Strong Year For Deal Activity In The Waste Sector

Mike Read, head of energy and environment at Grant Thornton UK LLP, says it never fails to amaze him how adaptable the waste and resources industry has become as he looks at M&A activity in the sector

I have been involved in the waste sector for over 15 years and yet it never fails to amaze me how adaptable the industry has become. After decades of doing largely the same thing we have recently seen nearly two decades of massive change, in terms of a transition into a technical infrastructure dominated business, where customer service is of greater importance and where legislation and regulation are becoming ever stricter.

This ability to adapt will continue to be tested to the limit, amidst the still uncertain impact of both the Brexit decision and the ongoing financial pressures faced by local authorities. Brexit could potentially have wide ranging implications all of which are difficult to judge, but, it could be argued, may actually benefit the UK in the long term. In particular, the large scale export of RDF and the cost of buying infrastructure from Europe which, with leaving the European Union, may result in a shift to greater self-sufficiency within the UK.

Whilst 2015 saw no M&A activity over £60m in value, 2016 saw the beginning of a shift towards larger deals, with three recorded surpassing £60m. The acquisition of Urbaser by Chinese investor Firion was the largest deal recorded, estimated at c.£2bn.

In addition, the UK will need to decide whether it continues to implement EU legislation and targets, particularly in relation to greater recycling, but it is hopefully unlikely that there will be any major reversal of the Directives and targets that helped bring the industry into the 21st century.

However, there will be many local authorities in particular hoping for a break from increased targets, as these are only going to heighten costs. As we have seen through councils, such as Sheffield and Peterborough, ending large privatised contracts early, in order to provide what they believe to be the best framework to reduce costs and potentially derive revenue, there is likely to be further upheaval in municipal waste services in a bid to secure the much needed funding for social care.

Our Annual Waste review always has the sub title “An Ever Changing Landscape”. The need for waste companies to continue to innovate service delivery, manage the value in the supply chain more effectively and explore alternate markets, whether that be into energy production or different geographical markets, suggests that for this year, and for the next few years, this title will not become any less apt.

Our most recent review found that 2016 was a strong year for deal activity in the waste sector, with the highest level recorded since 2011. We saw a 26% increase in deal levels compared to 2015, with 48 completed. The year started strongly, with 9 deals completed in the first quarter, and gradually increased throughout the year, with 15 completed in Q4 2016.

Whilst 2015 saw no M&A activity over £60m in value, 2016 saw the beginning of a shift towards larger deals, with three recorded surpassing £60m. The acquisition of Urbaser by Chinese investor Firion was the largest deal recorded, estimated at c.£2bn.

Our analysis also found that there was a shift of focus in sub-sector deal activity in 2016. Hazardous and industrial waste, and waste management, recorded the highest level of investment this year (31% respectively), overtaking recycling which dropped 10% from last year, down to 29%.

Within the recycling category, organic saw the highest level of deal activity (36%), increasing 3% from last year. There was also continued activity in the plastic sector (29%), whilst the wood and WEEE sub-sectors both increased activity levels from 0% to 7%.

Whilst interest in deals has continued into 2017, the potential impact of the Brexit decision is still difficult to judge but is bound to have some impact. The UK waste industry has had close links to Europe for many years, particularly with France, Germany and Spain. This is unlikely to end but whether these links and consequent investments shift more towards the USA and Asia remains to be seen, but the seeds for this have certainly been sown.


 

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