This transaction created a frenzy in the private equity world as the sweeping industry had been completely under the radar until then – especially since all the attention in the waste management space traditionally focused on waste hauling companies.
The SCA transaction was the first of many for the $60B private equity giant as it came in the industry to execute a “rollup” strategy. Since the acquisition in late 2020, SCA has already acquired 11 companies and it does not look like the juggernaut is going to slow down anytime soon.
What makes this sleepy little industry attractive to a rollup strategy?
There are a variety of factors that make this industry conducive for a rollup strategy. The sweeping industry is highly fragmented with 75% companies being single proprietorship and 90% with less than 10 pieces of equipment.
Small companies remain small as they are cash constrained. The sweeping companies need constant capital investment requirements as new sweeper trucks can cost upwards of $300K. With smaller, unsophisticated and cash-strapped companies, private equity players are able to consolidate multiple companies to grow without having to pay the high multiples in today’s frothy market conditions.
Predictable cash flows are another leading factor of attractiveness to a rollup strategy. Most of the revenue in the sweeping industry is in the form of contracts spanning 3-12 years with customers often being the government/municipalities. Even when there are no contracts, there is a high percentage of repeat business year after year.
Sweeping is also an essential service and runs like clockwork as evidenced by the minimal impact on the industry during the COVID shutdowns across the country. This makes the revenue of these businesses extremely predictable which allows for high leverage, the biggest value driver for Private Equity.
The obvious question though is, why now?
There are multiple macro trends that have led to this sudden interest in the sweeping industry. The biggest ones are regulatory in nature. National Pollutant Discharge Elimination System (NPDES) Stormwater phase II rule, intended to reduce pollutants in the stormwater drains, has become more stringent in recent years.
Street sweeping is one of the keyways municipalities and construction companies meet regulatory requirements by significantly reducing the quantity of pollutants in stormwater runoffs. A recent government report identified street sweeping as the most efficient and cost-effective practice for stormwater runoff pollution.
Sweeping is not just done for aesthetic purposes but also to keep drinking water safe.
In a report by the City of Palo Alto, the city staff estimated minimum annual savings of $700,000, not including long term liabilities such as pensions. It is estimated that 30% of municipalities have outsourced their street sweeping programs, a trend that is expected to continue.
If you have been a student of successful roll ups in the Private Equity space, it is hard to miss that the increased M&A activity in the sweeping industry appears awfully similar to that of the waste hauling industry in the 1980s.
The waste hauling industry had all the same parameters of being an essential service, with stable customers and long-term contracts along with regulatory tailwinds. The industry went through an intense roll up period leading to the highly consolidated industry with giants like Waste Management, Republic Services, Waste Connections etc.; with the top five players owning well over half of the $60B market share in the US.
Being a CEO of one of the largest sweeping companies in California, I have little doubt that the world of sweeping would undergo a similar transition where a couple players will own the entire market.
And Warburg Pincus already has a huge head start.