Date: September 12, 2008
Source: Elliott Associates, L.P.
Elliott Expresses Strong Disappointment With Decision by Republic's Board Regarding Waste Management Bid
Shareholder Urges Republic to Start Negotiations with WMI Immediately
Elliott Associates, L.P. (together with funds under common management), a shareholder of Republic Services, Inc. (NYSE: RSG), today announced that recently it sent the following letter (parts having been redacted in this press release) to Republic's Board of Directors:
August 28, 2008
Board of Directors
Republic Services, Inc.
110 S.E. 6th Street
Fort Lauderdale, Florida 33301
Dear Members of the Board of Directors:
Elliott Associates, L.P. and funds under common management ("Elliott" or "we") are a meaningful shareholder of Republic Services, Inc. ("Republic" or the "Company"). We write today to express our concern and disappointment over the decision by Republic's Board of Directors (the "Board" or "you") to classify the recent proposal by Waste Management, Inc. ("WMI") to acquire Republic for $37.00 per share as one that does not constitute, and could not reasonably be expected to lead to, a transaction that is more favorable to Republic stockholders than the merger currently contemplated between Republic and Allied Waste Industries, Inc. ("Allied").
As you are well aware, the merger agreement Republic has signed with Allied contains a provision that allows Republic to share non-public information with a party that makes an unsolicited acquisition proposal when the Board determines that such an offer "constitutes, or could reasonable be expected to lead to, a Superior Proposal." Elliott considers this to be particularly relevant in the case of an Allied-Republic combination because the waste management industry currently has three clear leaders and any transaction between two of them is likely to be the last transformative deal in the industry as further consolidation at the top will almost certainly face insurmountable antitrust hurdles. In effect, if the Allied-Republic merger is consummated, Republic's shareholders will forever be denied a control premium that will in part be based on synergies which WMI could achieve if it acquired Republic. Thus, an erroneous and strategically flawed decision by the Board will have permanentnegative consequences.
By structuring the merger agreement to allow not only discussions with parties who present superior proposals but also those where there is a reasonable prospect for a superior proposal, Republic clearly recognizes that discussions can enable a party to improve its offer. This clearly limits the grounds on which to dismiss a credible proposal as being either too remote or unfavorable, as neither of these can be properly assessed until discussions have allowed the approaching party to determine if it is able to improve its proposal on either certainty or price. We consider it hard to dismiss a proposal from the largest company within the waste management sector and to question WMI's "true motives for proposing a transaction with Republic", in light of the $250 million payment WMI would have to make to Republic if its proposed takeover is blocked on antitrust grounds. Elliott believes that the Board has erred in its decision not to find the WMI approach as one that has the potential tolead to a superior offer and urges you to correct this mistake and begin negotiations with WMI immediately.
Elliott also wishes to comment on the reasoning the Board has given for its most recent refusal to engage with WMI. The Board has mentioned the following as specific areas of concern:
the credit rating condition
access to financing
Price -- The fact that Republic's share price continues to trade at a substantial discount to WMI's $37.00 proposal and significant premium to the implied deal price in the merger with Allied speaks louder than any words, whether they come from you or from certain Republic shareholders you were referring to in your August 15th press release. Clearly, the overall shareholder base (including Elliott) is sending you a very clear message that WMI's proposal is preferred to a nil premium merger with Allied. Furthermore, WMI's latest proposal made it clear that WMI was open to increasing its offer should results of private due diligence warrant this. Finally, $37.00 per share is well within the range of value determined by your own financial advisor in connection with the Allied merger.
Credit rating condition -- WMI has made it a condition of its offer that the rating agencies confirm that following any transaction WMI would continue to enjoy an investment grade rating. While the rating agencies have opined in a general fashion on the credit quality of a pro-forma combination, the language used is somewhat vague as the rating agencies' practice is that a specific rating is not given unless both parties consent to it. It is important to highlight that any final analysis will include the de-leveraging benefit of overlapping asset disposals and given the business overlap between Republic and WMI, there surely will be some disposals in order to obtain antitrust clearance. On this point, we note the following comment from Standard & Poor's August 11th press release: "...we believe there is a good chance Waste Management could remain investment grade given the positive aspects of the transaction and our expectation that the company would use substantially all free cash flow and asset sale proceeds for debt reduction." Under the merger agreement, Republic can give consent to the rating agencies to issue a formal opinion on a Republic-WMI combination, in our opinion. Even if the Board is being advised that this consent cannot be given prior to declaring WMI's proposal as one that could reasonable be expected to lead to a superior proposal, once the Board makes that declaration Republic should immediately give such consent. This would enable the rating agencies to clarify this issue before you would have to determine if WMI offer constitutes a superior proposal. We would also note that nowhere in either of WMI's two proposals does it explicitly state that WMI would not be open to augment its 100% cash offer to a mix of cash and stock. Should the rating condition remain an issue after rating agencies' opinion, Republic could proactively try to negotiate this option and get further certainty and comfort on this point.
Access to financing -- WMI has obtained a highly confident letter from its financial advisor in relation to its financing. This is not atypical for an offer at this stage of discussions, and Elliott sees no reason to view the financing as being unrealistic and hence not an appropriate reason to refuse to initiate discussions. Despite the current difficult conditions in the credit markets, financing continues to be available for strategic transactions among investment grade participants. The proposal to acquire Republic is not coming from a fly by night entity with questionable financial wherewithal and strategic objective, but from the number one player in the industry with the largest capitalization, strong balance sheet and powerful strategic rationale for wanting to own our Company.
Antitrust -- WMI has offered to address antitrust concerns in the same manner as in the current merger agreement between Allied and Republic. In addition, WMI has made two offers that are superior to the current merger agreement, including (i) a ticking fee, in order to address the timing risk and (ii) a $250 million break fee that is specifically related to antitrust issues. We also note that our antitrust analysis of the two business combinations suggests that the disposal of assets required as a percentage of the combined portfolios would be similar for either a WMI-Republic or Allied-Republic transaction. While this analysis is not definitive, as it is limited to public information and involves some prediction of the likely Department of Justice approach, it strongly supports the view that competition is not appropriate grounds to refuse to initiate discussions.
Elliott appreciates that the board may have concerns about sharing information with a competitor. However we believe that many of the areas of uncertainty that Republic has raised can be addressed by providing data on a confidential basis to third parties -- e.g. rating agencies, antitrust attorneys -- and as such do not present a risk to the operations of Republic. Furthermore, nothing in the merger agreement prohibits Republic from asking clarifying questions to WMI and its advisers in order to get a better understanding of the quality of WMI's latest proposal. Our understanding is that you have failed to do even this, which causes us to question your true motives and deeply concerns us.
[***Redacted***] You can ill afford to dismiss shareholders' views at this critical juncture of our Company's history, particularly ones with holdings well in excess of the combined shareholdings of Republic's board and executive management.
In light of the potential for the appearance of self interest on the part of members of the Board in the merger with Allied resulting from their roles as directors of the surviving corporation, we believe that the Board should make extra allowance for the possibility that the WMI proposal is or will be superior, and render a determination that the proposal could reasonably be expected to lead to a superior proposal. We see significant upside to the shareholders of Republic in engaging WMI in the negotiating process, with no downside if the WMI proposal is not ultimately determined to be a superior proposal.
In summary, Elliott believes that the current WMI proposal can reasonably be expected to lead to an offer that is superior to Republic's no premium merger with Allied, and strongly urges the Board to come to the same view and to vigorously negotiate the best possible deal from WMI. In the absence of this, you are risking a real possibility that WMI makes a tender offer directly to Republic's shareholders on terms similar to its last proposal but without any break fee if the transaction does not obtain antitrust approval. In such a scenario the Board will have severely limited the leverage it currently has to improve WMI's proposal both on price and certainty of closing, yet you will be faced with a high probability of Republic's shareholders voting down the proposed merger with Allied. It is rare when a board has the fortune of two credible parties being interested in a business combination with the company it oversees. Today, you are in this situation and should do everything within your power as our fiduciary to obtain the best possible deal for Republic's shareholders. [***Redacted***] Further, Elliott reserves all rights with regard to the past and future conduct of the Board in connection with the potential combinations with WMI and Allied. We are also reviewing all options available to us as a Republic shareholder.
Should you have any questions, please do no hesitate to contact me at +44-20-3009-1065.
Very truly yours,
Senior Portfolio Manager
About Elliott Associates, L.P.
Elliott Associates, L.P. and its sister fund, Elliott International, L.P., together have more than $11.5 billion of capital under management as of August 2008. Founded in 1977, Elliott Associates is one of the oldest hedge funds under continuous management. The Elliott funds' investors include large institutions, high-net-worth individuals and families, and employees of the firm.