Cascade wants Waste Management to trash Republic Services offer, but higher bid could be in the works

By Paul A. Harris

St. Louis, Aug. 1 - Uncertainty surrounding possible consolidation among the top three U.S. trash haulers deepened with the Friday circulation of a letter to Waste Management, Inc. from Cascade Investment, LLC and the Bill & Melinda Gates Foundation Trust.

In that letter, Cascade urged Waste Management, the biggest player in the game, to consign its $34 per share bid for number two Republic Services, Inc. to the dustbin of history.

Of course Waste Management's bid for Republic Services itself came on the heels of Republic's bid for the number three hauler, Allied Waste Industries, Inc.

In fact some observers have interpreted Waste Management's bid for Republic as a tactic designed to forestall or perhaps even derail a possible merger between the number two and number three players.

Abandon this acquisition

In fact, in its Thursday letter to the Waste Management board, Cascade, which owns 15% of Republic and 2.3% of Waste Management, actually touched on that scenario.

"We can only assume your ill-timed and poorly conceived pursuit of Republic is designed to disrupt what you perceive as a competitive threat to your position in the market," Cascade said in the letter. "However, we believe your shareholders are better served and the company's competitive position better protected if you remain focused on continued improvement of the operating and financial performance of existing assets.

"An acquisition of Republic will most certainly burden the company with excessive debt, distract your management, result in significant regulatory burdens, and thereby reduce shareholder value. We encourage you to act with the best interests of your shareholders in mind, in a responsible and prudent manner, and to abandon this acquisition."

In Friday trading, shares of Waste Management (NYSE: WMI) gained 0.37%, or 13 cents per share, to close at $35.67.

Republic Services (NYSE: RSG) shares gained 0.31%, or a dime per share, to close at $32.60, slightly more than 4% below Waste Management's $34 bid.

Meanwhile the shares of the number three player, Allied Waste (NYSE: AW), closed 1.16%, or $0.14, higher at $12.24, a little more than 16.5% below the Republic bid of 0.45 of a Republic share for one Allied share, based on Republic's Friday closing price.

Parsing the prices

An analyst who covers Waste Management stock, and who agreed to speak to Prospect News on background Friday, said that Allied shares are still trading at a pretty significant discount to the implied value, relative to Republic's stock.

Meanwhile, the analyst said, Republic is somewhere between where it would probably be trading if there were no potential for a Waste Management bid and where it will be if Waste Management ups its bid.

"There is a chance that WMI will increase its bid because they said they intend to answer all of Republic's objections, one of which was the valuation," the analyst pointed out.

This source added that to some degree the expectation of a higher offer is "baked into Republic's stock.

"Counterbalancing that is the fact that in the wake of the original announcement between Republic and Allied, Republic's stock went down.

"If the WMI bid goes away Republic's stock probably goes down somewhat," the analyst added.

"Right now Republic's stock is hovering in between those two things."

The stock analyst further said that the fact that Allied Waste shares are trading at a discount to Republic is baking in a combination of two outcomes: 1) Waste Management ups its bid and Republic takes it; and 2) Republic ends up not taking Waste Management's bid, Republic's stock goes down and Allied Waste doesn't move too much.

The analyst said that the share prices are "hovering" right now, rendering them of limited use for predicting any outcome.

Asked where a higher Waste Management bid for Republic might come, the analyst said that 10% is possible but 20% is unlikely.

While the analyst concedes that Waste Management's bid for Republic could be a tactic designed to forestall or derail a Republic-Allied Waste merger - "the worst possible outcome for Waste Management" - Waste Management is nonetheless serious about wanting to acquire Republic.

The analyst also conceded that a merger of Waste Management, which is number one in the industry by far, and number two Republic Services would face intense antitrust scrutiny.

"There would presumably be a lot of divestitures involved in markets where there is any overlap," the source said.

Share prices of the top three U.S. trash haulers improved, Friday, against a backdrop of general weakness in the major U.S. stock indexes.

The Nasdaq fared worst, dropping 0.63%, or 14.19, to close at 2,310.96.

The S&P 500, meanwhile, fell 0.56%, or 7.07 points to close at 1,260.31.

That rendered the Dow Jones Industrial Average as the day's outperformer. It dropped 0.45% to close the day at 11,326.32, 51.7 points lower.

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