Venture looks like trash to investors

Kim Ellis

Investor discontent at Waste Management's planned $885 million tie-up with Australia's Transpacific Industries mounted yesterday as the duo agreed to form a $28 million joint venture in Victoria.

Investors said the venture undermined key arguments in favour of Transpacific's offer to Waste Management shareholders. Others questioned whether the joint venture should have been put on hold while the larger tie-up was discussed.

Waste Management's shares fell 3c to $8.57, below Transpacific's $8.64 a share offer for the company.

The joint venture will incorporate the duo's respective liquid-waste assets in Victoria, will have no impact on Waste Management's balance sheet and is expected to generate significant cost savings.

Waste Management said: "The joint venture is consistent with our intentions foreshadowed by comments to the market ... that the company was focused on extracting better returns on its capital invested in Australia."

However, observers say the deal erodes Waste Management's argument that it needed a tie-up with Transpacific to grow in Australia.

"It gives rise to the question how much can be done in Australia without putting the two together," said ING fund manager Amanda Smith.

Meanwhile, BT Funds Management executive Paul Richardson said the venture threw doubt on claims Transpacific had to do a cash deal in order to dispatch the alliance quickly.

In material supporting the transaction, directors said they had partly rejected a scrip merger because it would put Waste Management into limbo, while the deal was done.

Richardson said the alliance showed the businesses could still work together constructively with the merger deal, due to be put before Waste Management shareholders next month, hanging over their heads.

"We are relaxed about the proposal," Richardson said.

Fisher Funds chief investment officer Warren Couillault questioned whether such a deal should have been put together now, at a time when the two should be maintaining arm's length relations.

"It makes sense that these things are put on hold until a full merger has been approved by shareholders," Couillault said.

Meanwhile, some investors are growing concerned Waste Management's executive may be rushed to Transpacific too quickly.

They contrast the company's optimistic outlook on its Australian operations in publications such as its recent annual report with its dour outlook now.

Waste Management chief executive Kim Ellis told the Business Herald last month that the company's success in Australia since 2001 had been modest.

Meanwhile, he wanted to do the deal with Transpacific because the Australian company's planned bid for rival Cleanaway could leave Waste Management "as a very little player".

But, on March 1, Ellis told an investor conference that Transpacific's success with Cleanaway would leave several second-tier players looking for merger partners such as his company.

Chairman Jim Syme noted in Waste Management's annual report that structure in Australia was well managed and continuing to gather momentum. The report also noted, among other claims, that Waste Management's operation in Adelaide had "significant earnings potential".

Ellis said yesterday the joint venture was insignificant relative to the size of the whole merger with Transpacific. And Waste Management wanted to keep the business running as much as it was possible.

Waste Management had been able to strike an attractive deal with Transpacific only because the operations in Australia were doing well. He said the cash offer compensated Waste Management shareholders for the opportunities the company was forgoing.

THE OFFER

* Transpacific is offering $8.64 for each Waste Management share.
* Structured as a merger requiring 75 per cent shareholder approval.
* Meeting planned next month.