Waste business finds a buyer despite lack of financial details
New owner turns opportunity to gold: returns four times invested capital in two years
|When Allied Waste Services Inc. put a string of landfills and waste collection centres across Canada up for sale in 1999, there was a hitch: The seller could not provide prospective buyers a complete financial picture of the business.
The reason: This was a sale of roughly half a business — under orders from the Competition Bureau of Canada. The landfills and waste collection centres had been part of Browning Ferris Industries Inc.’s Canadian operations. Allied Waste tried to buy the entire Canadian operations, but the deal was nixed by the Competition Bureau on the grounds it would create a waste collection giant. Since this significant player could then influence prices, the government agency ordered Allied Waste to sell some of the former Browning Ferris operations scattered across the country.
New business lacked complete financial picture As a result, the waste operations for sale constituted a new business that no one had yet quantified. Each site had developed its own financial picture but there was no guarantee that each one was creating the numbers in the same way. It was like a collage of financial snapshots, with nothing to show how the business as a whole operated, or how profitable it was.
One potential buyer, a U.S. private equity firm, engaged Deloitte’s Canadian transaction team, led by Michael Badham, to investigate the numbers and the operations of the landfills and waste collection centres across the country.
Determining profitability: what was the business capable of? “The biggest issue was understanding the profitability of this operating entity,” says Harry Atterton, a firm director in Deloitte’s transaction services. “Every branch had a different profitability, so before you added them up, you didn’t know whether the business was very profitable. The analysis had to be done at the operational level, branch by branch. But we also had to show the complete aggregate picture. The financial buyer, after all, wanted to know what this business had done and what it was capable of doing.”
The team had to overcome plenty of obstacles:
Shopping for buyers The US private equity firm pulled out of the deal, so a management team led by Keith Carrigan, a veteran of the waste business, found another potential buyer — EdgeStone Capital Partners (which at the time was called NB Capital Partners, an affiliate of the National Bank of Canada), Canada’s leading mid-market merchant bank. EdgeStone hired the Deloitte team to dig deeper into the numbers of the waste business.
"Waste collection is basically a study in time management," says Atterton. You have to design the routes in the most efficient way in order to get the most out of the truck and crew. If you can do that effectively, you keep costs down and increase margins in a business that can prosper in good times or bad. After all, few people cancel garbage pickup, even when times are bad.
Investment thesis uncovers critical focus of deal: EBITDA "When Deloitte’s due diligence professionals review any business, they avoid the checklist approach," says Badham. Instead they focus the key question: What are the drivers of the business? Why does the client want to buy it? The team uses the answers — the client’s investment thesis — as a lens to analyze the challenges and risks presented by the target company.
Since Edgestone was a financial buyer, its focus was on EBITDA, so the Deloitte team examined the key drivers, components of the company’s EBITDA, as well as the factors that might impact growth.
It’s a done deal: EdgeStone invests EdgeStone invested in the company, and put together the financial consortium to complete the deal. Deloitte tax partner, Andrew Dunn, was instrumental in structuring the investment to maximize the tax advantages. The firm also provided IT expertise.
Income trust created 24 months later: $175 million raised in IPO Less than 24 months after EdgeStone invested in the waste collection business, it created an income trust, BFI Canada Income Fund, which went public in 2002, raising $175 million.
Gilbert Palter, managing partner at EdgeStone remembers the transaction: “The acquisition of BFI Canada was a defining deal in EdgeStone’s development, and the resulting return of over four times our invested capital in less than two years was one of our largest early successes.
“We sensed right away that BFI Canada represented a very special opportunity but we had to get up the curve very fast in order to take advantage of it. Michael’s team was extremely well positioned to help us get there. They were very responsive and were able to produce detailed analysis on critical aspects of this complex transaction. The team also worked very well with our team and the other advisors on the deal. Deloitte brought experience, intensity and a strong desire to help us succeed — thanks Michael.”