The waste and environmental services industry is anything but sedentary. Marked by mergers, acquisitions and flowing capital, as well as by changing regulations, the business keeps evolving. Billion-dollar companies set the standard, creating a heavily consolidated market that might be unique to the sector.
To explain how the industry has managed to maintain its momentum through present day, Waste Today is looking at the key elements, people and events that shaped the business we know today through the lens of three of the largest waste management companies. As our series progresses, we will shift focus to the younger companies that are gaining traction and working to keep up with the big guys.
We’ll start in the late 1980s, focusing on federal regulatory changes, as well as those in California, that influenced the industry. We’ll dive into what a rash of landfill closures meant for the industry and get a glimpse at how the “old way” of financing supported considerable industry consolidation.
Environmental interest fuels early change
Consolidation is a hallmark of the waste industry’s past and present. The phenomenon dates back to the early 1970s and continues into the present, with near-daily news of companies growing through mergers and acquisitions. This consolidation can be traced back directly to a time when the government, which once had little to do with the solid waste industry, began to pay closer attention.
The 1970s saw a wave of public interest in the environment, pushing lawmakers to examine the government’s role in the waste and environmental sector.
David Biderman, executive director and CEO of the Solid Waste Association of North America (SWANA), Silver Spring, Maryland, says everything changed for the industry once legislation began to affect the way waste collectors and landfill operators ran their businesses.
In 1976, the government passed the Resource Conservation and Recovery Act, or what has become known as RCRA. This was one of the first pieces of legislation directed at the waste industry. RCRA focused on three areas: nonhazardous waste, hazardous waste and underground storage tanks for hazardous waste. RCRA gives the U.S. Environmental Protection Agency (EPA) the authority to control hazardous waste from “cradle to grave,” including its generation, transportation, treatment, storage and disposal. Subtitle C focuses on hazardous solid waste, while Subtitle D of RCRA is dedicated to nonhazardous solid waste requirements.
Under Subtitle D, regulations established a ban on open dumping and set minimum federal criteria for operating municipal waste and industrial waste landfills, including design criteria, location restrictions, financial assurance, corrective action and closure requirements.
On the landfill front, the series of strict regulations established under RCRA opened the door for a multitude of business opportunities.
“In the ’80s, there was a wave of municipal dump closures,” Biderman says. “This created a huge business opportunity [for waste companies]. It really allowed these businesses to step into the shoes of the local, municipal governments.”
Ron Mittelstaedt, executive chairman of Waste Connections, The Woodlands, Texas, recalls the huge impact the wave of landfill closures had on the industry. RCRA’s Subtitle D was developed to reduce the number of landfills in the country and to address concerns regarding leachate. He says Subtitle D gave landfill owners a five-year “sunset provision” to comply with increasing regulations.
“What that meant is that owners had five years to comply with that new federal regulation or to close,” Mittelstaedt says.
RCRA Subtitles C and D established standards for landfill development, added requirements for the use of synthetic liners and, ultimately, provided a solution for leachate collection systems.
Additionally, RCRA Subtitles C and D required financial assurance for the closure and postclosure of landfills. Mittelstaedt says this was in the form of cash or a cash-equivalent financial instrument given to the government.
As the long-term costs of owning a landfill drastically increased with these new regulations, landfill owners were left weighing their options, and waste companies were presented with new opportunities. Nearly 75 percent of the landfills operating before Subtitle D went into effect ended up closing. “Something like 6,000 landfills were closed by 1994,” Mittelstaedt says. “That was leaving about 2,000 remaining open.”
Biderman says RCRA, along with the Supreme Court’s ruling that waste could be transported across state lines, established the “regulatory framework for the industry to begin to grow.”
He says, “When the Supreme Court ruled that garbage was commerce, it was then allowed to cross state lines.” Biderman notes that while federal legislation influenced the industry to enter a period of great growth and consolidation, it was really the Supreme Court’s moves in the late ’70s that paved the way for companies to branch out.
While nationwide regulations were affecting the industry, more regionalized regulatory actions followed, which Mittelstaedt, who has spent 35 years in the waste industry, says had impacts on a national scale.
According to CalRecyle, the California Integrated Waste Management Act (AB 939) made all California cities, counties and approved regional solid waste management agencies responsible for enacting plans and implementing programs to divert 25 percent of their solid waste by 1995 and 50 percent by 2000.
“There were huge fines for noncompliance,” Mittelstaedt says. “This led to the push for the first curbside collection residential programs on the West Coast.” While the legislation directly affected companies operating in California, he says the large fines associated with the legislation, coupled with being one of the first sweeping mandates to require diversion, caught the attention of the industry nationwide.
“That bill had enormous teeth in it. Something like $10,000-per-day fines for communities that were not in compliance with it,” he says.
In addition to these laws and regulations, several large municipalities were going bankrupt around this time. This gave private companies the opportunity to take over waste processing for these municipalities in a wave of privatization. Mittelstaedt says he believes that while privatization allowed for some industry growth, it wasn’t as impactful as being able to access the sheer amount capital required to run and grow a waste management business.
“Privatization has been going on since the ’60s, ’70s. In our industry, it moves very slowly. I wouldn’t tell you there’s been a material change as a result,” he says. “In some cases, [governments] have looked to the private industry to develop recycling and recovery facilities that, in turn, the municipal governments also use.”
A wave of consolidation
With landfills closing, waste companies made moves to capitalize on newly created business opportunities.
“A number of these companies were hoping to capitalize on the acquisition of landfills that were going to try and comply and stay around,” Mittelstaedt says. “And that led to a large period of consolidation in the early ’90s and mid-’90s.” Numerous new public companies formed during this period, he says.
Mittelstaedt saw firsthand the movements made in the industry. While he founded Waste Connections in 1997, he first entered the waste industry in the late 1980s with Houston-based Browning Ferris Industries (BFI). At the time, BFI was one of the largest public companies in the industry. After leaving BFI, Mittelstaedt then held various positions with Sanifill, a smaller public company based in Houston.
The late 1990s also saw changes in the financial sector. Joe Ursuy, senior vice president and manager of Dallas-based Comerica’s Environmental Services department, says the wave of consolidation during the 1990s came at a period of relatively low investor confidence.
“Private equity firms had a low interest in the waste industry,” Ursuy says. “Investor confidence was generally very low.” A stigma remained around the industry’s involvement with organized crime. Many large companies were facing accounting issues, and financial institutions did not fully understand landfill operations.
“There were only a couple banks interested in the industry,” he says. “After this massive wave of consolidation, when you’re buying a company a day, there were definitely accounting issues.”
To contextualize just how active the market was, Mittelstaedt says Waste Connections made 52 acquisitions in 1998 and 58 acquisitions in 1999.
Ursuy says banks were uninterested in the small waste management companies that were looking for financing and to establish lending relationships, focusing instead on the 15 or so largest companies.
“Smaller waste companies were working with local lenders, local banks, equipment financing on asset-based financing only, and it made acquisitions very difficult, which made growth slower for them,” he says. “Back in the late ’90s, early 2000s, there was nobody focused on that segment of the market, but there were a couple large banks doing very large deals, and if you didn’t want to borrow $75 [million] to $100 million back then, it was probably too small for them.”
Ursuy says Comerica began to service smaller companies to help them attain greater financial health.
At the same time, the early 1990s saw a recession. High debts, high interest rates and an uncertain economy led companies to begin looking at their books. Mittelstaedt says this is when BFI began to divest locations.
Oak Brook, Illinois-based Waste Management (now WM), which went public in 1972, was founded by Wayne Huizenga and two other investors, Dean Buntrock and Larry Beck. The company already had surpassed $1 billion in sales by the 1990s, and, like other large businesses at the time, saw a need to shift assets. In 1998, Houston-based USA Waste Services acquired Waste Management in a deal valued at more than $14 billion, according to a Wall Street Journal report that year.
The acquisition came at a relatively tumultuous time for the conglomerate. Waste Management had seen several high-level executive changes in a relatively short time and, according to a U.S. Security and Exchange Commission filing, “the commission alleged that beginning in 1992 and continuing into 1997, [the company] engaged in a systematic scheme to falsify and misrepresent Waste Management’s financial results.”
With the USA Waste transaction, Waste Management’s namesake prevailed, and USA Waste Services CEO John Drury became CEO of the newly combined business.
“USA Waste acquiring Waste Management and keeping the Waste Management name was a very significant transaction for that time,” Ursuy recalls. “That helped shape Waste Management into the company it is today.”
Mittelstaedt says the acquisition was “like the minnow swallowing the whale.”
Long-time industry professional Joe Cassin, current vice president of business development at WM, recalls the seemingly endless transactions being made in the 1990s.
“Before, the industry was fragmented,” he says. “But during [the late 1990s], the acquisition opportunities were endless. There was just so much consolidation.”
Meanwhile, Mittelstaedt’s first waste industry employer, BFI, was in the process of being acquired by Scottsdale, Arizona-based Allied Industries, a deal that was finalized in 1999. That same year, another large waste company, Republic Services, Phoenix, made the move to go public, branching out from the larger Republic Industry, which was founded by the same man behind the creation of Waste Management—Huizenga. Republic boasted revenue of $1 billion in 1997.
And, in another “minnow swallowing the whale” transactions, Republic Services successfully completed the acquisition of Allied Waste in 2008. The transactions combined the second- and third-largest waste companies.
More on the horizon
As the 1990s came to end, the three largest companies, Waste Management, Republic and Waste Connections, had no intentions of slowing down their M&A activity. However, shifts in capital deployment, financial changes and more economic challenges, while difficult for business at times, have paved the way for other companies to enter the arena, fueling more large transactions.
Ursuy says the private equity interest we see in the waste management industry today has created more opportunities for additional businesses to grow, including those that have been around for some time and some that are relatively new.
While the origins of today’s waste management industry are centered around WM, Republic and Waste Connections, Mittelstaedt says the capital-heavy nature of the industry will keep waste businesses and their private equity financiers active.
“The industry is far, far more capital-intensive today than it was 30 years ago,” he says. “The capital-intensive nature of the business continues to go up. Private companies are competing with larger public companies who have a far lower cost structure and lower capital structure, so it’s harder for them to be competitive on the street with the larger public companies.”