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MERGERS & ACQUISITIONS Waste – clearer growth story attracting wider investor base Mark Wilson (pictured right) from financial advisory firm Catalyst Corporate Finance analyses M&A trends in the waste and resouce management industry. he waste industry did not have its most prolific level of merger and acquisition (M&A) activity or private equity investment in 2013, however there were a number of really interesting investment trends emerging which will influence the sector for years to come. The UK is at the centre of much of this activity and its prospects are encouraging. The key investment themes for 2014 include: • a strong investor growth - strong with maximising value from recyclates, security of fuel supply and energy production a strategic priority; • strategic parties and funds from outside the US and Europe becoming more active investors in the sector; • private equity showing renewed interest in a sector which has been challenging for it in recent years; and • Increasing activity by the non- bank direct lending market providing much needed access to capital for waste businesses and their shareholders. Our analysis of deals completed around the world shows that there were around 10% fewer deals than in 2012 and 33% lower than 2011. However, as the recovery in the US and Europe gathers steam, we can't see this slowdown continuing for long. Part of the reason for the slowdown reflects the financial commitments made by the large players on infrastructure build-out, particularly the construction of energy-from-waste (EfW) facilities. This investment is generally funded through internal group credit lines or PPP/PFI credits and therefore does not feature in our figures. For example Viridor, which has been a serial acquirer of businesses in the UK of late, has not completed one acquisition during the last 12 months but has spent over £300 million in the last year to build out various EfW plants and recycling facilities. A change in the board composition has no doubt also interrupted M&A projects. Nevertheless, we are seeing increasing interest from strategic groups and funds from outside of the Western countries. In June the leading Dutch waste business Van Gansewinkel sold its EfW business, AVR, to a consortium led by Cheung Kong Infrastructure (CKI), part of the Cheung Kong Group and listed on the Hong Kong stock exchange. AVR processes c 1.8 million tonnes per annum and had a turnover of €256m in 2012 with an EBITDAE (earnings before interest, taxes, depreciation, amortization and exceptional items) of €108 million. The consideration of €944m (c. 8.8x EBITDAE) was above many analyst's expectations. We have also seen private equity investors become more active in the sector again, investing in more traditional buy-out structures rather than just projects. At the end of December, Agilitas Partners invested in Impetus Waste Management, which has a strong position in the north east and which is building a new waste transfer station, adjacent to the Air " Finally, if there is one sign that the industry is returning to normal, and that M&A is featuring more prominently on corporate agendas, it is surely the fact that Biffa is back in the market " T 22 Local Authority Waste & Recycling March 2014 March 2014 Local Authority Waste & Recycling 23 MERGERS & ACQUISITIONS Product EfW plant with a capacity of 600,000 tonnes per annum. Also in December, Waterland Private Equity, the Dutch independent investment group, acquired the EfW operator Attero for €170m. This is Waterland's first investment in the waste industry and is notable because it succeeded ahead of strategic players such as SITA and Indaver, which were known to be interested in an acquisition, as well as other private equity houses such as Cerberus and Gilde. The capital available through private equity funds globally is at a record high and with increasing confidence around the industry, we expect more of these funds to be deployed into waste companies and projects. The debt on the Impetus deal was provided by Alcentra, which is a global asset management firm focused on sub-investment grade corporate credit. The funding takes the form of a unitranche investment (see definition box) and is the latest of more than 85 middle market transactions (£1.5bn in funds) which included senior debt, unitranche, second lien, mezzanine and equity co-investments. Other direct lending funds such as BlueBay are known to be active in the sector. In December, we also heard that a new £48 million EfW plant, based on advanced thermal gasification technology, will be built in the Midlands. Consortium Birmingham Bio Power received back- ing from the Green Investment Bank amongst other funders and will pro- cess 67,000 tpa of recovered wood to produce 10.3MW of electrical power. The consortium of investors included GIB, Foresight Group, Balfour Beatty, Eternity Capital Management, GCP Infrastructure Fund as well as devel- oper Carbonarius. Whilst the Bio Power plant will process a relatively homogeneous feedstock, the industry will see the commissioning of two gasification plants processing municipal black bag waste – a heterogeneous feedstock and therefore more challenging. Based on Energos and Air Products technology, these plants will open in Glasgow and Teeside respectively sometime in 2014. Finally, if there is one sign that the industry is returning to normal, and that M&A is featuring more prominently on corporate agendas, it is surely the fact that Biffa is back in the market. They have recently acquired both Shanks' solid waste business and PHS' commercial and industrial (C&I) contracts and whilst cash is still relatively constrained, we expect continued activity into 2014. Mark Wilson is partner and head of waste and renewables at Catalyst Corporate Finance. Source: Catalyst Corporate Finance - Global Waste Deal Database A unitranche is a type of credit facility or loan that is becoming increasingly popular in circumstances where borrowers would otherwise have had to separately negotiate first lien and second lien loans (guaranteed by assets and demanding different interest rate repayments) or senior and mezzanine credit facilities. [Source: http://lexicon.ft.com/] Unitranche

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