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Waste Management offer seems fair but hardly a bargain

By Peter V O'Brien

Friday 31st March 2000

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The prospectus and investment statement for the sale of 55.96 million shares in waste company Waste Management New Zealand shows there is life outside internet and technology-related companies and opportunities for corporate growth in relatively basic activities.

It is difficult to think of activities more basic to modern living than waste disposal.

Pacific Waste Management, a subsidiary of US-based company Waste Management, is selling up to 57.45% of Waste Management New Zealand's capital, subject to an over-allotment option which could add another 3.02% to the sale.

Exercising the over-allotment option would mean Pacific Waste had sold its total holding.

Waste Management's shares have been sought after for years as the company demonstrated strong profit growth. A recent 1:1 bonus issue made the stock more marketable and the current sale should further increase liquidity.

The company's business concept may seem simple and basic but it is guaranteed to grow, provided it is managed properly and efficiently.

Documents related to the share offer say the total New Zealand solid waste market is estimated to be about three million tonnes a year, of which the Auckland market was about one million tonnes.

About 700,000 tonnes of the Auckland waste is commercial and the remaining 300,000 tonnes comes from municipal (residential) collections.

The prospectus says actual waste volumes collected are considered higher than the figures quoted, because a large amount of commercial waste contains "clean fill" (concrete, clay and so on) which is not included in the figures.

Waste Management is one of the companies that changed its name and direction in the 1980s, although the change was from one sound business activity to another, rather than shuffling paper and making dubious "profits."

The company was known as Carbonic Ice before 1985, when it acquired the business of A W Bryant, a waste business under the control of current Waste Management director Graeme Bowkett and former director Kent Baigent. That was effectively, although not technically, a reverse takeover. The US company bought its initial 24.9% of Waste Management New Zealand in 1986 and increased it later.

Waste removal and treatment would hardly be considered a glamour industry, nor one that could see reasonable growth in the context of the New Zealand economy, but that is a shortsighted view.

The offer documents refer to growth prospects only in general terms and then to do with internal developments and the opportunities to expand into related activities.

A backgrounder on the company says it is committed to a strategy of long-term earnings growth through consol-
idation of its existing business, expansion of the core business in key areas and entering related businesses where it has demonstrated expertise and com-
petitive advantage.

That is fairly general, even vague, but the company and its industry seem to have built-in growth prospects, given the amount of New Zealand's waste, in total and per head of population, is unlikely to decline, irrespective of the level of recyclable material (it still starts as waste).

The population is increasing, so the "waste base" should also increase over time.

It is obvious a business cannot flourish through relying solely on population changes and the level of activity each person generates for the particular industry (waste generation in this case), but waste has a sound base which, unlike the bases of several other industries, seems certain to increase.

The performance of Waste Management's share price since the sale offer from Pacific Waste Management reflects the terms of the offer and the overall state of the sharemarket.

The stock's high this year, after the 1:1 bonus issue, is $4.70 and the low $3.34. There would have been an interaction between the price at the time the indicative offer prices were set and a reaction between the indicative prices and the market.

An indicative price range of $3.30 to $3.80 a share has been set but the final price can be above or below the indicative price range. Public investors will pay only $3.80.

The sale of Waste Management shares could be seen as giving New Zealanders a chance to buy back part of the farm but institutions will pick up most of the offer.

Private investors have the chance to buy into a successful company but they will pay a fair price rather than obtain a bargain.

At $3.55, the mid-point of the indicative range, the shares would sell at 26.1 times 1999 earnings.

Offer prices in such situations have to be related to the market. Too low and the market price adjusts; too high and investors buy on the market rather than through the offer.

A greater spread of Waste Management shares would be a welcome development for the market, as would greater spreads for many of our other tightly held companies.

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