Opinion: Mark Wilson

We are firmly in the 'year in review' season, so to honour that tradition I thought I would reflect on a year, which has seen the UK enjoy a high level of inbound international M&A.

Over £45 billion was spent by overseas corporate buyers in 2011 on businesses based in the UK, which is almost spot on the year before. Deal volumes were also more or less the same at approximately 700 each year.

What may surprise you is that deal volume in the second half of this year mirrored the first, which feels intuitively wrong given the volatility we had in the markets in August and the procrastination around solving the Euro-zone solvency crisis in the third and fourth quarters – with still no end in sight. As we know from our own experience, regardless of the wider global issues corporates are seeking to grow and there is therefore still strong interest from international buyers to pursue M&A strategies, it is just that they are more cautious and their decision making processes at the moment are slightly more protracted.

Back to the stats: fifty percent of all deals completed by an overseas buyer were done by a corporate based in either the US or Canada. A third of deals were done by European buyers (principally France, Germany, Sweden and Netherlands) with BRICS nations (5%), the Middle East (2%) and Japan (2%) the most notable of the other buyers. Companies in the support services sector attracted most interest (38%) following by the financial services sector (12%). There was also a high proportion of engineering / industrial sector deals and a number of legal service deals, stimulated by the recent enactment of the Legal Services Act.

Key deals of the year were HP’s (US) acquisition of Autonomy for £7billion and Colefax’s (US) acquisition of Charter Plc for £1.5 billion, which is expected to complete in January 2012. Both deals were of international companies which had their roots in the UK and were completed by US buyers with strategies to acquire technologically sophisticated businesses as growth platforms to provide both scale and revenue and geographic diversity for their existing businesses.

No sooner was a new renewable energy industry launched in the UK, namely solar, than it has been effectively extinguished.

Since the introduction of the feed-in-tariffs (FITs) in April 2010, many companies invested heavily in building businesses serving all parts of the market. Local firms emerged to install solar PV panels on the roofs of our homes and large plc’s began to do mass implementations on social housing estates as well as incorporate solar into their new building designs.

Last summer I remember talking to my Spanish and Italian colleagues about the collapse of their solar PV markets in their countries, totally due to the wholesale withdrawal of Government incentives. We speculated whether this could happen in the UK, deciding that on balance, as the UK government had the benefit of their Southern cousins’ experience, we could expect a long and stable incentive system. The 43p per kilowatt could be relied upon and businesses could invest and develop accordingly. Carillion plc, a well respected business decided to acquire Eaga plc for £306 million (see my blog of January 2011); Keir also acquired a business in the space and numerous other businesses were invested in by the private equity community.

How wrong we were!

First the carve out on solar farms, then the halving of the tariff with immediate effect. I know there are some legal challenges in place so I won’t comment more other than to say that almost all industry associations have called the decision “nuts”.

Carillion announced today that they expect the Government’s plans for much larger and earlier than expected cuts to FITs to reduce the size of the UK solar PV market significantly. They have put 4,500 people on a statutory 90-day consultation process to allow them to reshape their business.

Emerging opportunities

I recently attended a cleantech seminar in Cape Town hosted by our South African partner firm, which focused on the huge opportunities in that part of the world for solar PV. Their electricity sector has received a lot of attention over the last three years, primarily due to the black-outs experienced in 2008. There is a disproportionately big mismatch between the future demand and the current electricity supply in South Africa and the South African Government is rolling out legislation and a framework to introduce Independent Power Producers (IPP’s) to compete with Eskom, the monopoly power generation provider.

The Integrated Resource Plan 2010 (IRP 2010) is an indication of Government’s long term plan to address base load capacity requirements. The Government has also launched a Renewable Energy Feed In Tariff (REFIT) programme and the numerous generation project opportunities identified by IRP 2010 and REFIT\REIPPPP is creating many investment opportunities for South African and international investors and funders.

We are beginning to help UK companies and investors to enter the SA market and our partners in Jo’burg are already advising a range of UK and European parties.

As one door closes, another one opens!

The holidays are over and for anyone involved in the waste industry, September this year must feel as busy a month as you can probably remember.

RWM (in partnership with the CIWM) have their new look exhibition at the NEC next week, already claiming to have over 600 exhibitors and some very heavy hitting speakers. I am certainly looking forward to my time there next week, albeit I may be flagging slightly by the end of the annual dinner on wednesday night...

We know it is a big industry, however the Department for Business, Innovation and Skills (BIS) have recently published a study which tells us it is even bigger than was recently thought (download report here). Of course it is difficult to agree the boundaries, but by the author’s calculation the waste industry is now worth over £7.5 billion annually and employs 128,000 people.

For those of you who are CIWM members, you should have received by now a copy of September’s magazine, and if you look on page 18 you will find this year’s fastest growing waste businesses in the “Fast 30”, an article that Catalyst provided the research for. It has been a lot of work in the making, particularly given the number of new and exciting companies in the industry this year and our own hectic dealflow including the completion of our latest acquisition for SAICA, however I am pleased with the results and if you are included well done and good luck for the rest of the year. If you are not, or you would like to debate the results, feel free to give me a call.

We have recently completed an article for the Chartered Institution of Wastes Management (CIWM) which detailed some of the changes in the waste industry and to the Top 20 players during the last 12 months. The article highlighted what an eventful last 12 months we have had in the industry, perfectly illustrated by looking at the movements in the Top 20 table of waste operators.

Last July, Biffa acquired Greenstar UK from NTR for £135m and promptly regained second spot. In the same month Viridor acquired private equity backed Reconomy Recycling Solutions (RSS) and jumped to fourth place, moving ahead of WRG.

This created an opening for some new arrivals including Leo Group, the animal by-products recycler; Eazyfone, the fast growing mobile phone recycler that topped last year’s Waste FAST 50 rankings (produced by Catalyst in conjunction with the Chartered Institution of Wastes Management CIWM); and the US owned medical waste management firm Stericycle. Focusing on specific waste streams appears to be a successful strategy, with specialists now representing around a quarter of the list.

As economic activity increases, many waste businesses are seeing their volumes and resulting trading figures improve. Recyclate prices (especially paper and plastics) have now overtaken the levels of September 2008, the pre-recession peak.

Despite these positive trends, if we strip out the effects of the acquisitions, the aggregate Top 20 revenues have actually declined by c. 1.9% compared to a rise of over 6% for the next 25 companies (albeit the reported revenues lag by around 12 months). These second tiers of companies, the so called mid-market, have revenues between £20m and £35m and are generally focused on specific waste streams or have dominant regional positions. The Big Five operators (Veolia, Biffa, Sita, Viridor and WRG) continue to compete for contracts and territory but their dominant positions in the rankings look unlikely to be challenged by other Top 20 participants or new entrants. They have achieved their scale by winning large long term PFI contracts and the last 12 months have further strengthened their positions.

M&A

Despite the high profile Greenstar and Reconomy acquisitions, analysis of deal volume trends over the last four years suggests that waste sector M&A activity has been on the decline. Whilst it is true that the recession has dampened activity we expect this trend to reverse as the economy strengthens and we have recently seen evidence of the return of the ‘serial acquirers’.

In addition to Viridor, who have completed five acquisitions in the last 12 months, PHS Group has once again entered the waste market by acquiring two secure document destruction businesses; ShredSecure and Shred Easy. In January Tradebe, the Spanish specialist waste management operator who acquired Pyros Environmental a couple of years ago and has acquired all over Europe and the US, bought clinical waste business Britcare. Tradebe now boasts 10 UK sites offering a range of treatments for hazardous and non-hazardous waste.

Another two Spanish companies have acquired recently. AmeyCespa, part of construction giant Ferrovial acquired Cambridgeshire based Donarbon in September 2010 for around £49m and are expected to acquire again. Paper manufacturer SAICA, who are building a £300m paper mill in Manchester, acquired Futur Recycling to secure waste paper supply for the mill.

Durham County Council sold Premier Waste’s commercial collections division and Washington MRF in Tyne and Wear to HW Martin for a sum rumoured to be above £10m. There has been speculation that this might be the start of further local authority sell offs.

A combination of better underlying trading and more sustainable profit forecasts and buyers having more free cash and banking headroom are likely to further stimulate M&A in 2011.

Outlook

Feedback from our clients suggest that both volumes and margins have improved this year, and we would expect proper growth to have returned to the Top 20 when we report again next year.

Speculation has been building over what the Waste Review (Defra review of England's waste policy) will say when it is published this summer.

We at Catalyst expect it will force greater application of the 'localism' agenda, which is likely to mean infrastructure planning guidance will be very local. We also expect that there will be a push towards the integration of business and residential waste operations and could spark a further Local Authority sell off. It also likely that lighter regulation will be applied around source separation (and logistics) for waste producers, which could expand competition and drive vertical integration in certain waste markets.

This all suggests more liberalization, which is likely to be beneficial for the private sector especially for regional businesses who are strong in their local markets, enjoy innovation and are well suited to smaller scale projects. We would therefore expect to see more high growth mid-market firms knock on the door of the Top 20 next year.

Almost a year on from the introduction of the UK’s feed-in-tariff (FITs) programme, the company which is poised to deliver a mass roll out of solar photovoltaics (PV) to the social housing community, Eaga plc, has been acquired by Wolverhampton based Carillion plc, for approximately £306 million – a not too expensive 6.8x this years EBIT!

As anyone who has been following Eaga’s fortunes will know, this valuation is roughly the same as last October just prior to when the Warm Front budget was pulled from under them following the Coalition’s Comprehensive Spending Review. Since then the company has worked hard on refining the economic model for its solar PV programme and secured funding of up to £60m of SPV equity through the HSBC Environmental and Barclays European Infrastructure Funds in late January. As a proven deliverer of complex national installation programmes, Eaga are a quality outfit with attractive growth prospects.

The features of this acquisition for Carillion are therefore compelling:

• creates a scalable platform to build a leading energy services provider
• immediately earnings enhancing – estimated at £45m in 2011
• significant scope for synergies – estimated at £9m annually by 2013
• cross-selling opportunities
• balance sheet strength in high growth market

If only I had had more conviction when I bought Eaga for my fantasy portfolio at 68p on the 21 January...

This week the CBI hosted a consultation session with Defra to enable members to feed into the Defra review of England's waste policy.

The Waste Review document will be published in late Spring this year with the objective of ensuring we take the right steps towards creating a ‘zero waste’ economy. Without going over a lot of old ground I thought I would highlight some of the points I took away from the meeting, which may give clients a flavour of the direction of travel of the Coalition.

• application of 'localism' agenda is likely to mean infrastructure planning guidance will be very local
• a bonfire of LA waste targets (to coin an Eric Pickles phrase) will encourage more faith in the market
• push towards the integration of business and residential waste operations and could spark a LA sell off
• recognition that smaller EfW projects are attractive, although don’t expect policy guidance towards merchant plants
• CHP schemes are likely to be favoured over electricity only EfW
• lighter regulation around source separation (and logistics) for waste producers
• risk based compliance enforcement – big company offenders watch out!

Clearly Defra were not going to spill all the beans at the meeting, but the list above does suggest more liberalisation in the market. This will create a shift in the market and I expect will be beneficial for the private sector especially for regional businesses who are strong in their local markets, enjoy innovation and are well suited to smaller scale projects. Any policy related shift tends to throw up new opportunities for investors, especially the private equity industry.

This week saw the publication by the Office of Fair Trading (OFT) of a report into infrastructure ownership and control in the UK, which focused on the waste sector amongst others. I am glad to say many of the observations are consistent with my own knowledge of the market – and I am also further reassured as they used Catalyst research as a source for their work!

I think however that they could have made a stronger case for immediate intervention and the need to force a more competitive environment, especially in municipal waste processing.

The ‘market failure’ that existed some years ago and that the Government had to address (by creating guarantees of future income streams in order to attract private sector investment) is largely a thing of the past. The OFT is right to claim that support created innovation and investment, however almost a decade on I don’t believe a 25 year PFI contract is the right way to lower competitive barriers. My view is that we need to encourage the immediate redesigning of waste procurement contracts and the tendering process to encourage more participants, particularly outside the ‘Top Seven’ – whose revenues incidentally have grown disproportionately faster than the rest of the market.

Waste processing technology and business models, which apply today could well become obsolete in a few years. However, local authorities and the PFI contracted waste management firms have no obvious interest in competition to encourage innovation once a contract is finalised as all parties are more interested in de-risking the ‘project’. Why for example, am I providing plastic, paper and tins to my municipal WM firm and not receiving value back for this? I am happy to pay my council tax to remove black bin waste however why should 22 million households not be compensated for the recyclates. Any innovation in this direction is unlikely to happen with the present set up.

So what are we likely to expect from the OFT. Definitely more pressure to unbundle municipal waste collection and treatment contracts and pressure to adjust the planning processes.

The Government anticipates that some £200 billion will be invested over the next five years in infrastructure and the majority of this investment will need to be financed by the private sector. This seems an opportune moment to put more pressure on councils to open up the municipal market!

There has been quite a lot of alarmist copy written about the potentially negative impact on the waste industry of last month’s Comprehensive Spending Review (CSR), especially with regards to the withdrawal of PFI funding for seven waste schemes.

On balance however, the Government’s actions seem to be pretty sensible and will hopefully create more opportunities for the private sector rather than fewer as they step in to provide more commercially viable solutions.

Although announced some weeks ago, Project Transform was one of the seven cancelled schemes. Submitted by Solihull, Coventry and Warwickshire County Councils, the sub-regional waste project involved the construction of a £240m energy from waste (EfW) plant, which would rely on £129m in PFI credits. The procurement process began last year but was stopped when an independent engineers report assured the Councils that the existing facility (a landmark on the Virgin train line to Euston) could be operated until 2040 for a quarter of the capex of a new facility. A sensible commercial outcome!

We have just completed the acquisition of a waste company for an overseas client. Our client needs to recycle to provide feedstock for its primary processes. It also feeds waste to an on-site EfW plant to meet some of its power needs and employs anaerobic digestion (a winner in the CSR through Renewable Heat Incentives and continued Feed in Tariffs) to process organic bi-products.

The development of this infrastructure did not require 25 year supply arrangements to underpin the business case (or require Government subsidies), and was based instead on straight forward commercial considerations and sound economics. Incidentally our client processes both commercial and municipal waste and routinely services local authority clients. Our expectation is that the private sector will now make much more of the running on local waste treatment solutions, especially given the recent changes to the regional planning strategies.

I've just returned from a week in India working with our partner firm Singhi Advisers, and I'm positively exhausted by the sheer pace at which the country continues to expand.

Whilst I'm now a regular visitor thanks to our strong dealflow with Singhi, in advance of our engineering M&A conference coming up in October, we took the opportunity to visit a number of the major engineering sector acquirers and learn more about their current plans.

There are several things I've taken away from this trip, including the fact that Indian buyers remain as keen as ever to access technologies and capacity especially within engineering (automotive, aerospace etc) markets in Western Europe and the US. Acquisitions and joint ventures within infrastructure development (especially in power and transportation) are particularly valued, and they are also increasingly interested in working with UK specialists in waste water and waste management.

Given the growth that many of these sub sectors currently display in the domestic Indian market (most at over 20% per annum), I am convinced more than ever that if you are a UK based corporate, you MUST have an Indian strategy. This market has proved its resilience through the global downturn, and I come away from this particular trip with the impression that certainly in the short-term it is only going to get stronger.

There is a deep sense of schadenfreude circulating the social housing contracting market at the moment as a result of Connaught’s rapid collapse in its fortunes. The huge fall in its market cap, lack of free cash, the FSA probe, questions around its accounting policies as well as fast eroding credit worthiness are all contributing to the crisis.

Many in the industry, especially on the social housing services side are very pleased to see their possible withdrawal from this market. Whilst always very good at self promotion, they were regarded as low ballers in an already margin sensitive industry, especially when it came to tendering for maintenance contracts. Their pricing strategy was in most situations to be as aggressive as possible and then control the services they ultimately delivered to ensure profitability. This strategy appears to have eventually caught up with them as their cash conversion rate is well under the industry average.

Whilst it is still early days, it is not unreasonable to expect that the group will be split up into its different constituent parts (such as Compliance) and acquired by trade or the incumbent management teams.

Today (June 2), the Department of Health posted a report on their website which had been commissioned by the previous government and requested through the Freedom of Information act (the report can be found here - (www.dh.gov.uk/en/MediaCentre/Statements/DH_116522).

Drafted by the management consultants McKinsey it provides a blueprint for achieving up to £20 billion in recurring savings in the NHS (England) by 2013/14 budget year.

It passes the weight test! At 124 pages it provides a very thorough review of the different areas of spending within the NHS, from optimising spend within care pathways such as decommissioning non-effective interventions to shifting care into more cost effective settings such as from acute to primary care. The DoH press department wouldn’t be drawn on whether this would form any part of the Coalition government’s austerity strategy, however we suspect that a lot of these measures will be ultimately implemented or at least be part of an overall direction of travel.

Some points are clear:

• more acute care will be delivered by primary care providers
• substantial productivity increases will be sought from primary care providers
• increases in self care measures will be achieved through providing elderly care in the home
• reduced variability in prescribing practices will be sought
• pressure on drugs costs will continue relentlessly

We will be publishing a report on the Healthcare Services sector in June which looks more deeply at the implications for healthcare service providers and the resulting impact on M&A.

Our research shows that the combined revenues of the top 20 waste management firms has grown by around 5% in the last twelve months, which although not stellar demonstrates a solid performance in difficult times. It is not a huge surprise therefore to see that Biffa, whose revenues dropped an estimated 13% in the same period, has finally replaced its chief executive after less than two years in the job.

The departing Andre Horbach has apparently overseen the company’s transformation from “a traditional rubbish collector into an environmental services company focused on recycling and energy from waste”, however the reality has seen them drop from top dog to third place behind Veolia and SITA – surely not why their private equity fund backer (Montagu Private Equity) bought them.

Reports that his departure was amicable are a little disingenuous given that a director of Montagu has stepped in as interim CEO. This would tend to suggest that there has been a wide divergence in the agreed strategy at the time of the buy-out and the subsequent execution. Their performance over two years has been awful - market share has dropped from 19% to 14% and from what we can make out of publicly available information, profits have plummeted as well. They are still heavily indebted and cash management will no doubt remain a top priority.

The outlook for Montagu’s investment is therefore uncertain. As we have seen from the decision by Irish firm NTR plc to take Greenstar off the market after appointing Morgan Stanley to manage its disposal and Carlyle’s effective withdrawal from the Shanks bid, there will probably not be an easy exit in the short term.

The pipeline of unfunded energy from waste (EfW) projects in the sub £100 million capital value range is mounting rapidly in the UK.

These projects are being developed by a range of interested parties from EfW technology companies (such as specialists in anaerobic digestion or gasification), land developers, EPC contractors, smaller energy companies, waste management specialists, food processors and a host of other parties.

It is fascinating to see how different parties are approaching these projects to unlock them, especially in light of much lower current availability of affordable debt funding.

In the case of technology companies, whose interest is principally in selling the technology solution rather than participating in the project vehicle (SPV), often the initial development costs (design, planning, securing supply and offtake agreements, project financing, etc) are being absorbed by the company until the SPV receives funding, at which point they get paid.

These development costs can add up quickly and the success of these businesses depends on the strength of their balance sheets. This is especially important given the protracted development timelines and the need for these companies to work on multi projects simultaneously. Too many of these businesses have insufficient balance sheet strength, a problem which becomes more acute when project guarantees are required as part of an overall EPC contract when the project kicks-off.

Establishing the right capital structure in the business is the cornerstone to being successful in this market. It is clear that the companies that have addressed this early are reaping the benefits.

It cannot have escaped the notice of US corporate development executives that the British companies they bought in August last year would today be 10% cheaper (assuming basic deal terms remained the same) thanks to the steady weakening of sterling over the period (whilst Japanese firms, who have been relatively absent from UK cross-border deals of late, would be 17% cheaper today!)

Exchange rates often rank quite low on the decision criteria used by M&A departments to assess overseas acquisitions, however this is changing, and we have seen a marked increase in interest from both American and Japanese firms looking to buy in the UK.

How long this window will last is difficult to say given the difficulty in forecasting currency movements, especially given the current political uncertainty. There are good reasons though to suspect that sterling will remain weak against the major currencies for at least the next six months. The economy, whilst improving, is doing so only very slowly and the expectations of further quantitative easing from the Bank of England are both likely to hurt the pound.

With no strengthening expected in the short term, we would expect to see a significant increase in inbound M&A across the British economy by overseas firms during 2010.

A couple of months ago we published a review of M&A activity in the UK's engineering sector. One of our starkest conclusions was that, in spite of the rise of China and India, US corporates remain the single most important source of inward investment for companies in the UK engineering sector, a tradition that dates back 60 years or more.

Over the last month we have seen some great examples of US investment in other sectors: in Food & Drink Kraft has finally persuaded Cadburys shareholders to sell, in healthcare one of the world's largest companies UnitedHealth Group Inc acquired Scriptswitch and today in chemicals, it was announced that RPM, an Ohio based business that Catalyst knows well, acquired Universal Sealants, a traditional British family business.

Clearly US corporate appetite for deals has not been diminished by last year's chaos. This is good news for UK shareholders thinking of selling to a US buyer as they are also generally good payers, as deeper analysis of these deals shows, and seasoned transactors.

A couple of weeks ago Adrian Ewer, CEO of John Laing suggested that PFI credits for waste contracts would soon be a thing of the past, especially if the conservative party wins the general election next May. This could have important ramifications for M&A in the sector.

The major waste players have made PFI an important part of their strategies to date, often spending millions on bids to secure the 20 year plus municipal contracts. The resources required for PFI have to some extent been diverted away from M&A during this period. However, with a less active PFI market expected in the future, these resources will become more available for alternative uses and M&A is clearly an attractive alternative to secure growth. At the recent Waste Seminar held by Catalyst and Pinsent Masons and attended by WRG, Cory and Veolia amongst others, we heard that M&A was still very much on the agenda – for a host of additional reasons.

There was consensus amongst the delegates that the industry will disaggregate over the next few years, meaning that the transport and logistics operations will ultimately split from disposal (landfill, resource and energy recovery) activities, a process helped through M&A. There was also an expectation that more foreign players will buy-in to the UK market in order to participate in the reconfiguration of the UK’s waste infrastructure – likely to last at least 10 years. There was also a recognition that a large number of innovative, fast growing independent businesses are emerging, which are either offering highly customer-centric services or creating alternatives to landfill, and are now being ‘tracked’ by the majors.

The message from the majors to those in the audience thinking of selling their businesses in the next couple of years was clear:

• be precise about the short-term ‘return’ for the buyer
• demonstrate that your business is not a ‘one trick pony’, overly exposed to market volatility
• use your gate fee pricing history to demonstrate your strong customer relationships
• prove you can manage recyclate price volatility through your track record
• adopt proven recycling and energy recovery technologies – no one wants technology risk
• don’t expect an unrealistic valuation for your business!

It is not just the UK that is seeing tentative signs of recovery in the M&A market. Three of our international Mergers Alliance partners announced deal completions on the same day in September.

First, our French partners Marceau Finance advised TFN, a leading facility management business with sales of Eur 508 million on the acquisition of VPNM, a subsidiary of Veolia Environement with sales of Eur 341 million. This is both one of France's largest deals of 2009 and the largest in the European FM market in general.

Next our American colleagues Brocair, based in New York, announced the sale of 'The Center for Wound Healing and Hyperbaric Medicine' to a consortium of private equity investors led by Candescent Partners. The Center develops and operates wound care centers and hyperbaric oxygen therapy (HBOT) facilities within hospitals. The business was started in 2005 and facilities were rolled out on the east coast as well as in select Midwest states.

Finally, CH Reynolds Corporate Finance based in Frankfurt advised Brückner Technology Holding on the sale of Kiefel Extrusion, a firm specialising in blown film extrusion and part of the larger Kiefel Group which had sales of c. Eur 120 million in 2008. The buyer was Reifenhäuser GmbH & Co based in Troisdorf. CH Reynolds originally advised Brückner in its acquisition of the Kiefel Group in 2007.

Today housebuilder Persimmon announced its results. Whilst profits were down on the same period in 2008 (no surprise there!) there was much that was positive in their announcement.

If they are a reasonable barometer for the sector, then we can expect to see a significant ramp up in cash generation across the industry for three reasons:

1) the sector has largely destocked and this will help resiliance in sales rates (and pricing) as demand is much more balanced to supply

2) operational restructuring is mostly complete and the benefits are now beginning to flow through to the bottom line

3) financing costs are dropping as free cash has been used to pay down debt levels and interest payments are lower (Persimmon's interest payments of £24.7 million for the six months to June 2009 are 30% lower than the same time last year)

The markets have by and large reacted positively to the news with little movement on the share price today and none of the 50% share price gain since June has been lost. Valuations in the sector finally seem to be on the rise.

This should be positive news for all housebuilders, large and small, public and private!

We have consistently maintained the view that the levels of funding growth received by the NHS in recent years has been unsustainable. The only way to ensure delivery of services with the desire clinical outputs with reduced funding will be to involve the private sector.

According to research from the King's Fund health think tank, NHS funding could be cut be as much 2% each year from 2011 onwards. This funding short fall could mean a gap between UK population's healthcare needs and delivery of up to 31%, according to the report.

Some argue that productivity improvements will help meet this gap, however over the past decade it appears that productivity has actually been falling.

We are already seeing success for private sector services in both the social care, secondary care. However provision of primary care (PC) by the private sector is a lamentable 2% of all spend (some £30 billion). This contrasts markedly with the elderly and physical disability (PD) sector where private sector provision is closer to 70%.

Much greater opportunity in PC for the private sector will emerge in the short term as the NHS is forced to seek better value for money and increased productivity. Some interesting businesses have emerged in the last few years which are challenging conventional GP surgery model and more private companies are competing for APMS contracts to run PC operations.

This is attracting considerable interest from both private equity and M&A from the listed trade players.

After a year in consultation, the Governement has finally published the 'UK Renewable Energy Strategy'.

During this year we have witnessed extreme energy cost volatility due to the sharp movements in oil and gas prices and also seen the Government successfully drive two important Bills through Parliament; the Energy Act 2008 and the Climate Change Act 2008.

This new strategy sets out how renewable energy will be promoted to individuals, communities and businesses in order to achieve the various 2020 targets enacted in those Bills.

In presenting the report, Ed Milliband, energy secretary made the difficult point that “there will be no low-cost, high-carbon energy option for the future”. Analysts estimate that industrial bills could rise by 17% and domestic bills by 8%. This bold statement paves the way, in our opinion, for a much more realistic perspective on the economics of renewable energy investment and should be helpful for both project developers and investors.

What is absolutely clear is that to achieve the targets set out in the report, huge investment will be made in the sector. The Government estimates in their report £100 billion of investment opportunities will be generated and will create half a billion more jobs in the renewable energy sector.

Our Clean Technology report published in May indicates that over £84 billion will be needed to establish an onshore and offshore wind infrastructure. Our expectation is that investment across the sector will exceed the Government's forecasts by some way.

We also outlined where we expected most investment to be channeled over the next decade and the Government's report does not change our views. As the Government points out there are now a range of incentives which they have put (or are putting) in place which will influence how investors select their investments.

Amongst the most important actions coming from the report with regards to financial incentives are:

1) Expansion and extension of the long-term incentive for major renewable electricity developments through the Renewables Obligation

2) Introduction of ‘clean energy cash-back’ for use of renewable heat and small-scale clean electricity generation from new guaranteed payments through Feed-In Tariffs from 2010 and a Renewable Heat Incentive by 2011

3) Amending or replacing the Renewable Transport Fuel Obligation to impose an obligation designed to deliver 10% renewable energy consumed in transport

4) Facilitating up to £4 billion of lending from the European Investment Bank to deal with immediate funding pressures resulting from the global crisis

In May we issued a report into the CleanTech sector which included a detailed look at the funding environment for renewable energy in the UK. One of the observations we made then was that there is a worrying funding gap developing which will limit our ability as a nation to meet the Government's 2020 renewables targets.

In particular we focused on the wind sector highlighting that there was c. £84 billion of investment required to deliver the onshore and offshore programme.

This weeks sharp fall in the Scottish & Southern Energy’s (SSE) share price, one of the UK's key investors in renewable energy has been due to concerns about a potential cash call. Moody’s has put SSE on review for a potential downgrade. The ratings agency has described SSE’s expenditure plans as “ambitious” and recognised its difficult trading conditions.

This is not the only power company to express concerns over the level of funding required for energy asset replacement. RWE, the German energy giant which acquired npower, expects to be investing three times its annual free cash flows to upgrade the UK's infrastructure - replacing coal and gas fired power stations, nuclear and wind generation.

There are three major implications.

1) It is likely that there will be a number of mega M&A deals involving power companies as they try to scale up their businesses and their balance sheets. SSE could easily become a target if it's share price continues to drop.

2) There is a huge opportunity for non traditional investors to particpate in the power infrastructure build out, which could include international private equity and infrastructure funds.

3) The Government will continue to drive fiscal incentives within microgenration, which will attract investors into the sub 5MW generating space.

Persimmon Plc provided a trading update yesterday, which would suggest the bottom of the housebuilding market has been passed. Unit sales are up on this time last year and the company has been able to pay down more debt than envisaged.

Whilst these signs are good there are still some underlying issues, which are causing concern within the industry and within the analyst community. The two principle issues include constrained land supply and a lack of capacity to build at volume. Both these issues we believe could stimulate acquisitions in the sector.

Mike Farley, Persimmon CEO mentioned that they "are finding it difficult to find good land available on the market at attractive prices". This is of course a function of the market and is both a misalignment in vendor's expectations and constrained supply. When the mortgage market returns to some sort of normality there will be significant step-up in demand; only 80,000 units are expected to be built in 2009 compared to a structural demand of 240,000.

This will put pressure on housebuilders to find suitable land immediately avaialble to build, despite holding large land banks they are not normally immediately available for development. One solution is to acquire smaller housebuilders who have good developments under way.

The second issue revolves around construction capacity. The housebuilders of today are very different from two years ago and the availablity of skilled tradesmen will not be easily switched on. The major housebuilders may see the easiest route to achieve the capacity they need by acquiring either exisiting housebuilders or construction firms.

Whilst no one believes we will return to the deal making of the mid 2000's we do expect to see some new M&A in the next 12 months.