The saga of beleaguered waste management company Biffa was finally brought to an end last week with the agreement of a debt-for-equity swap. Such a classic tale of an over-leveraged private equity deal going sour is, as ever, popular with the papers, but how did things get so bad at Biffa?
Montagu Private Equity and Global Infrastructure Partners (GIP) bought Biffa back in May 2008, at the height of the buyout boom and just months before the global economic meltdown that proceeded the collapse of Lehman Brothers. It's thought the business was bought for around £1.7bn, using a £1.1bn debt package. At around 65% leverage, the debt element of the deal was not particularly notable – it was not unusual to see 75% leveraged deals at the time – though it may seem high by today's standards.
The recession took its toll of course, though it might not have been initially obvious how Biffa would be affected by the state of the economy. After all, waste is produced and still needs to be dealt with regardless of recession, and one would expect a business in this field to be more resilient to macroeconomic factors than, for example, a retailer or car manufacturer.
However, Biffa didn't bank on one major development, its customers seeking to reduce the amount of waste they produce. For many firms struggling in the new economic reality, aggressive cost-cutting was the name of the game, and reducing the amount of waste produced not only reduced the amount of money spent on waste management but also helped firms to comply with green legislation.
Recycling has also been a problem for Biffa. The firm could have led the way in Britain given it already had a major presence in the UK waste management business. Montagu and GIP certainly tried to push the business in this direction, acquiring recycling specialist Greenstar UK in the summer of 2010. However, many industry commentators say Biffa was too late to the party, and remained too reliant on its landfill operations, which are becoming increasingly expensive to maintain as the UK government imposes ever stricter regulations.
Of course, while the above issues certainly didn't help Biffa, its crippling debt was proving highly detrimental to the business. With revenues of around £1bn, its £1.1bn debt package was simply unsustainable. The debt-for-equity swap will see its total debt reduced by around 55% to a more manageable £520m, alongside a £75m cash injection from senior lenders Angelo Gordon & Co, Avenue Capital Group, Babson Capital Europe and Sankaty Advisors. The business remains profitable and the debt writedown should aid its recovery. Nontheless, it remains a reminder of how a short-sighted leveraged buyout can sometimes be crippling for a business.
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