Mark Wilson, partner, and Robert Pearce, senior mergers and acquisitions analyst at Catalyst Corporate Finance, update us on the latest activity in the UK waste management industry
Published in the CIWM Journal August 2013
Lower volumes, lower recyclate values, increasing costs associated with the disposal of residual waste and a difficult lending environment have contributed to a challenging last 12 months in the waste sector. Despite this, we can see positive growth among 16 of the largest waste players for a second consecutive year, with three companies achieving double-digit growth. The lower half of the table (dominated by private businesses) reached a 9.5 percent average growth rate (4.1 percent without MTS Cleansing Services, which grew 58 percent last year!) while the top 10 (who hold almost 90 percent share of the market) were lower at 1.8 percent.
Our predictions last year of a change in the leading five by revenue have not been realised, as Biffa still remains independent and AmeyCespa has not yet published consolidated accounts with Enterprise plc. However, we expect the acquisitions of Donarbon and Enterprise plc to generate significant growth in revenue for AmeyCespa (from £35m in 2012), which should consequently feature highly in next year’s review.MTS Cleansing Services is the only new entrant in this year’s top 20, replacing Eazyfone. The UK remains attractive to overseas companies with 30 percent of the Top 20 under foreign ownership. We anticipate an increasing number of strategic acquisitions, driven by themes of further inbound investment from companies keen to participate in the UK market, consolidation and securing closed loop material supply.
A Familiar Big Five
Much of the news from the industry’s biggest companies revolves around their investment programmes in energy recovery and recycling infrastructure. Veolia, SITA and Viridor plan to build 26 new energy from waste (EfW) plants between them over the next seven years, which means their strategies (and capital) are focused in this area.
Veolia Environmental Services (VES)
VES delivered a 4.6 percent rise in revenue to £1.47bn, for the year ending 31 December 2012, and was assisted by increases in incinerated waste volumes and municipal waste collection rates and volumes. Reduced recycled material prices were largely offset by increased volumes, but the decline in landfill volumes and construction business had a negative impact.
“VES delivered a 4.6 percent rise in revenue to £1.47bn, for the year ending 31 December 2012, and was assisted by increases in incinerated waste volumes and municipal waste collection rates and volumes.”
Whilst late 2012 was dominated by market speculation of a potential merger between the French parent companies of VES (Veolia Environnement) and SITA UK (Suez Environnement), 2013 has been characterised by progress toward achieving strategic goals.
VES gained planning permission for an EfW facility on the Green Cross Industrial Estate in Leeds in February 2013. The plant, which will have an annual processing capacity of 214 000 tonnes of household waste, will be delivered under the £460m, 25-year Private Finance Initiative (PFI) contract with Leeds City Council.
In May 2013, the company secured an eight-year, £115m contract with Essex County Council to manage 21 household waste and recycling centres after fending off competition from AmeyCespa, FCC Environment, May Gurney, SITA UK and Urbaser.
Biffa’s fortunes appear to be changing after a difficult period during the recession; the company celebrated 100 years in the waste sector in December 2012 and remains the second largest by revenue with a 0.3 percent increase in revenue to £843m for the year ending 31 March 2012. Over the past couple of years, Biffa has closed several facilities, most recently the £13m Trafford Park materials recycling facility (MRF), due to lower volumes and a focus on profitability. A recovery in commercial and industrial waste volumes is expected to benefit the business.
Despite Biffa being marketed to potential buyers last year after struggling with interest payments, debt repayment obligations and declining waste volumes, no sale occurred and the company underwent a restructuring process, finalised in February. Alternative financial backing was provided by Avenue Capital Group, Angelo Gordan & Co, Babson Capital Europe and Sankaty Advisors, who have consequently become majority shareholders. Following High Court approval of the £1bn recapitalisation, which involved a 55 percent write-down of debt to £520m and a capital injection of £75m, the company has designed a five year, £250m investment strategy. Specific plans involve the £40m development of dirty MRFs in North East England, Birmingham and London.
The positive news continued as Biffa’s EfW facility on the site of the former Skelton Grange power station in Stourton, Leeds, received planning permission. The plant will generate 26MW of electricity yearly through the processing of 300 000 tonnes of industrial and commercial waste.
The Co-operative Group has announced it is working with Biffa to reduce landfill. The initiative will divert over 34 000 tonnes of annual food waste from its 2 800 supermarkets away from landfill to anaerobic digestion (AD) to produce biogas (64 percent), refuse-derived fuel facilities to produce fuel (15 percent) or MRFs to be recycled (21 percent).
SITA UK (Suez)
SITA UK remains among the leading players in the UK with an annual turnover of £784m for the year ending 31 December 2012, up 1.6 percent. Results for Suez’s Waste Europe division in Q1 2013 showed a 4.6 percent decline from the same period last year, attributable to adverse weather conditions and negative commodities price and volume effects in challenging macroeconomic conditions. However, the UK and Scandinavia achieved an organic growth of 1.3 percent, with SITA citing several lucrative contracts, a beneficial rise in UK landfill tax and an increase in treatment activities (due to optimisation of the Newcastle EfW plant) as contributing factors. Market rumours in October 2012 of a merger with Veolia Environnement, reportedly initiated by Suez, did not materialise.
“SITA UK remains among the leading players in the UK with an annual turnover of £784m for the year ending 31 December 2012, up 1.6 percent.”
In February 2013, SITA won an eight year, £113m contract (with the prospect of a four year extension worth an extra £46m) with Durham County Council. The company’s new EfW facility in Teesside will process 140 000 tonnes of residual household waste, currently landfilled, to generate 10MW of electricity. The appointment of SITA seals the fate of former contractor Premier Waste Management, who will cease operations when its current contracts expire.
SITA will finally commence construction on the Cornwall Energy Recovery Centre (CERC) in St Dennis after four years of planning refusals and appeals. The plant, part of the 30 year, £1.1bn PFI contract signed in 2006 with the County Council, is expected to become operational in 2016 and will process 240 000 tonnes of household waste annually. SITA is forecasting total project revenues of £1.4bn after accounting for third party waste and sale of electricity.
In April 2013, two SITA-led consortiums obtained preferred bidder status on resource recovery contracts; a contract with Merseyside Recycling and Waste Authority worth £1.18bn over 30 years to manage 430 000 tonnes of residual household waste annually; and a 25-year, £900m Public Private Partnership (PPP) contract with the West London Waste Authority. SITA’s success in Merseyside was seen as the final straw for contract competitor Covanta Energy, who promptly announced the intention to sell their UK operations.
Viridor (Pennon Group)
Viridor remains one of the highest revenue generators, despite a difficult year, with revenue falling 7.5 percent to £704m for the year ending 31 March 2013. In May the company revealed it was taking “aggressive action” to reduce costs after pre-tax profits plummeted by 36.6 percent to £36.5m, a result of a reduction in landfill volumes and the price of recyclates (from £118 to £99 per tonne between 2011 and late 2012). Viridor has already closed six facilities in the UK, and now plans to close 18 of its 21 landfill sites.
However, the company is expecting ‘significant growth’ from 2014/15, and pointed to its many EfW contract successes which will generate £100m over the next four years. In 2012, Viridor secured waste treatment contracts with Glasgow City Council (£254m, 25 years, up to 200 000 tpa) and South London Waste Partnership (£990m, 25 years, 200 000 tpa), which is subject to gaining planning permission for a £200m energy recovery facility (ERF) in Sutton. In February 2013, Viridor signed a 30-year PPP contract with Peterborough City Council, and was recommended as the preferred bidder for a residual waste contract with Prosiect Gwyrrd (an association of five South Wales councils). Viridor’s strategy is to have a 15 percent share in the UK EfW market by 2020.
Despite this positive news, there has been continued market speculation surrounding the future corporate structure of Viridor’s parent Pennon Group, with the rumoured initial public offering (IPO) of Viridor allegedly delayed due to the departure of its chief executive after 20 years at the company. Furthermore, Pennon has recently been the subject of rumours of takeover interest from the Abu Dhabi Investment Authority.
FCC Environment (FCC)
In 2010, FCC announced a shift in the focus of its UK operations from waste disposal to recycling, waste collection, commercial and industrial waste services and renewable energy. In line with this came the formation of FCC Environment in May 2012 from the consolidation of Waste Recycling Group (WRG) and Focsa Services.
“FCC Environment recently signed a 30-year contract with Buckinghamshire County Council for the thermal treatment of residual waste by developing an EfW plant in Greatmoor.”
Last filed accounts show FCC’s UK waste services revenues were up 4.9 percent to £522m, the fastest growth of the top five players, which the company says is a reflection of its diversification strategy and in spite of increases in landfill tax and the implementation of the European Landfill Directive.
FCC Environment recently signed a 30-year contract with Buckinghamshire County Council for the thermal treatment of residual waste by developing an EfW plant in Greatmoor. The facility will process 300 000 tonnes of residual waste annually and produce 22MW of electricity. The newly rebranded company also won a waste treatment contract with Milton Keynes Council to manage 50 000 tonnes of household waste per annum, in anticipation of the opening of a MRF at Bletchley landfill site.
In November 2012, the Pennine Resource Recovery (PRR) consortium – comprising FCC Environment, Skanska and AECOM – secured planning permission for a CHP plant in Bradford which will mechanically extract recyclable waste and convert the residue into electricity to supply the National Grid. The consortium gained preferred bidder status for the associated £1bn, 25-year residual waste treatment contract back in December 2011.
In its endeavour to promote and focus on renewable energy, FCC has harvested the initial crop of biomass fuel cultivated on two 30 hectare restored landfill and quarry sites in Nottinghamshire and West Yorkshire. An estimated 300 tonnes of fuel will be produced annually from the Miscanthus grass crop, which will be used to generate low carbon electricity in the 65MW Ferrybridge power station.
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