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Waste Connections (WCN) announced last Monday that it will acquire R360 Environment Solutions Inc, in a deal valuing the company at $1.3 billion. Investors are enthusiastic about the deal, sending shares of Waste Connections 7% higher over the week.

The Deal

Waste Connections announced that it will acquire R360 Environment Solutions, a leading provider of non-hazardous oilfield waste treatment and disposal services in the US. R360 is currently owned by an investor group led by Paine & Partners and Tinicum Capital Partners. R360 has many facilities in the oil-rich regions of Permian, Bakken and Eagle Ford and it operates some 26 facilities. Waste Connections will pay $1.3 billion in cash for the company. The company has not yet announced deals surrounding the financing of the deal.

Chairman and CEO Ronald J. Middelstaedt commented on the deal, "We are extremely pleased about the opportunity to bring R360 into the Waste Connections family. Through acquisitions and new facility development, R360 has created leading positions in key basins, providing closed loop oilfield waste services within an increasingly stringent regulatory environment. The acquisition represents a natural extension of our existing E&P disposal activities."

R360 Environment Solutions generates annual revenues of approximately $300 million. The deal will boost EBITDA margins by more than 400 basis points, given the higher margins of R360's activities. The transaction is also expected to be accretive to free cash flow margins. The deal values R360 at approximately 4.3 times annual revenues.

Waste Connections expects to close the deal in the fourth quarter of 2012. The deal is subject to regulatory approval and the usual closing conditions.

Valuation

Waste Connections ended its second quarter of 2012 with $136 million in cash and equivalents. The company operates with $982 million in short and long term debt, for a net debt position of $846 million.

For the first six months of 2012, Waste Connections generated revenues of $787 million. The company net earned $73.7 million, or $0.61 per diluted share. For the full year the company is on track to generate revenues of $1.62 billion. Full year net income could come in around $150 million, or $1.30 per share.

Valued at $3.9 billion, the market values the firm at roughly 2.4 times annual revenues and 24 times annual earnings. This excludes the impact of the acquisition of R360.

Currently, Waste Connections pays a quarterly dividend of $0.09, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Waste Connections have lost 5%. Shares have traded within a tight trading range of $29-$33 per share. Over the last week, shares have popped from the lower end of the range to levels around $32 as investors applaud the acquisition of R360.

Over the past five years, shares have risen some 50%. Shares doubled from their lows of $15 in early 2009, to peak at $35 by the end of 2011. Between 2008 and 2012 the company aggressively grew its annual revenues from $1.05 billion to an expected $1.62 billion this year. Net earnings rose in line, from $103 million in 2008, to an expected $150 million for 2012. Earnings per share grew in line with net income as the number of shares remained roughly the same.

The acquisition of R360 represents a move towards the energy market. Waste Connections still heavily relies on the traditional trash collection market, which is having a tough time.

R360 will boost Waste Connection's annual revenues by some 20% and boost the company's growth profile. The acquisition does come at a price. R360 is valued at 4.3 times annual revenues compared to a multiple of 2.4 times for Waste Connection. On the other hand, R360 generates EBITDA margins of mid 50%. This compares to Waste Connections' margins of 30-32.5%, according to a Wedbush analyst report.

The acquisition looks very attractive to me and boosts the appeal of Waste Connections as it boosts the size of the company significantly, and its growth profile. While I applaud the deal, I remain on the sidelines as the valuation multiples are too high in general for me.

Source: Waste Connections - Acquisition Of R360 Boosts The Company's Growth Profile