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Sector is spending on building not M&A

Merger and acquisition (M&A) activity generally rises on a strengthening economy and falls when it contracts.

This rule applies in almost all sectors as confidence grows and credit availability widens. We are yet to see this flow through to the waste sector, which has dropped slightly in terms of both deal volume and value in the first six months of 2014.

Economic conditions remain frustratingly challenging in the waste industry at the moment, partly due to over-capacity in some parts of the market, partly due to softness in material pricing and also due to the costly transition away from landfill.

The slowdown also reflects the financial commitments made by the large players on infrastructure build-out, particularly the construction of energy-from-waste (EfW) facilities. Viridor, Sita and Veolia are all committed to major build programmes that continue to restrict their appetite for M&A.

Viridor, for example, which has been a serial acquirer of businesses in the UK of late, has not completed one acquisition during the last 18 months but has spent over £300m in the last year to build out various EfW plants and recycling facilities.

Much of the recent M&A activity has been focused on reshaping existing businesses rather than pursuing growth.

Shanks sold its loss-making commercial and industrial (C&I) solid waste business, where it suffered from a lack of scale, to Biffa. It has also sold its 150,000 tonnes a year Blochairn MRF to Glasgow Council in an effort to offload non-core assets.  In January, PHS sold its main C&I contracts to Biffa. Both deals were at low valuations, consistent with Biffa’s current ‘value’ approach to acquisition.

In March, Augean sold its Waste Network division to both Cleansing Service Group and Greenway Environmental. The rationale behind this disposal, according to chief executive Stewart Davies, was to focus only in waste markets offering enhanced margins and more secure revenue streams – a common aspiration. We expect this to drive the continued restructuring of portfolios over the next 12 months.

By contrast, investment levels by the private equity community have held up well as the sector continues to attract funds from both established specialist investors such as Foresight and One51 and more generalist investors like Agilitas and H2 Equity Partners. The Green Investment Bank is also proving a helpful source of capital with considerable funds still to deploy.

Positive investment trends

Once we move beyond the restructuring of portfolios, we believe there are a number of core investment trends, which will influence the sector for a number of years to come:

  • investors are particularly attracted to companies which can clearly maximise value from recyclates, provide security of fuel supply (preferably under long-term contracts) and produce energy – not necessarily together;
  • the UK will remain an attractive investment destination for investors from overseas, both strategic and institutional funders, for the foreseeable future;
  • private equity will continue to provide capital selectively to fund both buy-outs and projects;
  • the public sector, whether local councils or national bodies will provide more flexible funding packages to the private sector; 
  • finally, the non-bank direct lenders, such as Alcentra which funded the debt on the Impetus buy-out, will provide an alternative lending option to the high street clearing banks.

Mark Wilson is Head of Waste & Renewables and a partner at Catalyst Corporate Finance

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