June 23 (Bloomberg) -- Republic Services Inc. agreed to buy larger rival Allied Waste Industries Inc. for $6.1 billion to become North America's second-largest trash hauler as a weaker economy and rising fuel prices strain waste-removal companies.
Allied investors will receive 0.45 Republic shares for each share they hold, the companies said today in a statement. The price is 3.5 percent higher than Phoenix-based Allied's June 20 closing price.
Republic Chief Executive Officer James O'Connor will lead the company, which will retain the Republic name and trail only Waste Management Inc. in waste-hauling. Trash companies have raised prices and dropped less-profitable routes as fuel prices soared and U.S. homebuilding slowed, cutting demand for construction-debris removal.
``It's a way of creating a bigger company, to be a No. 2 player to Waste Management,'' Standard & Poor's analyst Stewart Scharf said in a telephone interview. ``It's a way of reducing costs further as they try to improve the top line.''
Allied Waste fell 27 cents, or 2 percent, to $13.29 at 4:03 p.m. in New York Stock Exchange composite trading. The stock has declined 11 percent since June 13, the day the companies said they were in talks. Fort Lauderdale, Florida-based Republic Services slipped 21 cents to $30.98 and has dropped 8.5 percent since the discussions were disclosed.
Investors were concerned that the combination would be beset by ``growing pains and integration problems'' that plagued previous mergers between waste companies, Scharf said.
The transaction, expected to close in the fourth quarter, depends on regulatory approval and on achieving investment-grade debt ratings, Republic's O'Connor said on a call with analysts. Debt-rating firms already have indicated the latter condition will be met, he said.
Standard & Poor's rates Republic's debt BBB+, the third- lowest investment-grade rating. Allied's debt has junk status, ranked BB by S&P, or two levels below investment-grade.
Waste-management companies' incomes have been pulled down by the declining U.S. housing market, which is at its weakest in almost three decades. Sales for the Republic unit that deals with bulky refuse for customers including builders dropped 15 percent in the first quarter, after declining by the same margin in the second half of last year, the company said on April 24.
`Record Fuel Prices'
Refuse companies have levied surcharges on customers to help offset record fuel prices. Gasoline futures reached a record $3.5762 a gallon on June 16 and are up 40 percent this year. Crude-oil prices, which touched a record $139.89 on June 16, have gained more than 40 percent this year.
The combined company will have about $9 billion in annual revenue and plans to use an estimated $1.7 billion in annual cash flow to invest in the business, reduce debt and fund yearly dividends of 68 cents a share, O'Connor said. Houston-based Waste Management had $13.3 billion in revenue in 2007.
Scharf estimates Republic will have about 17 percent of the national market after the merger, still smaller than Waste Management's 25 percent.
The acquisition will generate annual savings of $150 million by the third year after the combination, the companies said. Those savings will come from job cuts and office closings and a lower fuel bill achieved by redirecting garbage trucks to closer landfills in the enlarged network, Republic Chief Financial Officer Tod Holmes said on the call.
``When you combine the assets, infrastructure and the two operations and management teams, it's a compelling proposition,'' O'Connor said on the call.
No detail on the number of job cuts was provided. Allied CEO John Zillmer said he and CFO Peter Hathaway will leave when the deal is concluded. Don Slager, Allied's president and chief operating officer, will retain the same title in the new company, according to the statement.
A competing offer for Allied is unlikely, Goldman, Sachs & Co. analysts led by David Feinberg, said in a note to clients. Goldman said ``rational pricing'' in the solid-waste industry would be among the benefits of the transaction and would help Waste Management as well.
Republic was advised by Merrill Lynch & Co., while legal counsel was provided by Florida-based Akerman Senterfitt and Chicago-based DLA Piper US LLP. Allied was advised by UBS AG and Chicago-based Mayer Brown LLP.