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Despite GMWDA woes, sector M&A activity rises

manchester waste

The past month brought the crushing blow for Viridor that its flagship contract in greater Manchester was being termi­nated – but the news came shortly after Grant Thornton’s Annual Waste Review found the wider waste sector market in ruder health, with a five-year high in mergers and acquisitions (M&A). As ever, the waste sector can be a roller-coaster.

It is not yet clear how the Greater Manchester Waste Dis­posal Authority (GMWDA) will unpick what is said to be the biggest waste contract in Europe. It was one of the worst-kept secret s in the sector that the partnership with the Viridor-Laing joint venture was on the rocks.

On 2 May, after a series of in-cam­era meetings over several months, GMWDA confirmed the 25-year pri­vate finance initiative (PFI) contract was being terminated. The only sur­prise was the timing, coming days before the election of new ‘metro mayor’ Andy Burnham, who will manage the region and take the GMWDA under his wing in 2018.

Talks continue and, unsurprisingly, Viridor will be seeking compensation. It is the latest long-term PFI deal to bite the dust.

But in 2009, when the partners for­malised their £3.8bn marriage, it was presented by the GMWDA as the model for the future of council waste manage­ment. And it was only 16 months ago that Viridor used the project as a tem­plate for so-called ‘English resource networks’, with each region having a package of infrastructure and dove­tailed collection and disposal services.

Revisiting the resource networks report today, which argued that other existing resource management sys­tems in local authorities were no longer fit for purpose, the message has a different ring: “The successful ‘Manchester Model’ is Europe’s largest resource partnership between the public and private sector which is not only delivering results but, through its innovative 2020 Vision, is also attracting inward investment from manufac­turers, and supporting the region’s decentralised energy ambitions.”

The strains were just too much. Last year, collecting councils said their ‘levy’ was too great and the GMWDA balanced the books from its reserves. This year, the toughest yet for councils because of former chancellor George Osborne’s earlier austerity budgets, there was more pressure on the disposal authority to bite the bullet.

The negotiations go on, so a likely solution remains conjecture, but it is hard to see how any party will avoid short-term financial pain. But all is not lost for Viridor. As with Veolia in Shef­field, Amey in Peterborough and several other contract terminations, the deci­sions will mean fresh procurement and that means new opportunities.

Grant Thornton’s newly published research indicating that 2016 was a strong year for deal activity in the waste sector shows a brighter side, with the highest level recorded since 2011. The business and financial specialist pub­lished its annual look at the industry in April and found that merger and acqui­sition (M&A) deal activity increased by 26% last year compared with 2015, and 48 deals were completed.

The report noted a shift to larger M&A deals: three exceeded £60m in 2016 while there was none in 2015.

The acquisition of Urbaser by Chi­nese investor Firion for around £2bn was the largest recorded in the UK. There had been strong interest from Chinese investors in Biffa before the company opted to go public, completing its offering in October 2016.

Mike Read, head of energy and envi­ronment at Grant Thornton, said: “While the second half of 2016 was dominated by the result of the EU ref­erendum, deal levels in the sector still continued to increase and the last quar­ter recorded the highest level overall.

“The increase in interest seen from Chinese investors is not surprising given the depreciation in the value of sterling, which has resulted in the price of UK services and goods becoming more competitive and attractive to overseas buyers.

“This trend is likely to continue into 2017 as overseas investors continue to be attracted to the high-growth energy-from-waste market in Europe.”

Two sub-sectors, hazardous & indus­trial waste and waste management, recorded the highest level of investment this year (both 31%), overtaking recy­cling, which fell from 39% in 2015 to 29%.

Within the recycling category, organ­ics saw the highest level of M&A activity (36%), up three points from last year. There was also continued activity in plastics (29%), while activity in the wood and WEEE sub-sectors both increased from none to 7%.

Read was positive about the impact of the Brexit decision, although he con­ceded it was too early to be sure.

“It could be argued that, for the waste sector, it may be beneficial for the UK in the longer term. The potential increase in the cost of buying infrastructure from the EU may result in a shift to greater self-sufficiency within the UK.”

The report also considered the value of secondary materials, and noted that the trend for recyclate prices in 2016 was better than the year before.

Price increases were seen across tex­tiles, glass, metals and plastics with, most notably, steel cans increasing in value by 289% between January and December 2016, following a global decline in the price of steel cans in 2015.

Grant Thornton said the change was partly prompted by an increase in virgin iron ore prices due to higher production costs, including a doubling of coking coal prices in China.

Despite the general upturn, MRFindus­ glass showed a moderate price decrease of 13%, attributed to an increased focus on material quality. Price trends indi­cate that glass from a MRF operation (destined for the aggregate market, due to its poorer quality and below the nec­essary standards of the remelt market) is attracting considerably lower prices than glass separated at source. Grant Thornton expects this trend to continue and to be reflected in other materials in 2017.

“High-quality materials achieve a greater market value than those of a low quality, particularly during periods when market values for materials are low,” the report says.

“Tightening of export protocols has also meant that it is no longer possible to export poorer quality materials, and operators cannot afford the reputational risk of sending highly contaminated materials abroad for reprocessing, only to have them rejected at the receiving port.” This challenge has been given fresh wind in 2017 by China’s National Sword quality and smuggling crack­down.

The trend towards improved quality for exports and tighter controls on imports of recovered materials should affect the quantities of recyclate exported and perhaps the destination. The report notes a change in receiving countries for UK plastic exports during 2016, for example, with Malaysia now the third largest market.

2016’s biggest deals

  • Firion Investments and Urbaser, 100% acquisition £2,082m
  • 3I Infrastructure and Infinis, 100% institutional buy-out £535m
  • Restore and PHS Datashred, 100% acquisition £83m

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