Despite widespread commercial shutdowns and stay-at-home orders complicating business for waste haulers across the country in Q1 and Q2, merger and acquisition (M&A) activity doesn’t appear to be taking a significant hit due to COVID-19.
Boston-based Capstone Headwaters reported in its Q1 Waste & Recycling Executive Summary released April 27 that M&A activity in the waste sector remained strong, increasing 48 percent in the first quarter.
In a conversation with Waste Today, Michael E. Hoffman, managing director at St. Louis-based Stifel, attributed the accelerated pace of activity from 2017 into 2019, which continued at the outset of the year, partially to owners wanting to sell due to friendly tax provisions sunsetting beginning in 2022 and because of concerns of a potential economic downturn.
“When you’re talking about normal M&A activity, [you expect it to] approach the underlying organic growth of the industry in terms of what has been bought historically, but we've been on a faster pace than that for now four years,” Hoffman says. “What I think happened that has helped sustain this level of activity heading into 2020 … was how well the industry was performing. Many prospective sellers were enjoying some of the best profitability they have ever seen. And then valuations moved up some, not dramatically, but maybe a half a turn or so depending on the type of business. So, [I think what had sellers active] was their numbers were really looking good and, by the way, every time you turn the TV on some financial talking head or the general media was saying, ‘We’re 10-plus years into the current business cycle, there's got to be [downturn].’ And these owners are left sitting here thinking that they have to get their business sold before there is a downturn.”
And although COVID-19 concerns, businesses shutdowns and travel restrictions complicated ongoing M&A transactions over the last several months, it hasn’t appeared as if these difficulties have outright stifled companies from working toward the finish line.
“If you had [a deal] in the works and far enough along, you could get it closed, and you heard that on the quarterly earnings [calls],” Hoffman says. “If you were starting something relatively new and were early in the process and you had logistical hurdles not being able to get on an airplane and do physical due diligence—which you need for most transactions unless you’re simply buying a customer list—or you had difficulty with the regulatory approval process because of work-from-home orders and similar issues, all those logistical issues caused the potential for [pending deals] to slow down. But what I’ll tell you is that every one of the companies I talked to, public or private, who are interested in buying say they are as busy looking at deals now as they were before the pandemic.”
Hoffman says in the second half of the year, he projects M&A appetites will be “mostly back to where they were before” the pandemic, but that would-be buyers need “a little bit of time to understand what the stability of a company’s monthly recurring revenues are” before having the level of comfort needed to push forward with a purchase.
And although he says that some commercial business closures are inevitable, presently, waste companies are reporting they’ve lost few accounts due to the virus. So while larger and more complicated deals may require added time for due diligence going forward, Hoffman says he thinks “tuck-in [deals] just will happen and I think deals with gold-plated businesses will probably just happen because we won't be in that in-between zone of wondering what you really have in terms of the numbers.”
Regarding the question of if the economic slowdown and resulting corporate uncertainty corresponding with the pandemic might bring sellers to the table faster as normal business activities resume, Hoffman says it is not something that he’s seen happening yet, but it’s something he’s keeping an eye on.
“I don't think there are companies who have been added to a corporate development team's list of prospective M&A targets because [owners have] said they don't want to fight out the rebuilding effort, and therefore, this pulls these deals forward,” Hoffman says. “I don't think that’s happening yet, but I think it's an interesting conversation on whether we see some businesses get to that point.”
Looking into his crystal ball, Hoffman thinks by year-end, the industry could yield M&A activity in line with what we’ve seen in the recent past.
“As we return to some sense of relative normalcy, I think at the end of the year, except for the slight delay that was caused in the second quarter, the industry will say it had as active of a deal year as it did in ’19, ‘18 and ’17,” Hoffman says. “There might end up being slightly less revenues because you've lost two or three months of activity, but the actual pace of activity could end up being fully in line with what you thought it was going to be [at the beginning of the year].”
Hoffman concludes that while a strong second half of the year could very well be in the offing in terms of waste sector buying and selling, one variable to look out for relates to political uncertainty. He says that business owners concerned about a change in political leadership in Washington in 2021, and specifically about what that could mean from a tax perspective historically, could more readily come to the table looking to initiate selling their business before the end of the year.
Despite uncertainties—COVID-19-related, political and otherwise—Hoffman projects a busy end to 2020.
“I believe we're in a swoosh-[shaped recovery], not a V, not a U, not a W,” he says. “I think it might be a string of swooshes, so shallow little dips as we roll through service interval changes and some lost businesses, followed by stronger activity. I think as long as we’re in a position where people can start moving around and do due diligence, and you can get all the logistical-related issues that might slow down an M&A process ironed out and those become moot, you’ll see M&A business [pick back up near right where we started the year off at.]”