Has the multi-year M&A boom in the waste and recycling industry reached its peak?

Merger and acquisition activity in the waste and recycling industry may have slowed in number this year, but many of the factors that drove consolidation in recent years remain, and well-capitalized buyers are expected to remain active.

Spending levels in 2023 are expected to remain strong, though perhaps not reaching the record levels of recent years influenced by corporate tax cuts, the pandemic, and other factors. The industry's five largest public companies have already spent nearly$3 billionon acquisitions in the U.S. and Canada in the first three quarters of this year, with more spending expected in the fourth quarter. Multiple deals involving private equity firms and infrastructure funds have also occurred.

"2021 and 2022 were absolute peak spending years," said Michael E. Hoffman, Managing Director and head of the Diversified Industrials research team at Stifel. "Now it's coming down. 2023 will still be above the industry's underlying organic growth, but I think we're returning to a more normal, reasonable pace."

Raymond James Director Leon Vayntraub said at a corporate growth conference in Chicago this month that his firm still observes "significant interest" and "a significant willingness to deploy capital." "When it's all said and done, we think 2023 will exceed 2021 levels, but probably not reach 2022," he said.

Unlike previous years, there is no single unique factor influencing sellers this year, such as concerns aboutcapital gains tax changes. Instead, the reasons companies are selling are more enduring—succession planning, labor and equipment challenges, or other forms of competitive pressure.

"In this market, high-quality companies are selling at attractive valuations. Lower-quality businesses are not. But companies with acquisition appetite remain acquisitive," said Scott Sergeant, Managing Director and head of Environmental & Industrial Services Investment Banking at Houlihan Lokey.

In some cases, Comerica Bank's Joe Ursuy said some of his clients had no plans to sell but received unsolicited attractive offers this year. Others may face the challenge of having to manage fleets more creatively given limited inventory.

Ursuy, Executive Vice President of National & Specialty Businesses at Comerica, said, "Over the past few years, the industry has done a good job mitigating inflation issues, primarily by pushing through price increases." Smaller companies working with Comerica have followed the industry giants' lead in this area. Although the economy may avoid a recession, uncertainty remains.

"If you're thinking, 'Maybe I should sell now, or wait two years,' doing it now might be more attractive," Ursuy said, noting the opposite can also be true. "Every company is at a different stage in its life cycle."

'Powerball' Valuations and Rising Interest Rates

Over the past few years, the financial equation has become more complex, with rising valuations coinciding with rising interest rates. Earlier this year, certain types of deal activity decreased due to continued rate hikes, lingering pandemic-related labor issues, and the spring banking crisis.

"Sellers were on the sidelines at the beginning of the year, probably primarily due to perception," said Anthony DiIenno, founder and CEO of A.D. Advisors, who advises smaller clients in the recycling, brokerage, and pallet industries on transactions. As inflation eases, DiIenno said, "I think sellers are accepting the new reality" and realizing that "some Powerball-type valuations are not realistic."

Although industry giants are less affected by high interest rates, they must contend with sellers' expectations of higher valuations. Hoffman said, "Valuation caps are coming down," and "interest rates clearly have an impact on that."

Sergeant said sellers' expectations may take time to adjust, but he still sees plenty of motivated sellers seeking exits for the usual reasons, such as tougher operating conditions or increased competition for technology spending. These factors "make it harder for smaller operators to thrive, so they are willing to transact," he said.

Another potential impact of the high-interest-rate environment is that it may limit the ability of some smaller or regional companies—depending on their bank debt structures—to grow through their own acquisitions. If companies locked in traditional fixed-rate loans at lower rates set in 2020 or 2021, they cannot reprice with new banks at current higher rates. While this is not a major trend, Ursuy said that since most of these deals have five-year terms, the issue should resolve itself over the next few years.

Evolving Buyer Landscape

Despite talk that the complex debt market or higher interest rates slowed private equity and infrastructure company activity this year, sources say that overall is not the case. "If they have slowed down, it's not for lack of interest. It could be that their portfolios are full right now, or the targets they are looking for haven't been found yet," Hoffman said. "But the ones I know are still actively looking."

This summer, a fund of Macquarie Infrastructure Partners acquiredFlorida-based Coastal Waste & Recycling(Houlihan Lokey served as advisor), an example of a platform-level deal. The industry has also seen many transactions of varying sizes involving such buyers. These buyers are increasingly willing to hold minority stakes in companies, which was uncommon for some entities in the past.

For example, Houlihan Lokey recently advised on the recapitalization of New Jersey-based Interstate Waste Services, in whichAres Management acquired a minority stake, while existing investors such as Littlejohn & Co. retained shares. This has also happened this year withsmaller companies.

Sergeant said this can be attractive to owners of quality companies because they may not be able to get top valuations today, but "they can get a deal done, bring in some equity capital, and still have the opportunity for a meaningful second bite at the apple." He also noted this is happening in other industries,such as engineering and consulting。

Sources say the willingness to pursue different deal structures also reflects the recognition that platform-level targets are scarce. This has affected the strategies of all buyers, including the large companies. "There are relatively fewer platform deals and more bolt-on acquisitions," Hoffman said.

Stricter antitrust scrutiny under the Biden administration has also limited the ability of large companies to pursue such platform deals.

Waste Connections CEO Ron Mittelstaedt, speaking at theCorporate Growth event, said that "theHart-Scott-Rodino standardsunder the Biden administration have become very difficult for all industries," and if theproposed updatestake effect next year, it could become even more difficult. Mittelstaedt estimated that external legal and related costs could at least triple, and deal completion times could double.

Combined with the rising role of private equity and infrastructure funds, this could mean some larger private companies will further engage in acquisitions. "Almost all of these companies have brought in outside capital in the last two or three years," Vayntraub said, predicting these regional companies "will play a bigger role in future consolidation."

Looking Ahead to 2024

Sources expect that unless backed by substantial financial support, it will remain challenging for new entrepreneurs to enter the industry and reach scale. The traditional path—starting a small roll-off hauling business with a few used trucks—is still considered viable, but it is not as easy as before due to higher interest rates. For those with access to financing, sources say the best move might be to first acquire a small company with employees and equipment.

These factors have also intensified consolidation in the environmental services industry, which handles industrial and hazardous waste. Sergeant noted that his firm has been involved in multiple deals this year, such as the take-private of Heritage-Crystal Clean and infrastructure fund-backed companies likeCovantaandVLS Environmental Solutionsexpanding through acquisitions.

The volume of such deals has declined this year, but sources expect more in the future. Sergeant said Republic Services' acquisition of US Ecology last year continues to create ripple effects. "It has sparked other activity and interest in continued consolidation in the hazardous/industrial waste industry, and I expect that trend to continue," he said.

Republic haspotential environmental services deals in the works, and although none have closed this year, other companies may also become more active in this area. "I think there will undoubtedly be more activity next year," Hoffman said. "But there won't be massive deals."

On the recycling side, improved commodity price trends could help companies looking to sell assets next year, DiIenno said. There are still significant consolidation opportunities in the brokerage space, as seen this year with themerger of Keter Environmental Services and Waste Harmonics.

"In the last 60 days, we've seen a real change," he said, in terms of overall activity. "I think the pace will pick up significantly."

Overall, the true boom period for M&A in the waste industry may have passed its peak. However, according to Hoffman's estimate, of the $90 billion U.S. solid waste market, about $35 billion is controlled by private companies, so opportunities remain plentiful.

As Mittelstaedt pointed out, the type and size of deals may differ in the future. He said pending federal antitrust rules could benefit large companies like Waste Connections that have already integrated disposal assets. Now, large companies are more focused on acquiring companies with collection, transfer, or MRF assets to strengthen their vertically integrated positions.

"There are fewer than 20 privately owned municipal solid waste landfills in the U.S. that are significant in their markets," Mittelstaedt said, adding that this makes it "almost impossible for anyone to create the next very large company, especially if disposal is involved."

Katie Pyzyk, a reporter for Packaging Dive, contributed to this article.