Republic Services, Inc. (RSG) and Allied Waste in December, 2008, completed the merger of the number two and number three non-hazardous solid waste collection and disposal companies serving the residential, commercial and municipal waste collection markets in the United States.
The combined company serves over 13 million customers in 40 states and Puerto Rico. While still not as large as industry leader, Waste Management, Inc. (WMI), the merger strengthens the company’s presence as the second largest waste hauler in the country.
Outstanding debt of Allied has been assumed by the combined company. The resulting balance sheet adds significantly to the credit quality of the bonds and increases their attractiveness as an investment option for those investors including bonds in their portfolio.
One of the critical vulnerabilities of companies engaged in the collection and disposal of non-hazardous solid waste is access to landfills. Those waste haulers which control proprietary landfills have a competitive edge over those relying on others for this resource. Increasing ownership of landfills is a key benefit of the merger of Allied and Republic.
Prior to the merger, RSG relied on others for the disposal of nearly 50% of its collections, controlling only 59 landfills in the 29 states in which it operated. The merger increased that number to 219, decreasing the company’s exposure to price changes and strengthening RSG’s competitive position.
RSG stock is currently trading at $25.90, 50% higher than its 52 week low. The high for the stock for the same period was $36.50. The company earns slightly less than WMI on a per share basis at $1.76 versus $2.24 and is priced at about 21 times earnings versus 19 times for WMI.
Allied Waste Bonds are of investment grade quality and carry a rating of BBB from S&P, Baa3 from Moody’s and B+ from Fitch. Allied 7.25% bonds due in 2015 are currently trading at 97.25, generating a yield of 7.8% to maturity and 12.8% to the first call in 2010. With a 600 basis point yield gain over comparable maturity treasuries, the investor is deriving the benefit of market fears regarding corporate bond defaults.
The merger of Allied and RSG provide a stronger balance sheet and an improved competitive position for the company.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.
