As we approach the end of the first quarter, it is worth reflecting on how strong merger and acquisition (M&A) activity was during 2018 in the waste and resources sector, and consider the trends in that period. These may determine the next 12 months or so, albeit with the small matter of Brexit to navigate.
There were 55 deals completed in FY18 across a wide range of waste streams and operating activities, which is materially above the long-term annual average.
The top UK operators continue to expand. Biffa and Veolia, the two largest players, advance by M&A activity.
Biffa has applied a tried-and tested strategy in the past decade by growing through smaller regional transactions, primarily in the industrial & commercial (I&C) space. Its largest purchase in 2018 was of Weir Waste, one of the largest regional operators in the Midlands, for £16.2m, and representing the first acquisition with Michael Topham as chief executive. Overall Biffa announced five acquisitions in 2018.
Veolia employs a similar strategy, also with a focus on I&C, announcing five acquisitions. A difference between the M&A strategies of the two is the end-market focus. While Biffa tends to focus on the ‘commercial’ within I&C (trade waste collection routes) Veolia, while still increasing its commercial offering, also targets industrial-orientated firms.
For example, the company strengthened its presence in decommissioning and radioactive waste with the acquisition of KDC Contractors, which operates across nuclear, petrochemical, pharmaceutical, energy and utilities.
Suez, Viridor and FCC have been relatively absent from the M&A market, and this trend appears to be continuing. We do not expect significant acquisition activity and may even see disposals.
We also expect that another large recycling group, EMR, will dispose of Metal & Waste Recycling in 2019, either in full or in part, following the Competition & Markets Authority ruling in August 2018.
The Republic of Ireland’s biggest player Panda (Beauparc) made another major acquisition with Associated Waste Management, strengthening its presence in Yorkshire and across the north. We expect Panda to continue to look for acquisitions in the UK, especially if investment from a private equity fund materialises, as was rumoured in October.
Private equity and institutional capital
Just under half of all transactions last year involved either a private equity (PE)-backed acquirer or an investment made by a PE fund or other institutional investor.
“Brexit uncertainty may have a dampening impact on M&A in the first half of 2019, but there is more than enough capital available in the UK for deals to make the second half rebound strongly.”
The largest acquisition in the UK waste management industry in the past year was funded through institutional capital. Cory Riverside Energy, the London energy-from-waste (EfW) plant, was sold by SVP Global and other shareholders for £1.5bn to a consortium led by Dalmore Capital, a London-based infrastructure investor, which manages £3.8bn of funds.
We anticipate further investment in EfW infrastructure in 2019.
The Business Growth Fund (BGF) and Three Hills Capital made investments in Red Industries (hazardous waste) and Recycling Lives (metal recycling), respectively. We expect BGF to continue to support businesses in the waste sector in 2019 and beyond.
Private capital also supported the management buy-out of Acumen Waste Services (hazardous waste), providing an exit for two retiring shareholders.
Private equity-backed companies also continued to focus on inorganic growth through M&A or ‘buy & build’.
Textile Recycling International, backed by Waterland Private Equity, acquired two businesses, further consolidating the UK’s textile recycling market. Enva (Exponent), acquired family-owned wood recycler Hadfield, while Reconomy (EMK Capital) acquired compliance scheme operator Valpak. Future Industrial Services (NorthEdge) and Regen (TPG) both made acquisitions and are expected to make further purchases in 2019.
Augean continued to divest assets, including the ex-Colt business to Future Industrial Services, AIS Total Waste to Regen and the East Kent incinerator to Wastecare. Having removed most assets that have proved financially troublesome, Augean will likely spend 2019 refocusing its core operations on high-profit and growth areas such as its air pollution control residue treatment capabilities.
The hazardous waste sector continues to see strong appetite from acquirers, with Tradebe, Veolia, NRC Group and Red Industries all active in 2018.
There has been strong interest in plastic recycling capabilities. With circular economy strategies being implemented by more consumer/retail-orientated businesses, there is growing interest in companies that offer innovative solutions to the issue of plastic waste.
Packaging giant RPC (currently in talks to be acquired by North American competitor Berry Global) bought Plasgran through its subsidiary BPI Recycled Products. Plasgran collects and recycles plastic waste into regrinds and compounds for manufacturing.
Metals recycler S Norton acquired the shares it did not already own in Axion Polymers, a recycler of plastics and aggregates, while Enva acquired Blue Sky Plastic Recycling, a recycler of plastic from WEEE products. Roydon Recycling, which focuses on post-consumer and post-industrial plastics, completed a management buy-out.
Headpoint expects more consolidation and investment in this area to create more home-produced materials for plastic remanufacturing.
In addition to investment in conventional EfW, there was a marked uptick in anaerobic digestion (AD) M&A activity, particularly portfolios incorporating a number of operating sites.
Foresight Group (Material Change, Isle of Wight AD), Biogen (Alauna Renewable Energy, Tamar Energy), Severn Trent (Agrivert) and Bio Capital (Renewi’s Cumbernauld facility) all made acquisitions during the year.
We fully expect more consolidation in the AD operators and supply chain during 2019.
Whether 2019 with be another record year of activity remains to be seen. We suspect that Brexit uncertainty may have a dampening impact on M&A in the first half, as it has on the wider economy. But there is more than enough capital available in the UK for deals to make the second half rebound strongly.
Mark Wilson is managing director at Headpoint