Sustainability, Geographic Expansion, and Expanded Services Drive Waste & Recycling M&A Market
The Waste & Recycling sector continues to consolidate at a solid pace in 2024. Through year-to-date (YTD), the sector has witnessed significant merger and acquisition (M&A) activity driven by several factors, including: (i) sustainability pressure; (ii) geographic expansion and consolidation; and (iii) strategic addition of new service capabilities to enter new markets and drive growth. Increasing regulatory pressures and demand from customers for sustainable service offerings has pushed firms toward recycling M&A and investments in technologies and processes that reduce their environmental footprint. The National Waste & Recycling Association (NWRA) has supported improvements to the Environmental Protection Agency’s (EPA) New Source Performance Standards, Emission Guidelines, and National Emission Standards for Hazardous Air Pollutants regulations that promote clarity in the regulatory scheme and lead to increased certainty for municipal solid waste landfills. Methane emissions at approximately two dozen U.S. landfills have exceeded federal limits and the White House has taken action to strengthen emissions reporting standards. To accelerate the transition to a reduced methane emissions environment, more than $1.3 billion in federal funding and technical assistance has been made available through the Inflation Reduction Act (IRA), according to the EPA1. This trend has been clearly demonstrated by Waste Connection’s (NYSE:WCN) recent purchase of Pioneer Recycling Services, a recycling player with advanced sorting technologies (May, undisclosed). Strategics have also continued to consolidate and expand their footprint geographically. This trend has been clearly evidenced by Casella’s recent August acquisitions in New Jersey (LMR Disposal) and Pennsylvania (Whitetail Disposal) to grow their presence in the Northeast and Mid-Atlantic regions (undisclosed). Lastly, Waste Management’s (NYSE:WM) recent announcement to acquire special medical waste services provider, Stericycle (Nasdaq:SRCL), for $7.8 billion equivalent to 2.9x EV/Revenue and 13.9x EV/EBITDA, demonstrates the trend for key players to expand their service offerings through M&A.
Competition Among Strategics Sends Waste & Recycling M&A Multiples Higher
Waste & Recycling M&A multiples have expanded over the past five years, as acquirers compete for new technologies and synergistic transactions to maximize routes. Sector transaction multiples have averaged 12.5x EV/EBITDA in YTD 2024, a significant jump from the full-year 2023 average of 10.2x EV/EBITDA and the three-year average of 10.6x EV/EBITDA. The rise in average multiples has coincided with a softened private equity dealmaking environment, as the cost of capital required to finance transactions has risen. Contrastingly, public players like Waste Connections (NYSE:WCN) and Clean Harbors (NYSE:CLH) have been relatively sheltered from the rise in cost of capital, having locked in favorable interest rates prior to the pandemic and subsequent rate hikes, according to the companies’ 10-Qs.5,6 This has allowed them to weather this interest rate environment as valuations and free cash flow generation remain robust. Cheap debt repayments and ample cash have provided opportunities for strategics to increase consolidation and diversify portfolios in the sector. Strategics are expected to continue leveraging free cash flow and multiples are projected to remain elevated with the eventual return of sponsors—signaling a market ripe for further consolidation.
SOURCE CAP STONE PARTNERS
