Rubbish deals

Francinia Protti-Alvarez
01 May 2009

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Prior to Lehman's collapse, the environment was one of the main issues on many government agendas. With dealflow all but dried up owing to financing difficulties, waste management stands out as a defensive sector

For all its lack of glamour, waste management is one of those sub-sectors, which has in recent years gained in notoriety. Its long-term growth and stable cashflows are the main allure for deal-hungry investors; the environmental "feel good" factor is a bonus, too, though environmental concerns are deemed of secondary importance. The positive financial outlook and favourable fiscal policies are the real drivers of investments in this sub-sector.

According to figures collected by unquote", the volume of waste management deals has increased fivefold from 2006 to 2008. The growth in value was less marked (see graph). The growth may be attributed to European legislation, which is transforming the face of the sector by requiring 65% of biodegradable waste to be diverted from landfill by 2020.

Junk is good

In the UK, landfill has been the traditional waste handling method. Recent changes to the landfill tax rate are benefiting those wanting to invest in integrated management of waste. There are two rates of landfill tax, a lower rate of £2.5/tonne (of inactive waste) and as at April 2009, a standard £40/tonne for all other waste. This second rate is expected to increase by £8 at least until 2010-11. Add to this an average £25/tonne for gate fees and the total price per tonne increases to c£73/tonne.

Rate changes are definitely sweet sounding for those investing in new waste management technologies. "We are at an inflexion point - prices are now moving into profitable territory, and another rise in landfill tax will help again next year (and the year after etc). Many new waste treatment technologies are uneconomical for MSW (Municipal Solid Waste) below £70; once we start moving above that figure, the story gets much more interesting," says Nigel Taunt from Impax.

In continental Europe, landfill has not always been an option, and thus fiscal policy is not the main driver. In some instances the model is developed as a "local" approach where individual communities build treatment facilities using the power/heat generated to support the host community. In others, companies offer collection, recycling and or energy recovery services. Take for example Dutch group AVR/van Gansewinkel, acquired by a CVC Capital Partners-led consortium in January 2006 for EU^R1.4bn. The company offers integrated waste management services (collection, recycling, energy/heat generation) in Benelux as well as in the Czech Republic, Poland, France, England and Portugal.

Energy generation is another upside of waste management investment; waste that cannot be recycled can be used to produce electricity and heat. AVR/Gansewinkel, for example, provides around 1 million people with electricity or heat from burning waste in three incineration plants in Duiven, Rotterdam and Rozenburg. The Dutch group also supplies many power stations, large and small, in the Benelux region.

"Overall, I see energy generation as the driving force in the waste market over the next five years - long term contracts can offer secure gate fees to take the waste and secure sale prices for the power and/or heat off-take, making this an excellent project finance play with equity value creation for those who back the developers of these assets," observes Taunt.

In the UK, integrated waste management service provider Biffa appears to be following a similar path. Biffa already operates an anaerobic digestion facility in Leicester that generates 1.3MW a year. It is understood the company is planning another plant, which if approved, could generate up to 4MW of electricity and 2MW of thermal heat a year while diverting two million tonnes of waste from landfill over 25 years.

Love your garbage

Biffa was acquired by Montagu Private Equity and Global Infrastructure Partners in early 2008 for £1.7bn - an astonishing feat given it was the first mega-deal since the onset of the credit crunch in summer 2007. Biffa was one of the few to successfully syndicate its debt in (early) 2008. The debt package is thought to have comprised 60% of the total deal value and according to sources close to the deal, was very favourable to the banks.

The deal was made possible not only by the sector itself, but also by Montagu's track record in it. In 2005 the buyout house invested in the sector by acquiring Cory for £200m; disposing of it in 2007 for £588m. "Biffa occupies a strong position in the market. The company's track record of profit growth and cash generation, and its opportunities for growth given changing legislation, make it an attractive target," notes Heidi Bryson from Montagu.

The spotlight is now on the Dutch Essent Milieu, the waste management division being sold by its parent company and likely to fetch a price of EU^R1-1.3bn. According to press reports, private equity firms Charterhouse Capital Partners and French PAI partners remain in the race and are likely to emerge as shortlisted bidders to commence due diligence towards the end of the ^Q2 bidding process. BC Partners meanwhile, has recently dropped out of the running. Advisers Credit Suisse and ING are close to arranging EU^R400-500m of staple debt.

Once deemed overpriced funding, staple finance is now key for sizeable deals. "In today's market, the biggest challenge remains the availability of finance generally, especially debt finance. Everyone is being cautious and projects are taking longer to deliver as a result," adds Taunt.

With rising volumes of waste and increasing energy costs, plus the guaranteed growth of this defensive sub-sector, it could prove that one man's rubbish really is another man's treasure.