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This Deal Reeks Of Value

Posted: Dec 01, 2009 10:12 AM by Sham Gad

Tickers in this Article: BIN, RSG, WM, WSII

Despite the market's unwavering optimism since March, today's market pros are still finding opportunity here and there. While the market's rally has been generous to most stocks, big bets by professional investment managers are a great source of ideas to individual investors.

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I recently penned an article for Investopedia readers about why the long-term outlook for waste disposal companies looks very favorable. Earlier this month, Kelso Investment Associates disclosed that it now holds nearly 5.3 million shares of Waste Services (Nasdaq:WSII), or over 11% of outstanding shares. Waste Services is a provider of waste collection and disposal services primarily to industrial and commercial customers in the U.S. and Canada. This is an interesting bet because Kelso has owned the shares since 2003 via an initial preferred stock purchase.

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Today, Waste Services is involved in a proposed merger with IESI-BFC (NYSE:BIN). This is an all stock deal that values each Waste Services share at 0.5833 shares of IESI-BFC. At the time the merger was announced, the deal valued each share of Waste Services at $7.76. However, shares in Waste will fluctuate in accordance to IESI-BFC share price movements.

Relatively Cheap
Kelso plans to vote its shares in favor of the deal, which is expected to close in the first quarter of 2010. The deal will create the third-largest waste management company behind Waste Management (NYSE:WM) and Republic Services (NYSE:RSG). Investors could buy WSII as a way to ultimately own IESI, which sells at about one times book value and 6.4 times EV/EBITDA. That compares to 2.6 book and 8.5 EV/EBITDA for Waste Management and 1.5 times book and 8.2 times EV/EBITDA for Republic Services, respectively. (For more, see The Wonderful World Of Mergers.)

Investors may also want to keep a close eye on this deal for any merger arbitrage opportunities should the share price of Waste Services ever trade significantly outside the 0.5833 value of each IESI share. Any significant price gap could enable investors to lock in an arbitrage profit via a long/short trade on both shares of stock. For every 100 shares of Waste Services, the corresponding trade would be 58 shares of IESI. At the current time, there is an investigation going at Waste Services over the merger regarding whether the company's board of directors acted in a fiduciary manner. These types of events can lead to interesting arbitrage opportunities.

Watch and Learn
Despite your interest, this deal is a good example to keep an eye on and learn from. By creating an even larger enterprise, this deal could create tremendous value over the long run.

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

Filed Under: Stock Analysis

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