Waste Management moves in on Republic Services

Houston-based Waste Management (NYSE: WMI) made a $34 per share all-cash offer for Fort Lauderdale, Fla., rival Republic Services (NYSE: RSG) today, potentially blocking Republic's bid to bulk itself up by acquiring Phoenix-based Allied Waste Industries (NYSE: AW).

Waste Management offer's is valued at approximately $6.2 billion.

Republic and Allied announced their merger plans late last month, with the deal valued at over $6 billion in Republic stock at the time (see Republic to buy Allied Waste for over $6B in stock). That deal would combine the country's No. 2 and No. 3 waste and environmental services providers.

Waste Management, the No. 1 firm in the industry in the U.S., believes it can offer a better value for Republic shareholders than they would get under a Republic-Allied merger.

"We did not go out looking for this deal, and did not contemplate making an unsolicited offer for Republic," said David Steiner, CEO of Waste Management, in a conference call.

"But when Republic was put into play as a result of their agreement with Allied, we were presented an opportunity we felt we could not ignore."

Waste Management expects a deal with Republic to be accretive to earnings in the first year and to deliver synergies of at least $150 million. The company said it's confident it will identify additional synergies once it's able to conduct due diligence.

"But this does not signal a return to a strategy of growth through acquisition," said Steiner. "Once we close this transaction, we will spend all of our time and efforts to ensure a smooth integration. We will not look to make any other significant acquisitions."

Waste Management's proposal represents a premium of approximately 22 percent over the closing price of Republic stock on July 11, the last trading day before Waste Management publicly disclosed its offer.

In a statement, Republic said, "The board of directors of Republic Services, along with its legal and financial advisors, will carefully review the proposal received from Waste Management consistent with its fiduciary duties. Following its review, the board will respond in due course."

Waste Management's shares dropped by 6.38 percent in early trading today to $34.28, but Republic's shares hit $31.30, rising by 12.19 percent.

Allied Waste was down 3.42 percent to $11.58 per share.

The deal poses an antitrust hurdle for Waste Management, which sold some assets to Republic in 1999 that it may not be allowed to buy back under an agreement it made at the time with the U.S. Department of Justice.

"While we know there are certain assets that we may need to divest, we are also certain that the assets that we'll get to keep are significant and make for a compelling transaction," said Steiner.

And Steiner said Waste Management could get to keep some of the business that it previously sold to Republic.

"For example, in Los Angeles, we had to divest of Chiquita Canyon. At that time we had the Bradley Landfill, which was taking in 10 thousand tons-plus per day," said Steiner. "Our Bradley Landfill has shut down. So the circumstances have changed in Los Angeles."

"We've shut down our landfill, the Department of Sanitation in Los Angeles has looked at two new sites for landfills, and so we believe that the change in the market would allow us to keep an asset that we are required to not go after under the 1999 consent decree."

Waste Management operates the largest network of landfills in the industry, with 277 active sites managing the disposal of more than 116 million tons of waste per year.

The company also handles 7.6 million tons of recyclable materials, with 105 recycling facilities, and 30 single-stream recycling plants. Republic has 59 landfills and 33 recycling facilities.

In addition to adding to Waste Management's landfill and recycling operations, a merger would also combine a growing number of renewable energy sites.

Waste Management owns or operates 16 waste to energy plants that can process up to an aggregate of 21,000 tons of waste per day and generate more than 650 megawatts of electricity. That's enough to power 600,000 homes per year.

The company also has 108 landfill gas projects with 10 more slated for construction this year. Waste Management said its projects supply enough gas to create more than 450 MW, enough to power 400,000 homes.

When Republic announced its deal with Allied, Republic chairman and CEO James O'Conner said his company had eight landfill gas to energy sites operating, with eight under contract negotiations and another eight that the it's looking at developing.

Waste Management could face another potential hurdle in its pursuit of Republic — the company has yet to secure financing for the acquisition. It's beginning the process of obtaining commitment letters for financing with the assistance of Credit Suisse.

Last month, Republic said it expected to close its deal with Allied by the fourth quarter of this year. Waste Management believes that a transaction with Republic could close early in 2009.