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Biffa kicks off a year of deals

All eyes are on waste disposal company Biffa and the news at the time of writing is that it has agreed to a £1.2 billion takeover proposal by a private equity consortium. So what does this mean for Biffa and the industry?

The deal has set tongues wagging in the City and caused debate among waste management industry analysts. The offer led by Montagu Private Equity and Global Infrastructure Partners (GIP), is pitched at 350 pence a share. However, although Biffa has recommended the offer, City sources say that industrial services company Suez and other third parties may put in higher bids.

A city source told MRW: Biffa is a great brand and waste management is an exciting place to be, especially in the moves towards pre-treatment of commercial and industrial waste. It is an exciting area with lots of private finance initiative (PFI) opportunities, big capital intensive projects and a move away from landfill.

Speaking about the deal Biffa non executive chairman Bob Davies said: Their [Montagu and GIP] offer recognises considerable value inherent in our market position and integrated business model, and I believe their investment plans will help Biffa maximise the opportunities presented by changing legislation to deliver growth in the medium term.
Montagu director Jason Gatenby said that the waste management was a sector we understand well.

London-based Montagu is no stranger to the waste industry world. Last year it sold waste management company Cory Environmental for £588 million after owning it for two years. The company was acquired by a consortium led by ABN AMRO Global Infrastructure Fund.
Corporate advisory group Catalyst Corporate Finance claim that if all goes to plan Montagu will get a good deal for Biffa. However, its head of research Mark Wilson said that Biffa may have a highly leveraged debt to pay back the banks that are involved in the deal.

He added: Montagu has made a good acquisition at a decent price if you compare the ABN deal with Cory or the FCC acquisition of Waste Recycling Group, and it proves that major private equity buyers are still able to complete highly leveraged deals despite the credit crunch and the tightening lending environment. It appears that a consortium of six banks will lend over £1bn to fund the deal and will significantly increase Biffas leverage raising debt from its present level of £350m. We will not be surprised if Montagu sell the business to another trade party in three or four years time at a much higher premium.

I understand that £1bn of bank finance is being used for the deal. This will come from a consortium of banks including Bank of Scotland Corporate, Barclays Capital, Credit Suisse, London Branch, HSBC and the Royal Bank of Scotland.

However, Wilson also believes that Montagu will have to grapple with the fact that Biffa is the largest landfill company in the UK and we know that the landfill tax escalator is already putting pressure on landfill so it expects that Biffa will make some strategic acquisitions under Monatgu to diversify away from landfill.

He also said that it was surprised that there had not been more trade interest from competitors in the bid, for instance, from Veolia or FCC. Wilson said: It is strange that Biffa has not attracted more trade interest given the clear potential for operational synergies with the other integrated waste management companies. It is possible that some trade buyers are simply not convinced by Biffas operating model, which is overly reliant on the collection business, and which suffered a 13.5% drop in operating profit in the first half of 2007- 08. They may also be concerned that Biffa is too exposed to landfill, especially given the success of the landfill tax escalator in driving recycling and recovery.

Since 2003 Biffas company value has grown and grown according to a recent report by industry analysts Plimsoll Publishing. The report entitled Waste Disposal Services, showed that in March 2003 Biffa was worth £4.2bn and that last year the company value had grown to £6.8bn. Plimsoll Publishing senior analyst David Patterson said: Waste management companies would appear to better insulated against the current credit and economic crisis given that waste management is seen as an essential commodity not a luxury. However, to stay ahead companies will require investment to stay abreast of ever more stringent legislation which will undoubtedly make its impact felt upon smaller companies.

Patterson continued to say that this could see many smaller companies being forced out and snapped up by larger predators.

So does this mean that all smaller companies will be in for a bad ride after the Biffa deal? Financial advisory group Grant Thornton associate director Nigel Mattravers said that this is not the case. He said: We speak to a range of funders on a daily basis about strategies and investment in the sector. There is pressure on councils and businesses to do more and more to treat their waste and the market is seen as a secure area for investment.

The headlines are about the big investments and foreign bank involvement but there is a ripple effect and we are seeing significant interest further down the market, not everybody has £1.2 billion to invest.

Mattravers explains that beyond the big headline news, other activities are going on in the industry on a smaller scale but are not reported in the national press. For instance, waste management company Greenstar UK acquired the Verdant Group last year. Greenstar predicted the acquisition of the Verdant Group would bring its turnover up to £121m.

As one analyst said: Hold on to your hats.2008 will be a big year in waste transactions.

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