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Republic to buy Allied in $6 billion waste deal
June 23, 2008 / 10:49 AM / 9 years ago

Republic to buy Allied in $6 billion waste deal

<p>Allied Waste trucks are lined up in an undated handout photo. REUTERS/Allied Waste/Handout</p>

BOSTON/PHILADELPHIA (Reuters) - Republic Services Inc (RSG.N) reached a $6 billion takeover deal for rival U.S. trash hauler Allied Waste Industries Inc AW.N on Monday, solidifying the company’s No. 2 position in its industry and giving it more power to push through price increases.

The all-stock deal for No. 3 Allied would create a company with $9 billion in annual revenue, trailing only Waste Management Inc WMI.N, whose 2007 revenue totaled $13.3 billion. Its next largest rival would be Waste Connections Inc WCN.N, which generated revenue of $958.5 million last year.

Based on Friday’s closing prices, the deal would value Allied at about $14.04 a share, a 3.5 percent premium.

Under the deal, which has been under discussion for more than two years, Allied shareholders would receive 0.45 share of Republic common stock for each Allied share.

Republic would issue about 198 million shares to Allied shareholders, representing about 52 percent ownership of the combined company.

The premium is 17 percent over the average closing price of Allied stock for the 30 trading days before June 12, the companies said.

Republic and Allied shares, which have slid since the companies confirmed they were holding merger talks 10 days ago, were both lower on Monday.

The deal could almost quadruple, from 59 to 228, Republic’s number of landfills for waste disposal.

“The value of the landfills is going to do nothing but increase down the road,” said Brian Nelson, senior equity analyst at Morningstar, in Chicago. “Ten years down the road, we’re going to be looking back at this transaction and saying this is a pretty savvy move because of suburban sprawl, because of population growth.”

Faced with rising costs for fuel, metals and higher disposal fees, the nation’s largest waste management companies have been pushing through price increases to improve profits.

“The merger of RSG and AW ... should provide a basis for continued rational pricing,” wrote Goldman Sachs analyst David Feinberg, in a note to clients.

STRENGTH IN SUN BELT

Together, the companies would generate more than half their revenue in the fast-growing southern United States.

“Our national platform will have 54 percent of its revenue in Sun Belt states that have population growth in excess of the U.S. national average,” Don Slager, president and chief operating officer of Phoenix-based Allied, who would hold that role in the combined company, told investors on a conference call.

The deal, expected to close in the fourth quarter, is subject to regulatory review. The companies also set as a condition that the debt of the combined company would receive an investment-grade rating.

Ratings agency Moody’s Investors Service said it would review its ratings on both companies.

“If the transaction proceeds as expected and the post-merger legal structure, liquidity profile and financial policies of the combined group are typical of investment grade credit profiles, then Moody’s expects it would assign a ‘Baa3’ rating to the combined Republic when it resolves the review,” said analyst Jonathan Root, in a statement. “Baa3” is Moody’s lowest investment-grade rating for corporate debt.

Republic, based in Fort Lauderdale, Florida, plans to put in place a new unsecured senior credit facility and issue new debt; the existing senior notes of both Republic and Allied would remain in place.

Republic shares were down 7 cents to $31.12 and Allied shares were off 28 cents, or 2.9 percent, to $13.28. Both trade on the New York Stock Exchange.

Republic’s shares have fallen 8 percent since the companies confirmed the talks, while Allied’s are down 4 percent. The Dow Jones U.S. Waste & Disposal Services Index .DJUSPC is down 1 percent over that time frame.

Merrill Lynch & Co MER.N served as Republic’s financial advisor and UBS UBSN.VX advised Allied.

REPUBLIC ‘IN THE DRIVING SEAT’

Republic’s chairman and chief executive officer, James O‘Connor, would hold those positions in the combined company. Slager would continue as president and chief operating officer.

John Zillmer, Allied’s chairman and CEO, said he would leave the company after the deal closed.

“Despite the fact that the combined company will be based in Phoenix, Arizona -- home to Allied Waste -- it is clear that (Republic) is firmly in the driving seat,” Deutsche Bank analyst Nigel Coe wrote in a note to clients.

The companies expect to cut annual expenses by $150 million within three years, with half coming through operational efficiencies like changing truck routes, and half being head-count reductions and other administrative savings.

Republic said it expects it would continue its current annual dividend of 68 cents per share.

Additional reporting by Christopher Kaufman in New York; editing by Gerald E. McCormick and John Wallace

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