Our Take on Waste Management Amid $7.2 Billion Stericycle Acquisition
With an eye toward the medical waste sector, Waste Management has an opportunity to wring out cost after a major acquisition.
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* Waste Management to acquire Stericycle for $7.2 billion.
* Stericycle will expand Waste’s presence in the medical waste business, one we see growing based on our position in Labcorp shares.
* Near-term EPS dilution at Waste could bring an opportunity to buy more WM shares for the portfolio.
* Bank of America’s investment banking business advised Stericycle on the deal.
We shared our road map for the coming week with you in today’s Daily Rundown video, and that allows us to focus on some developing news this morning that Waste Management WM will acquire medical waste company Stericycle SRCL for $62 per share, roughly $7.2 billion in total when we include the company’s $1.4 billion of net debt. Thinking about the acquisition, the reasons why we added Labcorp LH to the portfolio, and the opportunities for the disciplined Waste team to wring cost out of the Stericycle business and drive pricing, we like the move.
We’re not surprised to see WM shares trade-off in reaction, but with the benefit of some hindsight, this transaction explains why we heard Waste was exploring the $3 billion sale of its renewable natural gas (RNG) business. Near-term Waste will finance the transaction, but we would not be surprised to see an eventual sale of the RNG business as Waste targets net debt to EBITDA of 2.75x to 3.0x in the next 18 months.
In our view, Stericycle fits much better with Waste’s core business and brings a layer of growth to it. We are likely to see some adjustments in top- and bottom-line expectations for Waste in the coming days, with revenue rising to factor in the $2.7 billion to $2.8 billion that Stericycle was expected to generate this year and next. In the near term, we are likely to see some modest margin dilution given the difference between Waste’s operating margin of 20% to 21% and Stericycle’s low-teens margins. Add in the transaction financing and we could see some near-term EPS dilution, which explains WM shares trading off today.
Our plan will be to let the market absorb the acquisition news, let the top- and bottom-line expectations see revisions and then we’ll look to pick up some additional WM shares. We recognize the Waste Management team for what they are — shrewd operators and ones that have experience in integrating acquisitions.
As it relates to Waste’s existing residential and non-residential waste businesses, we will be digging into this week’s May PMI and April construction spending reports. In doing this, we’ll remember the positive combination of pricing and truck automation on Waste’s margins.
As mentioned in the press release for this transaction, Bank of America BAC advised Stericycle on the transaction, a positive for its investment banking business. Last week, we noted that we are seeing a pick-up in M&A activity, and Waste’s acquisition is the latest indication. Identifying the advisors for these transactions will likely lead us to once again revisit our price targets for Bank of America as well as Morgan Stanley MS shares.
At the time of publication, TheStreet Pro Portfolio was long WM, LH, BAC and Morgan Stanley.
