There has been no shortage of merger and acquisition news from the waste management industry in recent weeks. It started last month when Republic Services Inc. (RSG) made a $6.24 billion offer for Allied Waste Industries (AW). That deal would combine the second and third largest trash collecting businesses in the industry in a direct challenge to industry leader Waste Management, Inc. (WMI). In an effort to thwart that deal and maintain its dominance of the industry, Waste Management announced Monday that it will bid $6.19 billion for Republic Services.
The two companies compete against each other in 19 of Republic’s 20 markets, which should create administrative cost savings and allow the businesses to integrate easily. The merger of WMI and RSG would create a company whose combined 2007 revenue would be close to $16.5 billion.
The consolidation is being prompted by the pressure put on the industry’s bottom line by rising fuel costs. The waste hauling industry has also been hurt by a slowdown in construction waste cleanup. Housing starts are down 36% over the last year, and remodels have slowed down as well. With the prospect of increasing revenues looking increasingly difficult, WMI is going to attempt to pad its bottom line by cutting back on costs where it can.
Waste Management estimates that cost savings from the proposed deal with RSG would be around $150 million in the first year. Waste Management expects most of the cost savings to occur within the first two years. Furthermore, Waste Management issued preliminary second quarter earnings of 64 cents on $3.49 billion of revenue, which puts them ahead of consensus Wall Street estimates of 58 cents on $3.42 billion. The company will officially report on July 29.
WMI’s offer of $34 per share for Republic Services represents a 22% premium on its
