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Investors trust sector to deliver

The UK waste management industry experienced a 35% increase in the volume of merger and acquisition (M&A) transactions undertaken in the first quarter of 2008 over the comparable period in 2007.


There were eleven M&A deals completed and a further six development capital investments made by financial investors in the first quarter across a range of waste recycling and treatment businesses.


Catalyst Corporate Finance research director Mark Wilson said:We are not surprised by the upturn in activity. There are a number of factors now playing in the sector which will continue to drive transaction activity this year and next. High commodity prices are obviously sustaining interest in the metal recycling market; increasing legislation and restricted capacity for landfill are features which private equity find attractive and the landfill tax escalator is beginning to make the economics for development capital investments stack up.

The dominant deal in the sector was the acquisition of Biffa by WasteAcquisitionco backed by Montagu Private Equity, Global Infrastructure Partners and Uberior Co-Investments. The deal was ratified by shareholders on March 14 and became effective when Biffa delisted from the London Stock Exchange on April 8. 


Wilson
said: We said at the time of the offer that we thought that the Montagu investor group had struck a good deal. Given the current credit situation it is a strong endorsement of the characteristics of the waste industry to be able to complete this deal at all. It will be fascinating to see how Biffas strategy changes in the coming months and we expect bolt on acquisitions before the end of the year.

Metal recycling businesses were the dominant targets, with three acquisitions of scrap metal companies completed in the period. During January, the Irish firm One51 acquired two UK-based scrap businesses, furthering its strategy to build up a series of recycling and treatment businesses across the UK. The firm, which owns around 27% of Augean, the hazardous waste specialist based in Wetherby, is understood to have two deals in the pipeline which it will complete in the second quarter of 2008.


Royal Bank of
Scotland and Venture Finance backed the management buy out of R&M Metals & Powders. With inflated commodity prices showing little sign of weakening in the near future prices are actually expected to appreciate by a further 10% during 2008 trade and financial buyers are likely to continue to invest in this area. It is also understood that certain private equity investors holding investments in this space may look for an exit.

For example, Barclays Private Equity which invested in Metal & Waste Recycling since February 2006, could reasonably be expected to exit within the next 18 months.

Sims Group and Pennon Group both acquired businesses involved in the recycling and disposal of electrical equipment, an area which has been given a boost by last years WEEE directive. Wilson added that Catalyst expects more consolidation of businesses operating in this specialist area.

UK waste management transcations

Growth in development capital raised

 

The first quarter of 2008 has also seen a significant increase in the amount of development capital raised by waste management firms. The increase in funding illustrates the enthusiasm and confidence financial institutions have in the waste sector. The sectors green credentials appeal also to an ever increasing number of private equity funds which have a mandate to invest along themes of sustainability. Banks appear to be relaxing their lending criteria, and are willing to support merchant related projects, which are not by definition underpinned by long-term supply contracts with local waste authorities. The winners, in terms of those companies which do secure funding, are those that recognise that there is an opportunity to provide interim solutions to waste authorities to meet their immediate recycling targets, in advance of the mega private finance initiative (PFI) contracts being awarded.


In February, Dorset-based New Earth Solutions received £4m equity investment from Impax Asset Management to add to the £50m debt package secured from Nord/LB in 2007. This will enable it to roll out its biological waste treatment plants nationwide. Sterecycle, the municipal waste specialist which employs autoclaving technology, received £12m in fourth round funding from Goldman Sachs, Fidelity International Investments and from Impax. The funding will part-finance the roll out of plants across the country.

It is not just the specialist private equity (PE) funds like Ailsa3, Impax and Foresight which are looking at waste deals.


Wilson
added: In January we were advising a mid-market PE fund on the buy out of recycling business, a company which was being marketed widely through the private equity community, but which was ultimately acquired for by a strategic buyer.

While a few of these deals may have been accelerated to take advantage of the lower capital gains tax rates prior to April 5, we believe that there is fundamentally more M&A activity in the waste sector than there has been at any time in the past and we expect the rest of 2008 to be equally as active.

Image: Catalyst Corporate Finance research director Mark Wilson

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