Mark Wilson, partner, and Robert Pearce, senior mergers and acquisitions analyst at Catalyst Corporate Finance, update us on the latest activity in the UK waste management industry
Published in the CIWM Journal August 2013
Mergers & Acquisitions
The UK remains an appealing market for both British and foreign investors, due to the scale of investment, rapidly changing market and opportunity to access secondary raw materials.
A quarter of trade buyer transactions in 2012/13 involved an overseas buyer. As predicted last year, AmeyCespa (owned by Ferrovial) have further strengthened their presence in the UK market by acquiring utilities services provider Enterprise plc for £385m in February 2013. This transaction will double the size of their UK operations and increase their waste collection capacity, so we expect the company to be in the leading 20 in terms of revenue generated for the next year, when its first consolidated results are published.
“Waste sector deal volumes slowed in Q4 2012 and Q1 2013 due to difficult market conditions and the focus on internal operations and banking pressures. There was, however, a notable rise in refinancings.”
Overall, the pace of consolidation within the UK has slowed over the past year, with Viridor the only one of the five highest revenue generating businesses to press ahead with serial acquisitions of regional businesses, acquiring paper collection and processing business Pulp Friction (£9m) and specialist recycling firm JWT Holdings (£7.6m). Grundon Waste Management’s recycling initiative “Greenredeem” acquired Recycle Rewards, the UK division of innovative US company Recyclebank, with the intention of developing a new, influential brand to promote “on the go” recycling.
Covanta Energy is withdrawing from the UK after eight years, after losing out to Veolia on the £550m PFI contract with Leeds City Council in 2011 and failing to secure preferred bidder status for the 30 year, £1.2bn contract in Merseyside (although it has subsequently mounted a High Court challenge over the decision). The company has put its UK assets up for sale, which include three sites with planning permission for EfW plants in Bedfordshire (585 000 tpa), Cheshire (850 000 tpa) and Airdrie (300 000 tpa), an existing waste contract, municipal waste procurements and a leasehold interest.
Waste sector deal volumes slowed in Q4 2012 and Q1 2013 due to difficult market conditions and the focus on internal operations and banking pressures. There was, however, a notable rise in refinancings (nine transactions in the first half of 2013). Overall, we expect to see M&A and investment activity speeding up over the next 12 months.
UK Government legislation continues to drive the shift from waste disposal to recycling, reuse and energy recovery, giving rise to almost £7bn in announced investment in waste treatment infrastructure over the next six years. These ventures will have to be supported by new sources of capital including the Green Investment Bank (GIB), which published its first annual report in July.
As well as a growing number of strategic acquirers looking at securing recyclable materials or RDF supply and market consolidation, private equity will continue to invest in small and medium sized companies with innovative technologies or in need of funding to stimulate growth. Iona Capital, Ludgate Environmental and Foresight continue to invest in the sector.
New entrants continue to be attracted to the waste industry. Construction group Kier Group recently completed its acquisition of May Gurney, following the submission of a £221m bid in April (over £40m higher than Costain’s offering), and there are rumours of a potential takeover of Pennon Group by the Abu Dhabi Investment Authority. There is also the prospect of some M&A activity from Asian investors, following a stream of recent transactions in Europe, in particular by Hong-Kong based conglomerate Cheung Kong Group.
Industry Outlook
Despite a difficult operating environment over the last 12 months and some major challenges around the winding down of landfill, there are many positive developments in the pipeline which will support growth next year.
“GIB has specifically identified the AD market as having solid investment potential, with £650m of funding required to develop an additional 148MW equivalent (MWe) of AD capability. The sector has doubled since 2010, with 106MWe of capacity installed or under construction.”
GIB commenced operations in November 2012 with initial capital of £3bn and has attracted a further £800m from Government in its latest Spending Review.
GIB has specifically identified the AD market as having solid investment potential, with £650m of funding required to develop an additional 148MW equivalent (MWe) of AD capability. The sector has doubled since 2010, with 106MWe of capacity installed or under construction. In 2012, Tamar Energy raised £97m in development capital, acquired Countrystyle Composting and thereby secured the development rights to four proposed AD facilities (three with planning permission). The company intends to build more than 40 power plants and produce 100MW in green electricity by 2018. Grundon have also invested in AD, with the £11m financing of an Agrivert plant. In September 2012, it was announced that the eligibility criteria for the government’s Renewable Heat Incentive funding programme could be extended to include AD plants generating over 200kWth per year.
As mentioned earlier, the major focus of the industry is the development of EfW infrastructure. In addition to the big waste players, we have seen the successful entry of Air Products plc into the UK which, in collaboration with Impetus Waste Management, is planning to build four plasma gasification facilities. The first 50MW plant currently under construction in Teesside is the largest in the world and first of its kind in the UK, and will divert 350,000 tonnes of non-recyclable waste from landfill annually.
Whilst the industry waits for UK EfW capacity to come on-stream, and therefore a cost effective disposal route for residual waste, we are also seeing increased export of refuse derived fuel and solid recovered fuel to continental European EfW plants and companies like Cemex (see CIWM’s RDF/SRF report).
The emphasis of the industry is now firmly on infrastructure and how to dispose of residual waste cost effectively. We believe that the wider investment community is now warming to the opportunities in the sector.
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