Chasing Value: Bill Gates likes Republic Services
Cascade Investments owns 24% of the waste-management company and may want a whole lot more.
By Sheldon Liber
If you have been following insider buying at Republic Services (RSG), you would be aware that the largest shareholder, Bill Gates' Cascade Investments has been on a buying spree. It started buying RSG in 2002 and has increased its stake to about 24%. My investment company has taken note of this and we started our position when we could get in at an attractive level.
Republic Services is the second-largest waste-management company in the U.S., after Waste Management (WM).
Few stocks are immune to the world's calamities, but waste just keeps piling up in good times and bad. Not to make light of disasters, but consider that even hurricanes, tornadoes, floods, earthquakes and war just make more waste.
There are also high barriers to entry into the waste-management business. As of Dec. 31, 2011, Republic owned and operated 334 collection companies, 194 transfer stations, 191 active solid waste landfills, and 74 recycling facilities in 39 states and Puerto Rico. Think of the gargantuan task of developing a landfill -- from locating a site, to meeting environmental requirements, holding public hearings and satisfying local, state and federal government requirements, to finally actually building such a large project.
Now multiply that 191 times and you can see that the best way to compete is to buy other companies. You simply cannot replicate their assets in less than decades. That said, Republic Services is not a rapidly growing company, but it is a fairly stable one, paying a 3.3% dividend yield.
Since Cascade continues to increase its stake in Republic Services, and Bill Gates is ever expanding his environmental pursuits, the investment company may have an interest in buying out RSG. It was when Berkshire Hathaway reached about 24% ownership of Burlington Northern Santa Fe Railroad that Warren Buffett tendered an offer for the whole company -- at a 35% premium.
Republic closed at $28.07 Wednesday, Oct. 24. If an offer were made at a 30% premium, the price would exceed $36 per share. Of course, with Republic already Cascade's largest holding, they could simply move in a different direction chasing other interests. But marginal percentage increases will only drive the price up further with only an equally marginal impact for Cascade.
There are some obvious signs here: Cascades' current RSG stake, the decreasing available float, and Bill Gates' personal agenda and resources, not to mention the immediate capture of the dividend with its current 49% payout rate. It would not surprise me to learn of an offer sometime in 2013.
Sheldon D. Liber is the CEO/CIO of Chasing Value Asset Management, Inc., and General Partner of the Chasing Value Fund. You can follow him on Twitter @chasingvalue
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