review his firm’s strategic information.
• An energized management team — If an owner sells his firm to a competitor, the managers at his firm could be vulnerable to downsizing. The private equity firm, however, will need these people and could provide them with performance incentives.
• Flexible liquidity — A private equity firm can give the owners an opportunity to either sell outright or reduce their ownership stakes while continuing to run the business.
• Improved debt financing terms — Private equity firms often obtain better debt financing terms than entrepreneurs alone.
• Strategic advice — Staff members of the private equity firm can undertake key roles on a variety of projects, such as due diligence research on potential acquisitions.
• A more valuable business — An influx of private equity capital can enable a solid waste firm to make accretive acquisitions, investments in technology to drive efficiencies and cost reductions (e.g., improved routing software), and investments to lower transportation and disposal expenses (e.g., new single-stream recycling assets and facilities).
Factors to Consider
If a solid waste firm owner believes that a private equity partnership is what his company needs, he must consider several critical issues before selecting his partner, as having a private equity firm as a shareholder is like a business “marriage.” The issues to consider are:
• Buyout or Partnership? Are you willing to sell control of your company? Will the private equity firm consider being a minority shareholder? If so, how many deals have they done in which they don’t have control?
• Valuation and Deal Terms. Depending on whether the transaction is a buy-out of the company or a growth equity financing, is the valuation of the solid waste company fair? Are the other material deal terms (e.g., board representation and governance rights, liquidity provisions, etc.) fair given the ownership position of the private equity firm?
• Industry knowledge. Is the private equity firm adding value or is the solid waste company holding its hand on industry dynamics?
• Size of deal. Relative to the size of the private equity firm’s fund, what is the size of this deal? Given the size of the transaction, is the solid waste company going to be important to the equity firm?
The solid waste industry continues to change — privatization, flow control, aggressive waste diversion programs, the development of new waste-to-energy technologies, and the growing adoption of natural gas-fueled collection trucks are among the developments now impacting the industry. In the midst of this change, private equity remains an option for solid waste firms looking for the capital necessary to grow in a challenging environment.
Michael Castellarin is a principal at Toronto-based Clairvest Group Inc., a private equity firm managing approximately $950 million of equity capital, and leads the firm’s effort to invest in the solid waste and environmental services sectors. He can be reached at firstname.lastname@example.org or 416-413-6007.
Ryan Feldman is an associate at Clairvest Group Inc. and works alongside Michael in sourcing new investment opportunities and working with investee partners at the board level to execute strategic projects. He can be reached at email@example.com or 416-413-6002.