Headpoint Advisors’ managing director Mark Wilson and associate Leander Ots give their annual overview of activity in the UK waste and resource management industry, highlighting the leading players, and analysing mergers and acquisitions and investment activity across the sector.
The 2018/19 financial year was a strong one for the UK waste and resource management industry, with our top 20 largest companies generating sales of £7.4bn, roughly 3.5 per cent higher than the previous year (£7.1bn).
Positive top-line growth has come in spite of continuing overseas offtake issues. Some alternatives have been found to the Chinese market, but the implementation of a waste import tax in the Netherlands – one of the largest markets for UK waste, at more than one million tonnes a year – will lead to further market pressure once it comes into force in January 2020.
We expect the trend towards greater domestic processing to continue as overseas trade becomes increasingly disrupted by legislation changes and fluctuating processing costs
Prime Minister Boris Johnson’s call for a full ban on waste exports from the UK, plus potential Brexit headwinds impacting on refuse-derived fuel (RDF) export, support the need for a greater domestic processing and disposal capability.
A lack of overseas options is underpinning the financing of further energy from waste (EfW) facilities by domestic strategic players and institutional investors. Landfill also continues to be a short-term alternative. Scotland has pushed its municipal waste landfill ban back to 2025 from 2021, and Defra has assured operators that there will be landfill capacity in the case of severe post-Brexit disruption.
We expect the trend towards greater domestic processing to continue as overseas trade becomes increasingly disrupted by legislation changes and fluctuating processing costs. Investment is likely to bolster not just incineration, but also innovative recycling methods that align with consumer priorities. Industry consolidation will continue to drive mergers and acquisitions (M&A), as market participants seek feed for new processing sites.
The ‘big five’
The country’s largest operator, Veolia, added £100m of revenues through a mix of new sites, contract wins, and acquisitions. The company increased its landfill portfolio through the acquisition of Whitemoss Landfill in Skelmersdale, its only acquisition of the year. It is also set to supply the feedstock to the Rookery Pit EfW, which reached financial close this year with a minority investment from Veolia.
Competitor Biffa continues on its commercial waste consolidation strategy, making four acquisitions over the past 12 months, including that of Specialist Waste Recycling, the largest at just less than £26m. Much like other large operators, the company is investing in further EfW capability, reaching the advanced financing stage for the two EfW facilities it is developing with Covanta.
Viridor has overtaken Suez to become the third-largest operator in the UK, with an impressive 8.1 per cent revenue jump – marking the first change in the composition of the ‘big five’ in a number of years.
After the loss of the Greater Manchester contract, Viridor acquired joint-venture partner John Laing’s 37.5 per cent shareholding in the Runcorn EfW plant, bringing its total holding to 75 per cent. The company has made incineration capacity a priority and, to that end, announced its 12th EfW plant, in East Sussex, in a joint venture with Grundon, and is planning for a further three sites.
Paris-listed Suez, which reported a 3.9 per cent decline, has seen UK revenues drop for three consecutive years. It received approval for a £300m EfW plant in Blackburn, which will alleviate waste going to landfill in the Lancashire area.
FCC opened its Millerhill EfW in April, one month ahead of schedule and in tandem with the announcement that it had won the East Lothian contract, which will directly feed the new plant.
The company’s Scottish presence will be further strengthened by another facility at Greengairs, announced in May. FCC also revealed a partnership with Copenhagen Infrastructure Partners, a Danish pension-backed infrastructure fund, on the construction of a £480m EfW project in Cheshire.
The other 15 businesses can be divided roughly into two groups: high growth or stagnant.
Seven companies reported double-digit percentage revenue growth, and six others’ revenues stayed flat or reported a contraction. Overall, revenue for the group was up 9.4 per cent, to £2.4bn, representing 32 per cent of top-20 revenue, a larger percentage than last year.
Enva (in eighth spot) jumped three places, with 35 per cent year-on-year growth. The company has made ‘growth through M&A’ a key part of its equity story, acquiring at least two businesses per year since its acquisition by Exponent Private Equity in 2017. Associated Reclaimed Oils and Hadfield Wood Recyclers were its most recent acquisitions, and 50 per cent of its revenue growth in the past year was through acquisition.
Seven companies reported double-digit percentage revenue growth, and six others’ revenues stayed flat or reported a contraction
Mick George (11th) continues its upward trajectory, reporting 21 per cent growth. The company has become the premier construction and demolition (C&D) waste company in the East Midlands, and seeks to expand into the surrounding regions through construction project wins.
Reconomy (13th) reported 20 per cent growth through a mixture of organic growth in its core waste brokerage, as well as diversification into new industries. The acquisition of Prismm Environmental moved the business further into solutions for industry, while Valpak added to its consultancy and compliance offering after the acquisition of Helistrat last year.
Tradebe (14th), the Spanish hazardous waste specialist, jumped 24 per cent to £126m turnover. The company has posted two years of strong growth on the back of demand for specialist services. Its clinical-waste treatment services, which it bolstered with investment at its Rochester facility, is likely to benefit from turmoil at competitor SRCL (18th, -22 per cent) and the demise of rival Healthcare Environmental.
New entry Enovert (17th) will be better known as the old Cory Environmental landfill business. Sold in 2017 to reinsurance firm Armour Group, the company has been rebranded and now manages 12 landfill sites.
M&A activity has been falling for four consecutive quarters, dropping to 43 transactions over the past 12 months – a 40 per cent decrease on last year’s record number of transactions.
Whether Brexit uncertainty is causing investors to hold off investment activity will only become clearer next year, but it is certainly impacting on valuation negotiations and influencing capital-deployment strategies.
The drop is particularly noticeable among smaller, privately owned operators. With smaller cash reserves, regional operators are likely to be holding off on any major acquisitions until they have a better understanding of market conditions going forward.
The industry continues to see interest from different pools of strategic and institutional capital. Private equity, in particular, is still showing healthy interest.
Strategic buyer activity
In addition to serial acquirers Veolia and Biffa, there continues to be strategic buyers interested in industry consolidation
Beauparc Group, the largest waste management company in Ireland, has further expanded its presence in the UK with the acquisitions of Leeds-based Associated Waste Management in December 2018 and Mid-UK Recycling, acquired from administrators in June. In February, Beauparc sold a minority stake (37 per cent) to Blackstone Group, one of the largest global private equity investors, providing a partial exit for owner Eamon Waters.
While acquisitions by smaller operators have dropped, there continues to be activity driven by consolidation from a product, service or geographic perspective
While acquisitions by smaller operators have dropped, there continues to be activity driven by consolidation from a product, service or geographic perspective. Devon Contract Waste, a commercial and industrial (C&I) waste collector and processor, acquired three local businesses to support its regional growth and product-diversification strategy, making it one of the larger operators in Devon and Cornwall.
Wastecare, a provider of specialist services in the compliance, hazardous waste, and waste electrical and electronic equipment (WEEE) spaces, acquired Augean’s East Kent Incinerator in January. The incinerator is one of three high-temperature incinerators in the country. Wastecare will hope to turn this previously unprofitable facility around, which has been hard under previous management.
Private equity activity
A few new ‘buy and build’ platforms have been acquired by private equity investors over the past year, demonstrating that the sector continues to be popular with financial institutions.
Three Hills Capital Partners made a major investment in Preston-based Recycling Lives, which reported a £75m turnover in its 2018 financial year. The company has earmarked funds for M&A investment as part of a national growth strategy. It’s first post-investment acquisition was the takeover of the EMR-owned Metal & Waste Recycling, which was mandated to be sold by the Competition and Markets Authority.
In January, Business Growth Fund (BGF) – a minority-stake investor – along with HSBC invested in Red Industries, a hazardous waste specialist, in a funding package understood to be around £39m. Part of this funding was used to acquire competitor Environmental Resource Group (ERG).
Since being founded in 2011, BGF has become an active investor across different waste streams. The fund has investments in all four constituent countries of the UK, including RiverRidge (Northern Ireland), Keenan Recycling (Scotland), Wales Environmental (Wales) and J&B Recycling, Total Recycling Services and Johnson Aggregates (England). In September, Red Industries announced its second acquisition of 2019: Haz Environmental.
Waterland Private Equity-backed Textile Recycling International (previously JMP Wilcox) is following the ‘bolt on’ acquisition model. The company acquired Cookstown Textile Recyclers and Nathan’s Wastesavers at the end of 2018, cementing its position as the largest textile recycler in the UK.
The only management buy-out (MBO) in the past 12 months was of Acumen Waste Services, backed by Barclays and Lombard Asset Finance. The company’s management team has taken over the equity of long-standing shareholders who were looking for a retirement exit.
Infrastructure fund investment
Compared with last year’s high-profile sale of Cory Riverside, 2019 has been a relatively subdued year. Long-term investors – who tend to be more risk averse and target long-term, predictable cash flows – have been wary of the uncertainties caused by Brexit, and are likely to hold off on major investments until more market certainty is available.
In October 2018, a consortium, led by Infracapital, invested a further £150m into the Bioenergy Infrastructure Group (BIG), a major operator of anaerobic digestion (AD) and EfW plants. The funding round saw long-term investor Foresight exit the business, selling its stake to Aurium Capital. BIG has since opened its waste wood gasification plant at Ince.
Compared with last year’s high-profile sale of Cory Riverside, 2019 has been a relatively subdued year
Foresight’s main focus has instead been the acquisition of John Laing’s Environmental portfolio in June, comprising 28 operational projects with an asset value of £764m. The acquisition resulted in the Environmental Assets team of 12 moving over to Foresight, and brings the fund’s total assets under management in the clean energy and environmental infrastructure sector to more than £4bn. The new fund made its first acquisition of AD operator Warren Power in August, for £14.8m.
US specialist EfW operator Wheelabrator is seeking backing for another two plants in the UK after the company’s sale to Macquarie Infrastructure Group in February of this year. One is set to be located on a current Raymond Brown site in Hampshire, while the other is a renewed attempt at Skelton Grange EfW, previously planned by Biffa.
What does the future hold?
The UK waste management industry faces a number of challenges in the short term: securing direct processing outlets for domestic waste; technological innovation to increase product reuse and recycling; pressure on council budgets; and how to deal with the fallout from Brexit. These are big challenges that will take time to address. Nonetheless, companies in the sector continue to grow and make significant investments for the future.
We predict that, overall, the industry will be relatively flat, matching current macroeconomic conditions, but specialist sectors with higher barriers to entry and strong demand for services, such as WEEE and hazardous waste, will outpace average growth. These sectors will also attract sustained M&A appetite from larger strategic acquirers and private equity-backed operators.
Whether M&A across the rest of the industry increases is likely to depend on post-Brexit market conditions. If uncertainty caused by the process is lifted, we see no reason why waste M&A should not see higher transaction volumes in the next 12 months.
About the authors
Mark Wilson is managing director at Headpoint Advisors and has more than 20 years’ experience advising owners, management teams and corporates on company sales, buyouts and acquisitions.
Leander Ots is an associate at Headpoint Advisors, responsible for researching and assessing trade acquirers and identifying acquisition targets for ﬁnancial and corporate buyers within the waste and energy sectors.
Headpoint Advisors is a CIWM Afﬁliated Organisation. Call +44 7966 319 161 or visit www.headpointadvisors.com
*To be considered for inclusion, participants’ revenues are required to be consolidated and relate to waste management activities undertaken in the UK; revenues generated outside the UK have been extracted. The compiled list allows for companies domiciled outside of the UK to be considered, providing entities report separate accounting information for UK activities.