Dive Brief:

• The U.S. Department of Justice (DOJ) could potentially require anywhere from $250 million to $370 million worth of divestitures from Waste Management's pending acquisition of Advanced Disposal Services, based on assessments from multiple sources including financial analysts with Jefferies and Stifel. The merger agreement's original cap was for divestitures worth $200 million in annual revenue.
• GFL Environmental is now the expected buyer for most or all of those assets, with a heavy focus on Wisconsin where M&A news service CTFN recently reported the DOJ may be asking for additional divestitures. In a Monday report, Stifel estimated the Canadian company could pay upward of $760 million for a package with notable assets in Great Lakes states and operations elsewhere. GFL did not respond to a request for comment.
• Waste Management did not reply to a request for comment on reports about the divestiture package or whether it still expected the deal to close by the end of Q2, now one week away. During a June 10 Stifel virtual conference, CFO Devina Rankin said "the Waste Management team works closely with the DOJ to continue to move the transaction forward." Advanced deferred to Waste Management for comment. 

Dive Insight:

One of the largest deals the North American waste industry has seen in years is also becoming among its longest in recent memory, as the parties await federal antitrust approval more than 14 months after first announcing the $4.9 billion transaction. Beyond the Q2 closing target (already extended from Q1 due in part to COVID-19 disruptions), they are also heading toward a July 13 walk date that could prompt complex contractual discussions around break-up fees and debt financing if the deal is not complete. 

Recent reporting from The Capitol Forum, another M&A-focused subscription service, indicated an extension was considered likely, although none of the parties have confirmed such plans. And while an extension could also come with a possible renegotiation of terms, in part because the divestitures are believed to be well above the original cap, at least one analyst who covers the sector does not believe this would be a deal breaker if it occurs.

"We don’t think there will be a big discount on any kind of renegotiating," Hamzah Mazari, a managing director at Jefferies, told Waste Dive. In his view, the deal is still attractive for Waste Management – even with higher-than-anticipated divestitures – and the core case holds up despite a recent contraction in Advanced's business.

"[W]hen you handcuff a management team for a year or more, they can’t do M&A, they can’t make strategic long-term decisions, obviously the business is going to under-perform in that scenario," Mazari said. "But the assets are very good quality and you have a very good management team at ADSW."

He speculated that DOJ has used a broader range of assessment metrics than in past industry deals, possibly including residential collection, leading to a longer list of potential divestitures. Michael E. Hoffman, a managing director at Stifel, was not available for comment on why he anticipates the divestiture requirements are more than originally anticipated.

Mazari also pointed to a requirement that the divestiture buyer be lined up ahead of any final approval as another potential delaying factor. The DOJ did not respond to a request for comment on its approach, but the latter practice has been reported elsewhere and is considered increasingly common.

“It has become the practice of DOJ to approve divestiture buyers in advance," said Seth Bloom, founder of Bloom Strategic Counsel and former general counsel to the U.S. Senate Antitrust Subcommittee, pointing to past examples in the grocery and rental car sectors where divestiture plans were problematic. "Some of these divestitures have come under criticism, that might be why DOJ is becoming more strict."

Even with that in mind, when assessing this deal's timeline Bloom said it was “not unknown, but it’s unusual to have a review that lasts that long."

While GFL is now widely viewed as the buyer another potentially complicating factor is the possibility of an additional buyer for certain regional assets. Meridian Waste, one name that still comes up in discussions, told Waste Dive last month it had been "actively participating in the bid process." The company declined to comment for this story.

GFL has less overlap than other large players in Midwestern states – especially in Wisconsin, Illinois and Indiana where it has no solid waste presence – and good integration opportunities in others. Potential assets in Michigan, Georgia or Alabama would all complement existing regional operations acquired in recent years. That position, coupled with a period of ongoing expansion and a successful initial public offering, presents a rare opportunity.

"Those kind of deals don’t come up very often in this space. And when they do they’re usually very expensive, and when they do you’re bidding against a lot of people," said Mazari. "So this is a unique situation for GFL that they’re public, they’ve got enough capital, their cost of debt isn’t bad at all, and it looks like they’re not going to have that much competition on this deal."

Observers have long viewed the Wisconsin assets as the most attractive, largely because there are so many available. Multiple sources familiar with the transaction have confirmed expected divestitures span from Advanced's Seven Mile Creek Landfill in the Eau Claire region (where expansion negotiations are ongoing) down into the state's more populated eastern areas. This includes a significant amount of other landfills, transfer stations and commercial collection routes across numerous counties.

That heavy market concentration comes from decades of prior acquisitions, including Waste Management's inaugural 1959 expansion outside of its original Illinois base into Milwaukee through a predecessor company. The company's founders honed their vertical integration strategy in Wisconsin by building up considerable landfill assets. That dominance later attracted competition from locally-based Superior Services, which went on to become a publicly-traded player before selling in 1999 to the company now known as Veolia. After Advanced bought Veolia's solid waste assets in 2012, it continued expanding there through multiple tuck-ins.

Divested elements of that combined presence in Wisconsin could now be at the heart of a package that presents a new launching pad for GFL if the deal proceeds as anticipated.