Waste City

First oil, then breast implants, and now coffee grounds and orange peels: Welcome to Houston, garbage capital of the universe.

September 1999By Comments

Cans overflowing with rotting orange peels and smelly coffee grounds sat uncollected for days, and the residents of the Willowbrook subdivision in southwest Houston were none too happy. At a neighborhood meeting they complained long and loud about their garbage pickup. Tom Fatjo, Jr., an accountant who was the president of the civic association, quietly proposed that they pool their money and buy a garbage truck. His idea was promptly trashed. “This obnoxious guy said, ‘Why don’t you be our garbage man?’” Fatjo recalls. “The thought intrigued me. So I did.” Within weeks of that meeting in the summer of 1966, Fatjo spent $7,000 on a used Chevy truck fitted with a Pakmor compactor. He talked his father into helping him, and together they began collecting trash for Willowbrook and a couple of nearby subdivisions. The first day was nightmarish: It took three times longer to complete the route than they had estimated.

An affable, balding man known for his salesmanship, Fatjo laughs while telling the story. In fact, he’s laughing all the way to the bank: That one truck 33 years ago ignited a trash revolution. Fatjo quickly saw an opportunity to combine lots of small companies into a giant conglomerate, and two years later he realized that dream in the form of Browning-Ferris Industries (BFI). Along the way, he helped turn Houston—once known for oil and space shots and more recently breast implants and computers—into Waste City, the center of the garbage universe. Waste Management, Inc., the world’s largest trash collection and disposal company, is based there. So is U S Liquids, North America’s largest consolidator of liquid-waste services. So is Synagro Technologies, which also handles liquid waste. So are the remnants of BFI, formerly the nation’s second-largest waste hauler, which is in the process of being acquired by Allied Waste of Scottsdale, Arizona, in a deal valued at $9.1 billion.

Why is Houston, as it were, at the top of the garbage heap? “It has been an incubator of talent and expertise, from law firms to accounting firms,” says Ross Patten, Synagro’s chairman and CEO. Roger Ramsey, the former chairman of Allied, says the city has at least three important things going for it: its climate, its positive business atmosphere, and its transportation infrastructure. “It’s a pretty nice place to live,” he says. “Plus it has a good airport. I needed to be able to go someplace without having to change planes three times.”

For the Bayou City the benefits of Big Trash are obvious—or should be. In 1998 the domestic waste industry had revenues of $38 billion, and over the next decade that figure is expected to reach $50 billion; Waste Management alone had revenues of $12.7 billion last year, making it the fifth-largest corporation in Houston behind Enron, Compaq, Sysco, and Dynegy. And unlike oil, waste stays profitable even during economic downturns. Thus, while oil giants like BP Amoco, Texaco, and Shell are laying off thousands of employees—one analyst estimates that Houston will have lost 15,000 energy-related jobs from September 1998 to August 1999—Waste Management is busier than ever: It currently collects more than 60 million tons of trash each year—enough to fill the Astrodome every four and a half days.

While Houston’s other waste companies can’t claim those kinds of numbers, they’re nonetheless dumpster monsters in their own right. For instance, just as the Eighth Wonder of the World inspired similar sports stadiums elsewhere, another Houston original, BFI, spawned a truckload of companies eager to duplicate its model. “BFI seemed to accumulate a lot of entrepreneurial people,” Patten says. “They grew and learned the industry; then, as the company changed, they moved on and continued to use their entrepreneurial spirit and drive to build other companies.” Indeed, the chairmen and CEOs of Waste Management, U S Liquids, and Synagro, the former chairman of Allied, and the president of Republic Services of Fort Lauderdale, Florida—the nation’s third-largest waste hauler—were previously BFI executives.

Of all the BFI alumni, perhaps the one who has done the most to consolidate and modernize the waste business is John Drury, the chairman and CEO of Waste Management. The hard-charging son of a Minnesota trash collector, Drury began driving trash trucks at age fourteen. In 1970, after his father sold the family business to BFI, Drury went to work for the company as a vice president, rising to be its president in 1982. But he soon clashed with William D. Ruckelshaus, who before becoming the chairman and CEO of BFI in 1988 headed the Environmental Protection Agency in the Nixon and Reagan administrations. Ruckelshaus believed that the future of waste was in recycling, and he wanted BFI to spend heavily on it. Drury disagreed, arguing that the most profitable part of the business was trash hauling and disposal. In 1990 Drury was forced out, but four years later he signed on as the CEO of Houston-based USA Waste Services, and four years after that he engineered the takeover of Waste Management in a transaction worth $20 billion.

It was a stunning deal. Fatjo calls it “one of the most outstanding corporate feats I’ve ever seen.” Before Drury arrived, USA Waste operated a single landfill in Norman, Oklahoma. Armed with the lessons of BFI’s early success, he immediately transformed the company into a voracious merger machine, spending $2.72 billion over a two-year period to gobble up trash companies across the U.S. and Canada. At the same time, Waste Management—then based in Oak Brook, Illinois—was foundering, bloated by more acquisitions than it could handle and hampered by accounting practices that resulted in a pretax charge of $3.54 billion. That financial mess helped Drury, who had been laying the groundwork for a Waste Management takeover. On March 11, 1998, the deal was announced: The combined company would keep the Waste Management name, and its headquarters would be moved to Houston.

Since the takeover, the new Waste Management has been facing some difficult issues. Drury has had to rework an entire corporate culture, even down to changing the colors on the company’s trucks. For years Waste Management’s equipment has been painted Buntrock burgundy, a maroon color named for one of its founders, Dean Buntrock. Drury has made no secret of his distaste for the old color scheme, which he calls ugly, and he is having the trucks done up in green and gold. Repainting will be relatively easy compared with streamlining and reorganizing a company with 23,000 trucks and 319 landfills. Indeed, Waste Management was so overstaffed when Drury took over that some of its employees began hiding at its landfills and other locations to avoid being fired by the new regime. “We literally have found thirty to forty people where we were told there were three or four,” Drury told the Wall Street Journal last year. As part of his plan, he vows to cut the combined company’s operating expenses by $800 million a year.

Synagro has seen similar success, with 1998 revenues of $29.9 million and plans for triple that amount this year, thanks largely to aggressive acquisitions of other sludge handlers. U S Liquids is also gobbling up smaller regional rivals. The company, which disposes of everything from septic-tank waste to outdated soda and cleans out grease-trap waste from restaurants and industrial facilities, has thus far exceeded its revenue estimates in every quarter since it went public, in August 1997. Last year U S Liquids had revenues of $121 million; this year that figure could go as high as $300 million, and there’s talk of $1 billion in revenues annually within just five years. “In North America we think this industry is worth about $10 billion per year,” explains chairman and CEO Michael P. Lawlor—and he may be underestimating. A report released last year by Deutsche Bank Research said the domestic market for processing and disposing of liquid wastes exceeds $25 billion and should continue growing because of increasing regulatory pressures and the rising cost of discharging wastewater.

No wonder, then, that Wall Street is closely watching the Houston waste companies. Deutsche Bank and Sanders Morris Mundy both have buy ratings on U S Liquids. Sanders Morris Mundy also rates Synagro as a buy. And while many analysts had also been picking Waste Management as a winner, the company has stumbled badly in recent months. In early July the company’s stock fell 37 percent in one day on news that it would fall short of revenue estimates. The announcement forced many analysts who had buy ratings on Waste Management to downgrade the stock. The revenue shortfall was blamed on a number of factors, including Waste Management’s efforts to raise prices in some of its larger markets and difficulties in completing the merger between USA Waste and Waste Management.

Despite the vagaries of the business, Tom Fatjo is still bullish on waste. “It’s a great industry with great growth potential,” says the man who put everything he had into it—and still does. Earlier this year he launched a new company, Waste Corporation of America, that will focus on buying disposal facilities and small haulers in Southern states; already he’s snapped up companies in Florida, Alabama, and South Carolina with combined annual revenues of $25 million. He hopes to hit $100 million in revenues within twelve months, with an initial public offering slated for late fall or early 2000. “As far as I can see, the waste business is going to be an important part of America,” he says. “After I’m done, there will still be people who need to have their trash picked up.”

Having made a fortune in the waste business, Fatjo could easily locate his new venture anywhere in the country—perhaps even on a balmy island in the Caribbean. So where is his new headquarters? Houston, of course. But this time, Fatjo won’t be driving any of the trucks.

Related Content