Bingo Industries (BIN.AX) – Merger Arbitrage – 8% Upside

Current Price: A$3.24

Offer Price: A$3.50

Upside: 8%

Expected Closing: TBD

This idea was shared by Justin.

 

Bingo Industries is a waste management company, which operates in two Australian regions. On the 16th of January, the company received a non-binding indicative cash buyout proposal at A$3.50/share, for a total valuation of A$2.29 billion. The offer was made by a consortium led by Australian PE firm CPE Capital and a major asset manager (US$130bn AUM) Macquarie Infrastructure and Real Assets (MIRA). The buyers are highly credible and already have experience in the waste management industry. Last week (April 12th) rumors came out that the buyers had finished due diligence, secured financing, and “are closing in on their target”. It is expected that the firm offer should materialize shortly.

The offer will be subject to regulatory, ACCC (antitrust watchdog), and shareholder approval – scheme mergers in Australia require 50% of the total shareholders to be present (vote) in the meeting and approval of 75% of the votes cast. Shareholders will also have a possibility to choose between cash (A$3.50/share) and mixed offer (stock and cash). Major shareholders are CEO (who is also founders’ son) Daniel Tartak (owns 21.8%) and director Ian Malouf (owns 12%). No comments were made by them so far, however, taking into account that the board has entered into discussions and allowed due diligence, both directors are likely to support the merger. A generous acquisition multiple (compared to peers and other waste asset purchases) of 17x FY20 EBITDA and 43x FY20 NPAT is likely to support management’s and shareholders’ approvals.

I expect that after a firm offer announcement, the current 8% spread will close immediately. This offers an interesting short-term play with an attractive IRR.

The biggest risk is that after finishing the due diligence, the buyers will decide not to proceed with a firm offer. Downside to pre-announcement stands at 15%. The actual downside could be different as since then, H1 FY21 results were released (February 21st) showing substantial COVID-19 impact on the business (see graphs below), however, the company expects recovery by the end of this year.

Additionally, during the takeover process, in February, BIN was attacked by a rather unknown short-seller SnowCap making various accusations on the company in its 29-page report. However, the media and the company have basically dismissed the report as false and the market showed limited reaction to it (BIN share price fell 2.8% and another 2% the next day). Buyers have declined to comment, leaving due diligence process results for an answer. Overall, it seems that the report and the short-seller itself are not very credible and if their accusations were, in fact, correct (the company truly inflated their EBITDA margins, made aggressive revenue accounting, had problems with its key customers, etc.), the due diligence process wouldn’t take so long for CPE and MIRA and they would’ve walked away a long time ago. On the contrary, the recent rumors indicate that a firm offer should materialize soon.

 

SnowCap’s report

On the 5th of February, short-seller SnowCap issued a public report on BIN. The report basically accused Bingo of inflating its recovery rate numbers and EBITDA margins, over-hyped recycling capabilities, aggressive revenue recognition, track record of breaching environmental regulations, etc.

Overall, the report and short-seller itself do not seem very credible, hence, the limited share price reaction from the market:

• SnowCap is an unknown short-seller. Their website is basically empty. The only other report (Freedom Foods, $FNP.AX) was published in March last year and the share price has declined since. However, it is currently unknown if the reported accusations are credible. For example, AFR.com stated that none of the Freedom Foods investors they’ve asked knew about SnowCap.
• The timing itself seems very strange. AFR.com claims it is the first time in Australia, when a short-seller’s report was made during a takeover process, which raised eyebrows regarding the actual intentions of the short-seller.
• On the 23rd of March, Bingo issued an indirect answer to the short seller: “SnowCap report is full of factual error and has drawn a series of conclusions based on historical information and incomplete or inaccurate data assumptions.” Bingo also mentioned that it had no intention to release any formal response because the report lacked credibility. CPE did not comment on the report.
• Overall, media’s position on the report has been very skeptical calling it more of an offshore short attack than credible research (AFR.com):

The report had all the markings of an offshore short attack. It contained a mix of old accusations, new theories and, from what we can tell, some back calculations on things like waste prices and energy usage to try to undo Bingo with simple logic.

 

Buyers

CPE Capital claims to be Australia’s most experienced private capital manager. The firm has made 75 platform investments across 8 funds through A$3.8 billion in investor commitments targeting mid-market companies in Australasia. One of the recent CPE Capital’s investments was Banksmeadow recycling facility (A$50m), which they acquired from Bingo itself. The acquisition was made after Bingo had to divest some assets due to the Dial-a-Dump (A$578m) purchase in 2019 from the current director Mr. Malouf (owns 12%). CPE also develops a recycling ecology park at Eastern Creek (near Sydney).

Macquarie Infrastructure and Real Assets (MIRA) is one of the biggest infrastructure investors in the world and is also considered to be one of the most influential waste investors. MIRA owns waste management assets in the US and Europe. The asset manager has about 10% of the portfolio investments located in Australia (infrastructure, agriculture and RE investments). Importantly, MIRA is currently raising up to $3 billion for their new fund MAIF 3, or Macquarie Asia-Pacific Infrastructure Fund 3, and, reportedly, has already “created room” in its new fund for Bingo.

 

The offer comes at a strategically favorable timing

• MIRA is currently raising up to $3 billion for its new fund MAIF 3, or Macquarie Asia-Pacific Infrastructure Fund 3, and, reportedly, has already “created room” in its new fund for Bingo.
• Australian government stimulus injection (announced in mid-2020) into the recycling sector. Till 2024 Australian government is ready to bring around A$600 million into the industry. Bingo’s operational regions, Victoria and NSW alone should receive around A$80 to A$100 million of grants plus other benefits.
• Actively ongoing takeover process by two global large-cap peers – buyer Veolia Environmental (market cap – $13.5 billion) and target Suez (market cap – $12.7 billion). Veolia already holds 30% stake in Suez and both parties are expected to sign a definitive agreement by the 14th of May. If the merger succeeds, certain media report speculates that it will likely result in various asset divestments, which provides a strategic angle for CPE capital to potentially use Bingo as a roll-up platform to “grab” these divested assets.

 

Bingo 

BIN operations are organized into 3 segments:

• Collections (38% of revenues) – waste collection from construction sites/infrastructure projects and commercial sector (offices, hospitality, education, etc.).
• Post-collections (56% of revenues) – recycling and disposal of the waste as well as recycled product manufacturing services.
• Other (6% of revenues) – manufacturing and sale of steel and plastic bins.

Currently, Bingo Industries operates a network of 10 facilities and 330 trucks in Australia’s New South Wales and Victoria regions. It owns various waste management brands including DATS Environmental Services, Melbourne Recycling Centers, and Harpers Bin Hires.

Bingo Industries is run by Daniel Tartak since June 2015. In 2005, his father Tony Tartak started this business by investing less than $1 million to buy a four-truck skip bin company. The company became publicly listed on the ASX in May 2017 after raising A$440 million in the IPO at A$1.80/share.

In 2019 the company made a major acquisition of Dial-A-Dump (waste and recycling business) for $578M from director Ian Malouf (12% owner) to improve its competitive stance versus much larger peers such as Cleanaway or multinationals Veolia and Suez.

 

Valuation

The company (and waste industry in general) was moderately impacted by the COVID-19 outbreak due to reduced activity in construction sites and commercial buildings (offices, etc.). So TTM results are somewhat depressed. Construction activity is expected to return to pre-COVID levels in 2022-2023 and overall the company expects a broader waste industry recovery going into FY22. Despite that, the effect on FY20 (ending in June) numbers was minimal, so I think it’s fair to use those numbers for the valuation. Keep in mind that part of the growth in FY20 was due to the full impact of the Dial-A-Dump acquisition (closed at the end of Mar’19).

Comparison with Bingo’s only Australian pure-play waste management peer Cleanaway is provided below:

Overall, the current offer comes at a significant premium to CWY valuation as well as recent transactions (based on my superficial calculations). However, the comparison with CWY is somewhat skewed as Cleanaway has almost no exposure in the construction/demolition market and operates mostly in municipal, commercial and residential sectors. CWY also has substantially lower margins. BIN had 27% and 31% EBITDA margin in FY19 and FY20 vs CWY had around 22% in both years, moreover, BIN’s NPAT margin in FY20 was 10.5% vs 6.5% for CWY.

Recent transaction comparisons:

• A 2019 Dial-A-Dump acquisition was made at 9.6x EV/EBITDA multiple.
• This media report states that Cleanaway’s (closest peer) pre-synergy acquisition of ToxFree (waste management services) in 2017 was done at a multiple of 10x.

This clearly increases the risk of buyer walking away, but at the same time makes management and shareholders more likely to approve the transaction.

 

Timeline

• 16th Jan – CPE Capital and MIRA provided an indicative cash buyout proposal for Bingo Industries at A$3.50/share (A$2.29 billion). The proposal included an alternative mixed offer (shares and cash), which would provide a lower initial consideration than the cash proposal, but with the potential for higher consideration over time (depends on currently unknown earning thresholds to be achieved afterward). Mixed proposal is conditioned on “minimum and maximum acceptance condition”. So far it’s not exactly clear what kind of condition is that, however, it was stated that “it will likely require major shareholders BINGO Managing Director and CEO, Daniel Tartak, and BINGO Director, Ian Malouf, to accept the cash and Unlisted Scrip Alternative”.
• 19th Jan – BIN publicly announced the offer calling it unsolicited and highly conditional, however, allowed to proceed with due diligence. The share price jumped up from A$2.74/share to $3.30/share.
• 5th Feb – short-seller SnowCap issued a public report on BIN. A week later BIN share price declined to A$3.04/share, but slowly recovered afterward.
• 23rd Mar – the company made an answer to the short seller discrediting the report.
• 12th April – rumors were released that the due diligence process has been finished already and a firm offer is to be expected in a week or two. Share price increased from A$3.04 to A$3.36/share.