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There was some M&A news in the waste industry this morning. Waste Management (WM -2%) announced a definitive agreement to acquire Stericycle (SRCL +15%) for $62 per share in cash, representing a total EV of $7.2 bln when including $1.4 bln of Stericycle's net debt. The deal price represents a 20% premium to SRCL's closing price on Friday. The transaction was unanimously approved by both boards of directors and is expected to close as early as Q4.

• Waste Management provides collection, recycling and disposal services to millions of residential, commercial, industrial and municipal customers. It has the largest disposal network and collection fleet in North America. Stericycle is a bit different because it focuses on medical waste and compliance services. This deal will expand WM's environmental service offerings and increases its presence in the attractive medical waste industry.
• In terms of the rationale, WM noted that the deal provides a complementary business platform in the healthcare market, a sector with attractive growth dynamics. It also allows WM to offer customers the opportunity to partner with a single service provider with a comprehensive suite of environmental waste services. Given the growth outlook for healthcare services in North America, WM expects Stericycle to deliver revenue growth that surpasses its core solid waste business.
• On the cost side, WM expects the transaction to generate more than $125 mln in annual run-rate synergies. For example, Stericycle should benefit from WM's logistics expertise and its track record of using technology to optimize operating and SG&A costs. The acquisition is expected to be accretive to WM's earnings and cash flows within one year of close.
• WM said it intends to finance the transaction using a combination of bank debt and senior notes. In the near term, WM expects its net debt-to-EBITDA ratio to increase to 3.4x. However, WM says it remains committed to a strong balance sheet and solid investment grade credit profile. As such, it plans a temporary suspension of share repurchases to get its leverage ratio back into its targeted range of 2.75x to 3.0x approximately 18 months after closing.

Overall, we think the deal makes sense for both companies. For WM, it greatly expands its exposure to medical waste, which has higher growth prospects than its core business. Plus we see the value in being a one-stop shop for its customers' waste needs. Medical waste is a highly regulated area, but that also limits competition and allows for premium services. Perhaps the high price and its using debt to finance the deal may be weighing on WM today.

The deal also makes sense for Stericycle. The stock has been stuck trading sideways for much of the past year. It has posted yr/yr revenue declines in each of the past four quarters and has been hit-or-miss on earnings in recent quarters. The company has also been going through some layoffs. There was a Bloomberg report on May 23 that the company was considering a sale, so this deal was not a total surprise. However, even after that report the stock was trading in the high $40s to low $50s. We think investors were surprised to see Stericycle be able to snag a $62 per share all-cash deal price. So the deal looks good for both sides.