The Waste & Recycling sector has continued to benefit from consistent growth in waste volume, elevated manufacturing activity, and rising demand for recycled materials. Consumption remains high in spite of inflation, with personal consumption expenditures increasing 8.5% in May 2022 year-over-year (YOY), according to the U.S. Bureau of Economic Analysis.1 Elevated consumption has a positive correlation with hazardous and non-hazardous waste volumes and while a prolonged inflationary environment may negatively impact future consumption, this trend has not yet materialized. In congruence with high consumption, industrial production remains elevated with manufacturers increasing output to meet demand in growing end markets. Notably, the Industrial Production Index increased 4.2% in June 2022 YOY, according to the Board of Governors of the Federal Reserve System.2 Strong manufacturing activity will also supplement the Hazardous Waste segment as some forms of industrial waste cannot be processed alongside non-hazardous streams. Due to favorable conditions, volume projections for full-year 2022 are in the 1%-2+% range for many public waste companies, exceeding the “normal” annual expansion of 0.5%-1%, but falling below the record levels that were driven by rapid economic recovery in 2021, according to Waste 360.3
Strong M&A activity is continuing in the Waste & Recycling space into 2022 as buyers remain focused on the recurring and essential business services profile. U.S. geographies with attractive waste profiles and businesses with defensible positions and a recognized reputation are especially interesting targets.
Pricing Increases and Waste Volume Drive Public Company Performance
The Waste Collection Services segment is fairly concentrated, with the five largest companies [Waste Management (NYSE:WM), Republic Services (NYSE:RSG), Waste Connections (NYSE:WCN), Stericycle (Nasdaq:SRCL), and Veolia (EXTPA:VIE)] comprising 57.2% of the market share in 2021, according to IBISWorld.4 However, the concentration is partially offset by the vast quantity of small- and medium-sized enterprises (SMEs). In recent years, the largest companies have been actively consolidating SMEs to spur vertical integration and scale, presenting attractive exit opportunities for smaller companies that have a footprint in lucrative geographic regions or possess innovative capabilities and technologies.
Public company performance is often a strong gauge for the broader Non-hazardous segment’s performance as many of the trends impacting public players affect companies of smaller sizes. In Q4 2021, leading public players outperformed expectations due to waste volume growth, demand, and tactical pricing aiming to offset the margin impact of inflation. Public company performance is expected to remain strong throughout 2022, with EBITDA and free cash flow for Q1 largely meeting expectations. “Our disciplined pricing programs, robust volume growth, and solid recycling performance fueled strong top-line growth, and that translated into a nearly 11% increase in operating EBITDA in the first quarter,” said Devina Rankin, Executive Vice President and Chief Financial Officer of Waste Management, in the company’s Q1 2022 earnings call.5 While margin performance varied from operator to operator, companies’ ability to effectively pass elevated costs onto consumers proved to be critical. This has been demonstrated by Waste Connections, which reported that record pricing growth drove solid waste margin expansion of 10 basis points despite inflationary pressures, according to the company’s Q1 2022 earnings call.6
To fuel long-term growth and increase environmental stewardship, many public companies are expected to increase capital expenditure on material recovery facilities (MRFs) and renewable natural gas (RNG) facilities. Notably, Waste Management announced that it intends to spend an incremental $550 million on recycling automation and new MRF investments and RNG plants in 2022, along with more than $1 billion from 2023-2025, noting that the return on these investments would outpace solid waste. In addition, large players are expected to continue to pursue vertical integration opportunities throughout 2022. M&A activity will be supplemented by the desire to enhance technology (particularly with applications in sustainability) and bolster the labor force. Privately owned waste and recycling companies are expected to utilize a similar playbook, leveraging innovative recycling capabilities to attain customer loyalty, and acquiring competitors to gain regional dominance.
Merger and Acquisition Activity Builds Upon Record Year
M&A activity in the Waste & Recycling sector proliferated in 2021, increasing 65% YOY, driven by pent-up deal demand, the desire for founders to seek liquidity, and the need for owners to position their companies for expanded growth opportunities. Transaction volume has only accelerated in 2022 to-date, with 171 deals announced or completed through July 7, comfortably outpacing the 106 engagements in the same period in the prior year. Add-on acquisitions continue to comprise the largest share of deal activity (36.3%) as platform companies have leveraged private equity backing to bolster scale, break into attractive geographies, and add capabilities. Sharing the same expansionary motives, strategics remain acquisitive accounting for 54.4% of transactions. Segments that have historically proven highly defensible (including Hazardous Waste Collection & Disposal), as well as segments forecast to experience substantial growth (including Plastic Recycling Services), are expected to continue to attract strong acquirer interest.
In recent years, inorganic growth has been a particular point of emphasis for leading public players and has continued in 2022 to-date. Notably, Republic Services allocated $65.6 million towards acquisitions in Q1 2022, followed by its $2.2 billion acquisition of US Ecology in May (discussed below), according to the Republic Services' earnings call.7 Waste Connections reported spending $355.2 million on four acquisitions in Q1 2022 and estimated that those deals were worth $175 million in annualized revenue in its Q1 2022 earnings call. In September 2021, Waste Connections acquired E.L. Harvey & Sons (undisclosed), a Westborough, Massachusetts-based waste and recycling service provider recognized as one of New England's leading independent companies with 110 years in operation, according to Waste Dive.8 The acquisition of E.L. Harvey & Sons is indicative of an ongoing pattern of large national operators acquiring smaller local or regional players. At the same time, some public players have taken a more conservative approach to M&A, with Waste Management spending just $5 million on acquisitions in Q1 2022, according to its earnings call. Capstone expects consolidation in the Waste & Recycling sector to continue at a fervent pace as sector players compete for market share and technology.
Sustainable Business Practices and Consumption Raise Demand for Recycled Plastics
Sector participants that invest in plastic recycling are expected to benefit from environmentally conscious consumption and business practices. Under heightened scrutiny from shareholders, investors, and consumers, large public companies have launched sustainability initiatives including product lines using recycled materials. For example, as part of Nike's (NYSE:NKE) "Move to Zero" campaign, the company is using polyester that comes from recycled bottles which are cleaned, shredded, and then spun into yarn, according to a press release.9
The Food & Beverage sector accounted for more than two-thirds of post-consumer recycled (PCR) consumption in 2021 and brands such as PepsiCo (Nasdaq:PEP) and Keurig Dr Pepper (Nasdaq:KDP) have invested in more circular value chains to reduce waste. Keurig Dr Pepper, which averaged 11% PCR resin across its plastic packaging portfolio in 2021, is aiming to reach 25% PCR use in plastic packaging by 2025, according to the company's 2021 Corporate Responsibility Report.10 Demand for PCR packaging was nearly 4.8 million metric tons in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 5.9% through 2026 reaching a worldwide demand of 6.4 million metric tons, according to Environment + Energy Leader.11
SMEs have also implemented sustainable solutions in their business models, benefitting from consumers' willingness to pay more for a product that is sustainably originated. Notably, the 2021 Global Buying Green Report found that 67% of consumers think it is important that products they purchase are packaged in recyclable material, and 87% of consumers among younger generations showed a willingness to pay more for sustainable packaging, according to Trivium Packaging.12 In May, Stalk Market, a manufacturer of innovative compostable and eco-friendly packaging, was acquired by food packaging company Inno-Pak for an undisclosed sum. Through the acquisition, Inno-Pak expanded its footprint in the promising Sustainable Packaging market.
MRFs and recycled plastic providers are expected to benefit from continued demand in the Packaging segment as the material offers thermal insulation, shock absorption for fragile items, and moisture resistance while benefitting the environment. In addition, plastics are increasingly being used in other sectors such as Automotive, Textiles, Electrical and Electronics, and Building & Construction due to their lightweight and versatile properties. Notably, the high demand drove the Producer Price Index for Recyclable Plastics to its highest monthly level in May in over ten years.
Increasing government investment in advanced plastics recycling technologies is anticipated to add to lucrative opportunities for market players. The U.S. Department of Energy announced the funding of $27 million for 12 projects that aim to support the development of advanced plastic recycling technologies and new plastics that are recyclable by design in 2020, according to Energy.gov.13 More recently, the U.S. Environmental Protection Agency (EPA) opened the application period for its 2022-2023 Small Business Innovation Research (SBIR) Phase 1 program, providing up to $100,000 to demonstrate proof of concept of technologies in the realm of circular economy and sustainable materials (June 2022). Companies that are successful in Phase 1 can apply to Phase 2 funding which awards up to $400,000 for two years, with a commercialization option of up to $100,000, to further develop and commercialize technology, according to Small Business Innovation Research.14 Waste & Recycling sector participants that offer innovative environmental solutions stand to benefit from the continued introduction of federal agency incentives along with rising corporate and consumer demand.
Hazardous Segment Demonstrates Defensibility
The Hazardous Collection & Disposal segment is also anticipated to benefit from steady corporate demand. Municipal landfills and collection service providers do not typically operate in the Hazardous segment as these waste streams require a special permit issued by the EPA under the authority of the Resource Conservation and Recovery Act, due to specific handling, transportation, and disposal requirements. As a result of the heavy reporting, regulatory, and compliance costs, the segment has high barriers to entry with very few new incinerators or landfills opening for operation in recent years. On the other hand, stringent regulations result in higher compliance costs, putting margin pressure on segment participants.
Hazardous waste volumes are expected to benefit from utility construction growth paired with rising industrial production in 2022. Utility construction which includes water, sewage, or power supply infrastructure is forecast to be driven by rising Private sector investment initiatives including the passage of the Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act) in November 2021, according to The White House.15 In addition, Capstone expects operators in niche hazardous waste segments in which waste is difficult to recycle, such as Medical Waste, to demonstrate defensibility and record steady revenue growth in the foreseeable future. This could incentivize larger players seeking revenue diversification to enhance their footprint in the space through acquisition, particularly as the Non-hazardous landscape continues to shift. Notably, Republic Services acquired US Ecology (Nasdaq:ECOL) in February 2022 at an enterprise value of ~$2.2 billion, bolstering its presence in the Hazardous Waste segment. US Ecology has the largest position in Hazardous Waste Landfills, according to Waste Dive.16 Read more about the deal in the notable transactions section below.
Due to strong waste volumes and demand for recycled materials, the Waste & Recycling sector has attracted high acquisition interest from strategic and financial buyers. Outlined below are some notable transactions that recently occurred in the space.
- Republic Services Acquires JRM Hauling & Recycling (May 2022, Undisclosed) - Leading environmental services provider Republic Services acquired JRM Hauling & Recycling a Massachusetts hauler and recycler for residential, commercial, and industrial customers throughout Massachusetts, New Hampshire, and Rhode Island. Founded in 1995 in Gloucester, Massachusetts by the Motzkin family, JRM recorded rapid growth since its inception but was heavily impacted by the pandemic. Republic represents a great fit for JRM due to its existing transfer station near JRM’s base in Peabody, Massachusetts.
In recent years, the Massachusetts regional market has witnessed several other large private companies sell to the leading consolidators in the industry, as exemplified by Waste Connections’ acquisition of E.L. Harvey & Sons. In addition to its sizable presence with more than 350 employees and 300 trucks, JRM operates GreenWorks MRF, a single-stream recycling facility that can process up to 30 tons per hour, according to Waste Dive.17 Amid elevated pressure regarding disposal capacity, all nine MRFs in Massachusetts will be owned or operated by publicly traded companies, pending the completion of this acquisition.
- Republic Services to Acquire US Ecology (February 2022, $2.2 Billion) - Republic Services entered into a definitive agreement to acquire all outstanding shares of US Ecology at $48 per share in cash, equivalent to ~$2.2 billion, including net debt of ~$700 million. Using US Ecology's trailing-twelve-month figures as of September 30, 2021, the transaction is equivalent to ~14.1x EV/EBITDA and ~2.3x EV/Revenue. US Ecology, another leading provider of environmental solutions, offers treatment, recycling, and disposal of hazardous, non-hazardous, and specialty waste. The acquisition drives vertical integration across Republic's value chain, expands its environmental solutions footprint, and is expected to result in outsized growth through cross-selling and tuck-in acquisition opportunities.
"Today's announcement enables Republic Services to provide customers with one of the most complete sets of product offerings across the Environmental Services space and creates significant value for our stakeholders. This strategic acquisition expands our geographic footprint across the U.S. and Canada and provides vertical integration capabilities for our environmental solutions business," said Jon Vander Ark, President and Chief Executive Officer at Republic Services, in the press release.
- Schupan & Sons Acquired Mid America Recycling (March 2022, Undisclosed) - Schupan & Sons, a metal and plastic recycling and metal distributor based in Kalamazoo, Michigan, acquired Mid America Recycling. Based in Des Moines, Iowa, Mid America Recycling offers multimaterial services, recycling ~1.5 billion pounds of scrap annually, according to a press release.18 The company began its operations in 1979 in response to the passage of Iowa's Beverage Containers Control Law which aims to reduce and clean up litter by recovering beverage containers for recycling. The acquisition of Mid America Recycling's Michigan deposit container processing system will aid Schupan's strategic growth plans.
"Mid America Recycling's multimaterial recycling and deposit container operations align perfectly with being an industry leader in providing sustainable, high-quality, recycled materials. Mid America has been a recycling leader in Iowa for years and has a knowledgeable team with strong customer relationships," said Tom Emmerich, Schupan's Chief Operating Officer, in the press release.
To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Waste & Recycling sector knowledge, please contact Managing Director Doug Usifer.
U.S. Bureau of Economic Analysis, "Personal Income and Outlays," https://www.bea.gov/data/income-saving/personal-income , accessed July 6, 2022.
Board of Governors of the Federal Reserve System, "Industrial Production and Capacity Utilization," https://www.federalreserve.gov/releases/g17/, accessed July 6, 2022.
Waste 360, “Solid Waste Companies to Present Their 2022 Outlooks,” https://www.waste360.com/business/solid-waste-companies-present-their-2022-outlooks, accessed July 8, 2022.
Keurig Dr Pepper, "2021 Corporate Responsibility Report," https://www.keurigdrpepper.com/en/our-company/corporate-responsibility, accessed July 6, 2022.
Environment + Energy Leader, "Post-Consumer Recycled Plastic Packaging Demand Increases," https://www.environmentalleader.com/2022/05/post-consumer-recycled-plastic-packaging-demand-increases/, accessed July 6, 2022.
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The Motley Food, "Waste Management (WM) Q1 2022 Earnings Call Transcript," https://www.fool.com/earnings/call-transcripts/2022/04/26/waste-management-wm-q1-2022-earnings-call-transcri/, accessed July 7, 2022.
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AlphaSense, "Republic Services, Inc. Q1 2022 Earnings Call," https://research.alpha-sense.com/?dt=1_8_75_12000&sort=SOURCES_LABEL_SHORT&order=DESC&search_id=tmp-a0909820618bba57d699c3f46b869db06cacdc25, accessed July 12, 2022.
Waste Dive, "Waste Connections acquiring E.L. Harvey & Sons in notable New England expansion," https://www.wastedive.com/news/waste-connections-acquiring-el-harvey-massachusetts/605729/, accessed July 13, 2022.
Nike, "Move to Zero," https://www.nike.com/gb/a/sustainability-2025-targets, accessed July 7, 2022.
Trivium Packaging, "2021 Global Buying Green Report," https://triviumpackaging.com/sustainability/2021BuyingGreenReport.pdf, accessed July 7, 2022.
Gov, "U.S. Department of Energy Announces $27 Million in Plastics Recycling Research and Development," https://www.energy.gov/articles/us-department-energy-announces-27-million-plastics-recycling-research-and-development#:~:text=WASHINGTON%2C%20D.C.%20%E2%80%93%20Today%2C%20the,are%20recyclable%2Dby%2Ddesign., accessed July 8, 2022.
Small Business Innovation Research, "The SBIR and STTR Programs," https://www.sbir.gov/about, accessed July 12, 2022.
The White House, "President Biden's Bipartisan Infrastructure Law," https://www.whitehouse.gov/bipartisan-infrastructure-law/, accessed July 12, 2022.
Waste Dive, "Republic Services closes $2.2B acquisition of US Ecology in major hazardous waste expansion," https://www.wastedive.com/news/republic-services-us-ecology-environmental-solutions/618561/, accessed July 12, 2022.
Waste Dive, “Republic Services closes acquisition of large Massachusetts hauler and recycler JRM,” https://www.wastedive.com/news/republic-services-closes-acquisition-of-large-massachusetts-hauler-and-recy/607886/, accessed July 12, 2022.
MiBiz, "Schupan & Sons acquires Iowa materials recycler," https://mibiz.com/sections/manufacturing/schupan-sons-acquires-iowa-materials-recycler, accessed July 14, 2022.
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