Riding the wave of waste M&As

Written by: Matt Clay | Published:
Regain Polymers was bought by European investor Aurelius

Now a multi-billion-pound industry, UK waste and recycling is attracting attention from both local and international investors. However, having had a quiet start to the year compared with 2014, will merger and acquisition activity pick up? Matt Clay investigates

Headline deals in the UK’s waste and recycling sector may attract less attention than the Premier League, yet the industry still boasts its fair share of multi-million-pound deals.

During the first six months of 2014, a total of 45 merger and acquisition (M&A) transactions took place. However, the first six months of this year was substantially quieter, with only 24 transactions recorded, according to data from Catalyst Corporate Finance.

Many believe it was the impact of the general election in May, stirring up uncertainty in the market.

Tristan Nagler, managing director of European investor Aurelius, says the election delayed the usual investment schedule.

“Historically, our extent of M&A markets is that you get a steady flow of deals in January as soon as people come back from the Christmas break,” he tells RWW.

“Then you get a strong deal flow after Easter. You tend to have a slow summer and then a strong flow in September for the autumn. This year, spring was disrupted because of the election and autumn hasn’t quite crystallised as there was so much activity over the summer,” adds Nagler.

Plastic fantastic

Aurelius is perhaps best known for investing into and saving the 150,000 tonne per year, Hemswell-based ECO Plastics in December 2014. The investor got a taste for the UK plastics processing industry after investing in Irish firm Wellman International back in 2007. Four years later, it sold the company for €42 million to Asian acquirer Indorama. To conclude Aurelius’s hat-trick of plastics investments, it then bought Regain Polymers, which reported a turnover of £31 million in 2014.

Nagler says the investor is attracted to plastics as it is a more developed industry compared with others such as anaerobic digestion (AD).

“As an investor, we try to target mature sectors rather than emerging sectors,” he says. “There’s a lot of green capital for technology development and commercialising businesses and that’s not where we are in the market. We are a situational investor; we are drawn to situations where we can take ownership of mature businesses and make them as successful and profitable as they can be.”

The managing director says they target “businesses that have got the infrastructure ready-built – we don’t really want to build facilities, such as a landfill site or an AD plant”.

For others, a change in the government’s stance on solar power could lead to finance being redirected towards waste. In the summer, the government proposed slashing feed-in-tariff (FIT) payments for solar PV by up to 87% from January 2016. While bad news for solar firms, this could be good news for the waste sector.

Speaking to RWW, Mark Wilson, partner of Catalyst Corporate Finance, says: “We’re hearing from investment funds focused on the solar industry that they could well start investing in the waste and biomass markets as a result of the accelerated wind-down of the FIT regime. There could be a reallocation of capital. Waste projects are now being seen to provide returns that investors are struggling to get from solar projects.” Wilson also says the cancellation of an auction on contracts for difference for energy from waste and renewable projects creates “some uncertainty around the subsidy environment, which up to this point has been pretty supportive of the industry”.

Independent of government change

Nagler emphasises the importance of being independent of government subsidies.

“We don’t really want to be at the mercy of government policy change. You could be waiting for a long time for the government to start subsidising again.

“We’d prefer to be in a position where we’re not dependent on that,” he says.

The UK’s uncertain role in Europe is another factor that contributed to a slowdown in investment during the start of 2015, according to Steve Lee, CEO of the Chartered Institution of Wastes Management (CIWM).

“Investment appetite has been dampened by economic uncertainty and the austerity agenda, market uncertainty around material prices and volatility, political uncertainty including the UK’s future role in Europe, and uncertainty with regard to government policy, for example on renewable energy incentives,” Lee says.

According to data from Catalyst produced for the CIWM, in 2014 Veolia cemented its place as the largest of the top five players by growing outside the municipal collection space. At the end of 2014, Veolia ES (UK) purchased the open-air windrow composting business, Simpro, from organic waste company TEG Group, after it entered into administration.

In the same year, the company grew revenue by increasing activity in commercial, hazardous and industrial waste services.

Future growth area

It’s the commercial and industrial waste (C&I) sector, and the various niches within it, that will be a future growth area for many in the industry, according to Alon Laniado, investment director at Eternity Capital, a private equity fund that makes investments dedicated to the waste sector.

“In comparison to household waste where the market is led by a few big players, many other segments like C&I waste are governed by smaller players,” he tells RWW.

“There is an opportunity for larger players to control a larger part of the market and create some savings in terms of efficiencies and synergies.”

In March 2014, Eternity Capital invested £9.6 million in a 1.3MW AD facility in Fraddon, Cornwall, in collaboration with developer and operator Greener for Life.

Previous to that the firm invested £47.8 million in an energy from waste plant in Birmingham, to produce 10.3MWe from 70,000 tonnes of recovered wood.

Laniado believes other factors contributed to a slower start to the year for M&A.

“Because the oil price and other commodities went down, many companies are facing lower profits,” he says. “They are not able to pass on these low prices to the producers of the waste.

“When you export to the Asian market they are able to pay as much for the material as they used to before, so it’s rendered many activities in the UK slightly less competitive. As a result I’m not surprised people have paused on where they can invest and make money.”

The investment director says traditionally much of the M&A activity has been driven by large waste companies consolidating smaller companies. “However, the big waste companies have a number of funding constraints; they don’t have the liquidity they used to have and are unable to buy smaller companies.”

Earlier this month, one of the top five – Biffa – bought the chemical treatment division of PHS Group and the chemical treatment division of Enviroco in October. However, amid speculation it will be taken public with an initial public offering next year, the company has been relatively quiet and was unavailable to comment. Meanwhile, waste management firm Viridor continues with its £1.5 billion investment plan to develop a UK-wide network of energy recovery facilities.

To help boost its collection network in the South West, in June the company acquired the waste collection division of Commercial Recycling’s operation in Dorset and Somerset.

For many, M&A activity and consolidation of the wide array of waste collection firms is a positive move in what is often called a disjointed industry.

Consolidating a fragmented market

“The UK waste market is still very fragmented and has relatively low barriers to entry,” says Jacob Hayler, executive director of the Environmental Services Association.

“Over time, consolidation will help the industry to continue to realise economies of scale and to deploy capital more efficiently.”

Elaine Tracy from AMCS, which acquired waste management software company P&L Software Systems in September, believes consolidation is one way for larger players to obtain the nimbleness often found in smaller, independent companies.

“Scale and efficiency are becoming increasingly important and it is likely that we will see further M&A activity as businesses seek to realise this,” says Tracy. “Smaller businesses are also often more creative; they have had to innovate to survive and succeed. Acquisition presents a good way for larger operators to access this innovation and broaden their service offerings in specific niche areas or territories.”

While a dip in commodity prices and an election may have slowed down the rapid pace of M&A activity in the UK, the future looks positive for more investment.

“The UK is very attractive to investors,” says Dr Adam Read, practice director – resource efficiency & waste management, Ricardo Energy & Environment.

“There is the potential of C&I waste, plus the regulated nature of our sector makes it a safer investment market than others in Europe. We have good data, clear targets and a willingness to change.”

Catalyst’s Wilson says more investment will lead to a better quality infrastructure.

“To make the waste supply chain more efficient, you’ve got to invest in infrastructure, and this takes capital,” he concludes. “Generally, the more capital you have access to and the lower the cost of it, the better the infrastructure that you’re going to build and the better the outcomes for your clients Consolidation supports this.”

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