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Opinion: Mark Wilson
Waste sector M&A - picking up the pace
There has been an uptick in deal making in the waste industry over the last few weeks, which we expect to continue over the coming months.
After a period of absence from M&A, Biffa made headlines by acquiring Shanks' solid waste business in the UK. Biffa was able to cherry pick the facilities it wanted and has paid £8 million in cash and £1.5 million in working capital (above the normalised level), which Shanks will receive as it unwinds. It was a split exchange with completion expected at the end of December. For the £8 million in cash, Biffa has received £3.9 million in assets and £47 million in sales and a more-or-less breakeven business. Clearly there will be significant synergies with Biffa’s existing C&I business, so this looks like sensible business for both Biffa and Shanks.
Shanks will no doubt be aware that the diversified Dutch waste management business Attero, owned by six provinces and other municipalities, has been up for sale since May and is thought to be close to completing a deal. In addition to its landfill and incineration business, Attero is also the leading organic waste processor in the Netherlands with a 45% market share (570ktpa), with Indaver (175ktpa) and Shanks (130ktpa) some way behind. Given Shanks' focus on organics in the Benelux, it will be interesting to see if it can carve out this part of the business from the holding company – this surely must be the deal to do after disposing of the solid waste operation.
Again overseas, it was announced that Bill Gates has invested in the Spanish firm FCC, becoming one of the single largest shareholders with around a 6% holding. Whilst the headlines spun this as a bet on Spain, FCC has been pretty active in diversifying geographically and building its environmental services business, which processed nine million tonnes of waste last year and delivered around 75% of group EBITDA. FCC Environmental will benefit from this investment, especially as it will assist FCC refinance €5 billion of bank debt that starts to mature next year.
Back in the UK, the shareholders of Infinis have decided to go down the IPO route and have issued a prospectus and a price range (available via this link). Based on the offer range, the company will have an enterprise value of between £1.35 billion and £1.5 billion which would make a valuation of 12x EBITDA at the upper end. The company will be admitted to the LSE on 20 November so we will be able to gauge wider investor appetite for the sector shortly.
Finally, this has been an important week for Catalyst as we completed the sale of Inutec, a leading provider of analytical, technical development, radioactive waste processing and disposal services for Low Level and Intermediate Level Waste. Inutec operates on a nuclear licensed site and has wide authorisations which give it a rare capability in the UK radioactive waste market.
UK energy - political battleground
In July 2009, when Ed Miliband was Secretary of State for Energy and Climate Change in the last government, he declared that there was no “low-cost energy future out there” and made the point that even in a high-carbon environment, the future is going to be high-cost due to global demand dynamics. He said this on the launch of the UK Low Carbon Transition Plan White Paper, which was one of a number of constructive papers he launched to support sustainability. Clearly recent comments ignore these sentiments and he has now firmly established energy (prices) as a policy battleground in the run up to the 2015 election.
In the meantime, SSE has hiked prices and partially blamed this on government imposed programmes such as Green Deal and ECO. David Cameron has responded and defended green subsidies on energy bills as necessary to fund nuclear, renewable power and energy efficiency initiatives. I hope I am not alone in being slightly unnerved however when he uttered the words “green levies to subsidise renewables will not be on bills for a moment longer than is necessary".
There are a lot of small, medium and large businesses in the UK that now depend on renewable incentives programmes (such as the NFFO, ROC, FIT and RHI regimes) and energy efficiency programmes such as ECO so we expect this lobby to fight back.
Uncertainty around the future of these programmes does introduce new levels of economic risk and could be a dampener on investment levels. SSE has stated that they will not take any final decision on offshore wind projects before the next election, although they say they are continuing to develop them.
Investment is however continuing, as demonstrated this week when Connection Capital, the vehicle for high net worth investors, invested £4.1 million in Earthmill, which is the largest 50-250kW wind turbine supplier and installer in the UK. This is a great growth story of a business underpinned by the renewables incentives regime. Expect more of this when the RHI changes feed through.
E.ON switches on Matrix acquisition
Germany utility giant E.ON has acquired Matrix, one of the leading providers of energy management and efficiency services in the UK.
Over the last three years, revenues at Matrix (or Green Sky Energy) have doubled to £54 million for 2012 with an EBITDA level of £7.5 million. With the deal value rumoured to be between £85 million and £100 million, and therefore a multiple range of between 11x and 13x EBITDA, all the exiting investors did rather well out of this transaction. This deal represented an exit for private equity fund LDC, who invested around £10 million in 2010, and more than 30 employee and management shareholders who have shared in the exit.
There are a number of factors which explain such a high exit multiple:
operating in a fast-growing market – DECC estimates the UK could save 196TWh by 2020, equivalent to 22 power stations and around 11% lower than the ‘business as usual’ baseline
compelling business model – a track record of delivering energy savings of up to 40% for clients
blue-chip retail, telecoms and finance sector clients
technical capacity – able to identify optimization opportunities through data-analytics
customer lock in – connection to client BMS to optimize energy use by heating, cooling or lighting systems
scale and global operations – nine regional offices, 31,000 data connections to customer sites in 22 countries
financial performance – EBITDA doubled last year (14% margin)
The other key factor was clearly the appetite of the buyer E.ON, which has made it clear that it wishes to deepen its energy efficiency offering. As they said following the deal, “deep data-led building energy expertise with our capital-led energy efficiency and on-site generation capabilities will allow us to provide our customers in the UK and continental Europe much greater control of their energy cost”.
The pressure is on the energy companies to diversify their businesses into energy efficiency and renewable solutions. This is just one example of several deals in the pipeline.
Infinis - strategic in the UK's renewables sector
After a number of false starts, it became official this month that Terra Firma is looking to exit its investment in Infinis plc, one of the UK’s larger renewable energy businesses with around 614MW of installed capacity. This follows the recent £350 million refinancing exercise completed early in 2013. Terra Firma has hired a squad of advisors to achieve a sale, including Deutsche Bank and Barclays. Information memorandums have been sent to potential buyers and first-round offers are expected by the middle of September.
With a price tag of £1.5 billion, Terra Firma’s expectations are pretty ambitious given that at this level it will cost a buyer £2.4 million per MW, or 14.8x historic EBITDA (YE 31 March 2013) – listed businesses in the power sector average 7x only. There is no doubt that Infinis is an important renewable energy producer, but does the company deserve such a valuation premium?
The facts are quite compelling. Infinis is a leader in the landfill gas-to-electricity market, with 121 landfill gas sites (330MW) exporting approximately 2,002 GWh of electricity to the grid, or circa 5.7% of the UK’s renewable electricity generation. The company has diversified well, generating power from 15 onshore wind farms (267 MW) and 10 hydro sites (17MW). It has maintained high operating margins (EBITDA margin 58% on sales of £174 million last year) through their favourable (royalty-free) gas supply contracts with FCC Environment (previously WRG), and relatively low capex requirements means great cash generation.
In an uncertain world where forecasting future revenues and profits is extremely difficult, Infinis has good mid-term visibility on operating profit by selling electricity either under the NFFO regime on long-term contracts at RPI-linked prices or under the RO regime. Bidders will be asked to make offers based on future profits rather than historic and these grew at circa 9% last year. Furthermore, power producers operating in the UK are under strict renewables targets and acquiring Infinis would support their migration process.
This is a strategic asset so competition should be high, as will the price.
Funds galore at the Green Investment Bank
This week the Green Investment Bank (GIB) published its first annual report and its top executives are hosting reviews in London and Edinburgh. Hot on the heels of CEO Shaun Kingsbury announcing plans to spend up to £900 million on UK cleantech projects in the next year to March 2014, the Government is giving the bank another £800 million (announced in yesterday’s Spending Review) to focus on projects such as waste processing and offshore wind.
The GIB has had a busy five months of full operation:
- 11 investments (2.5 Mt CO2 reduced)
- £635 million invested and matched by £1.6 billion of private sector funding
- 74 employees in two offices
It is now looking to deploy the majority of its capital in four priority sectors: offshore wind, non-domestic energy efficiency, waste-to-recycling and waste-to-energy projects. Investing through both debt and equity instruments, the GIB will seek single-digit returns for ungeared equity and 10% for geared equity. It sees this as market rates and whilst private equity may see this somewhat differently, this should not be considered cheap money as GIB will follow market terms. Interestingly, the GIB is also considering direct equity investments to acquire minority stakes in target companies alongside UK and foreign private investors, although not in M&A situations per se.
There is no doubt that the GIB is making a big contribution to the funding landscape of waste, renewables and cleantech, and we hope to see it continue to support the mid-market in particular.
Energy-from-waste business acquired by Hong Kong investor
Whilst the UK’s top waste management companies pursue ambitious construction plans for their own energy-from-waste (EfW) plants, the leading Dutch waste business Van Gansewinkel has just announced that it has 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. This is interesting on a few levels.
First, Van Gansewinkel, which is backed by sponsors CVC and KKR, has been under financial pressure due to lower collection volumes and recyclate prices, particularly in the C&I sector – a common theme round Europe. It announced that it would go through a restructuring process in 2012 and was investigating a range of strategic possibilities – also a common theme. This disposal is the positive culmination of this process and will significantly strengthen their balance sheet given the consideration of €944 million (c. 8.8x EBITDAE).
Operationally though, it possibly signals an interesting development in the separation of collection and recycling operations from energy recovery. The cost effective disposal of residual waste is a strategic issue for most waste businesses and many see that controlling their own EfW plants (as Cory, Grundon, Viridor, SITA etc. do) provides both a solution to costly landfill and an important profit stream. AVR processed c 1.8m tonnes per annum and had a turnover of €256 million in 2012 with an EBITDAE of €108 million. This may encourage other waste players to review their organisational structures.
Finally, this is an interesting transaction almost more because of the parties that did not buy AVR than ultimately did. It is clearly a reflection of the state of the industry’s finances in Europe that no European party felt it strategically important enough to acquire this asset. Hong Kong billionaire Li Ka-shing, who is Asia’s richest man and the man behind the consortium, has clearly set his sights on the waste industry following success in water and power assets. Kam Hing-lam, Cheung Kong Infrastructure's group managing director has stated that “CKI is making good inroads in the area of waste management. With waste treatment being an imminent issue in most places around the world, we see good growth potential in this business.”
The transaction is, of course, subject to the customary requirements, including European Union Merger Regulation approval, but is expected to complete in Q3 this year.
I suspect that this will not be the last we hear of CKI.
Covanta - energy being wasted in the UK
It has been common knowledge for a while that Covanta’s efforts in the UK have not delivered the results expected by their parent company, and they are now withdrawing from the UK. Despite offering a one-stop-shop energy from waste solution, they have not replicated the great track record achieved in the US (where they operate 40 EfW plants), failing to get a single EfW project built since they first entered the British market in 2005.
Covanta’s loss to SITA UK of the £1.2 billion 30-year Merseyside Recycling and Waste Authority contract was apparantly the final straw. The business lost £10 million in 2011 and, whilst the accounts are not publically available yet for 2012, the losses are expected to have widened. This reflects the failure of the business to get projects such as Brig-Y-Cwm and Middlewich through planning and slow progress in moving to consent and construction on other projects.
They are now looking for a buyer for the assets they hold, which include sites at Rookery in Bedfordshire (585ktpa), Green Hills in Scotland (300ktpa) and Ince in Cheshire (850ktpa), as well as some waste contracts. This presents a great opportunity for independent waste companies as well as the top five players. It will be an interesting discussion on valuation, an area where, unsurprisingly, we have strong views.
Green Investment Bank - not wasting time
Since its launch at the back end of last year, the Green Investment Bank (GIB) has made a number of investments targeted at a range of ‘green’ projects and companies which includes the waste sector. At our Waste Breakfast in London this week we were joined by Foresight and Greensphere Capital who are mandated by GIB to deploy their capital in smaller waste projects.
The principle objective of GIB is to support the waste industry bridge the gap in waste treatment capacity in order to meet the EU Landfill diversion targets. There is currently a capacity gap of around 13 million tonnes per annum which needs to be built in the next few years. The big players, Veolia, SITA and Viridor, have plans to build a large amount of this capacity mainly through energy from waste (EfW) plants using incineration or advanced thermal technologies, however a gap will still remain which GIB is mandated to support filling – at least in part.
Whilst the big players are building capacity to treat large volumes (SITA will create a 400,000 tpa Energy Recovery Centre in Severnside) waste treatment is largely a local issue and many treatment facilities, especially of organic waste, will process under 50,000 tpa. We have seen funds from GIB committed to two projects so far: The TEG Group’s anaerobic digestion (AD) and in-vessel composting (IVC) facility in Dagenham costing £21 million and the first of its type in London and Greenlight AD Power (£16 million) which is a platform for a roll out of AD plants across the UK. Foresight and Greensphere managed these investments respectively, which included match funding from their own private equity funds.
GIB is having an immediate impact on the waste industry and can only help in sending out signals to the wider institutional funding market about the attractiveness of waste investments.
PE+EfW, AD, MBT, MRF etc - the easily understandable world of Waste M&A!
As the year draws to a close it is worth noting that 2012 has seen more private equity funding come into the waste industry than for a number of years. Yesterday E.ON agreed to form a JV with EQT, the Swedish PE group through its Infrastructure II fund. The JV will acquire 100% of the equity of E.ON Energy from Waste, a business that E.ON has been trying to exit for some time. Rumoured to be valued at c. Eur 1 billion, the transaction is subject to antitrust approval and completion will occur in 2013.
In November new private equity funders (e.g. Babson Capital etc) invested in Biffa and four of its lenders agreed to swap debt for equity, writing off half the £1.1 billion of outstanding debt. Biffa's restructuring predicament had been a dark cloud over the UK industry. According to Ian Wakelin, Biffa's new balance sheet will allow it to start investing again.
In the autumn TEG received funding from Foresight amongst others to build out it's organic waste treatment plant in Dagenham and Iona Capital has invested in a number AD facilities across the UK. Greensphere Capital, chaired by Jon Moulton, invested £16m in Greenlight AD Power in November.
With support from the Green Investment bank expected to gather pace in 2013 and more traditional mid market PE funds showing renewed interest in the sector we expect investment levels to grow again next year.
Closed Loop Economy - why it matters
We have seen a significant ramp up in commentary about the Closed Loop Economy this year, ranging from headline topic at the CIWM conference in June to Ellen Macarthur’s work with McKinsey & Co on the circular economy (www.ellenmacarthurfoundation.org/circular-economy/circular-economy). WRAP even has its own Director of Closed Loop Economy!
The principles are pretty straightforward, moving away from a linear process of resource extraction, use and then disposal to a system where resources remain in use almost indefinitely. Some industries are very good at recovering resources in perpetuity, such as aluminium. The story is very different for ‘rare earth’ materials, with the world’s industry consuming around 140,000 tonnes annually but recovering a fraction of this amount.
The implementation of closed loop principles are challenging. Whilst recycling is now well established in the UK, there are still 28 million tonnes of waste that go to landfill each year. Couple this to the fact that senior executives of manufacturing firms across the UK are grappling with the twin issues of securing raw materials at the right price and quality and the ‘end of life’ responsibility they have as producers, this should be creating great opportunities in both material recovery and secondary reprocessing. Multinationals are beginning to lead the charge!
Coca Cola has just announced an investment of £6m in a joint venture with French PET recycler APPE, which follows on from the earlier investment in a £15m recycling facility with ECO Plastics in the UK. They have targeted including 25% recycled plastic in all plastic packaging by 2012.
The paper packaging industry has also invested across its supply chain with both SAICA and DS Smith establishing operations that integrate paper recovery with paper making and packaging plants. SAICA’s investment in the UK will ensure over 600,000 tonnes of recovered cardboard remains in the UK rather than goes to China.
This week IKEA has pledged to help UK councils recycle kitchens and larger furniture and also committed to recycle 90% of all their waste before 2015. Clearly a significant investment is being made to achieve this.
Given global raw material price volatility and long term demand growth, we see this as an important investment area for years to come – with or without the more altruistic justifications!
Anaerobic digestion - coming of age
A year or so ago we advised a well known private equity fund on its investment in the buy-out of an anaerobic digestion operator, which was based on an ambitious plant roll out programme. Unfortunately due to constraints in the (debt) funding market at the time and some onerous asset reversion clauses in the waste supply agreements with local authorities, the deal fell through.
During our work we spoke with many different interested parties; banks, technology providers, technical due diligence providers, commercial analysts, legal specialists, political lobbyists and got to understand the AD market in depth. Our assessment at the time was that whilst AD was going to be important to the UK’s waste infrastructure, progress was going to be slow. We continued to remain involved in the sector and it is pleasing to see that over the past few months there has been a clear quickening of activity.
TEG will become London’s first anaerobic digestion plant after announcing an investment of £21m in Dagenham to process 50,000 tonnes per annum. Investors include the waste infrastructure development fund ‘London Green Fund’ (£9m) managed by the Foresight Group, UK Waste Resources and Energy Investments Fund (£2m - UK government), Quercus Assets Selection has provided £2m and the remaining £8m of senior debt will be provided by Investec and London Waste and Recycling Board.
Earlier this month SITA also announced that Warwickshire County Council had cleared plans for its 50ktpa site at Packington near Meridan, which will probably take local commercial organic waste and municipal green waste from where I live in Solihull. Whilst there are some operators which have built super sized plants (e.g. Biffa’s 120ktpa plant in Cannock) it seems the preferred size is around 50ktpa ranging in cost between £8m and £20m.
Chinese buying aviation assets
Earlier this month we published a report on the Global Aerospace sector which highlighted the importance of the Asian market to the growth of the industry. One of our observations was on how Chinese companies are buying up general aviation assets around the world, especially in the US.
We learnt this week that Superior Aviation Beijing has offered $1.8bn to buy bankrupt US aircraft maker Hawker Beechcraft, which is known for its performance jets as well as business turbo-prop and piston aircraft. Superior is owned by the Chinese industrialist Shenzong Cheng, known as the 'Helicopter King of China' and his wife, Qin Wang as well as the Beijing municipal government.
It is not a straightforward transaction as HB’s defence business would no doubt have to be carved out and sensitive advanced technology may be held back. However, if successful this would mark a step up in terms of outlay for a Chinese acquirer – Aviation Industry Corporation of China (AVIC) acquisition of Cirrus, the iconic GA aircraft manufacturer cost c. $200m – and underlines the single-mindedness Chinese companies have when they see an opportunity to service their domestic market. China is after all the world's second-biggest private jet market after the US.
If the deal doesn’t go through it is understood that other BRIC competitors - Brazil's Embraer and India's Mahindra & Mahindra - are waiting in the wings!
Waste industry reshuffle?
Next month the Chartered Institution of Wastes Management (CIWM) publishes the waste industry Top 20, which I am pleased to say we have produced for them again - our fifth since 2008. The article covers the major developments in the industry over the past 12 months.
there are two striking things about this year’s edition; the industry is on the verge of a major reshuffle and Spanish firms now control an increasing amount of the UK market.
There are currently a number of industry shaping M&A deals in the pipeline. The owners of Biffa, Montagu Private Equity and Global Infrastructure Partners appointed Goldman Sachs to review its strategic options, and it is common knowledge that Biffa is currently being marketed to prospective buyers. Veolia, Suez and Pennon are all rumoured to be interested in carving up the business. Whilst Veolia has announced a long term commitment to UK waste market, this week chairman Antoine Frérot confirmed that they were looking to sell their solid waste business in the United States and had received several non-binding offers with plans to select a buyer by the summer. We know it is looking to dispose of water and transport assets in the UK and it is unclear if this will extend to any part of the waste business. SCA Recycling is being acquired by DS Smith plc (due to complete this summer), which will further consolidate the paper recycling industry. Furthermore AmeyCespa (Ferrovial) is rumoured to be about to buy Enterprise plc, the 3i backed business. Major changes to the structure of the industry if they all take place.
There is also a notable Spanish tone running through recent M&A activity, which we expect to continue for the next few years especially given the difficulties in the Spanish economy. In the paper recycling sector, Zaragoza-headquartered SAICA has now completed four acquisitions across the UK to secure recovered paper for its mill in Partington. Tradebe, the hazardous waste specialist, acquired Solvent Resource and will continue to look for bolt-on opportunities. Ferrovial as mentioned above is keen to acquire Enterprise and we expect Urbaser, owned by Madrid-headquartered ACS, to continue rapidly building its municipal waste business following the recent contract successes in Essex and Gloucestershire. WRG has rebranded itself FCC Environment (extinguishing a long standing British marque) and Cory remains owned by Spanish financial backers.
For what was once a very domestic industry, in less than a decade we have seen it rapidly internationalise. We expect this to continue!
A major coup for the waste sector
Last week Vince Cable announced that the Green Investment Bank (GIB) will make its first investments in small scale waste infrastructure. £80m of investment will be 'match funded' (adding a further £80m) in a range of opportunities including recycling and reprocessing facilities, pre-treatment projects and energy-from-waste plants.
A coup for the sector with the potential to have a very positive impact and unlock a backlog of projects.
The government has appointed fund managers Foresight Group (£50m) and Greensphere Capital (£30m) to administer the funds. Foresight has significant experience in the sector with investments in Closed Loop Recycling and Vertal amongst others. Greensphere on the other hand has no track record having been set up within the last year. It does however have seasoned investor Jon Moulton as chairman.
The government signalled that £15m would be the maximum single investment and indicated that the funds are likely to back small to medium-sized projects rather than large-scale EfW.
I am currently in the process of understanding the specific investment criteria but even without the detail i am quite optimistic that this will help a number of our clients in the sector.
Brazil adds power to Aggreko
Aggreko plc announced this week that it is to spend £140 million to acquire a key rival, Poit Energia, based in Sao Paulo. Poit will add to Aggreko’s fleet of generators in advance of the 2012 World Cup and the 2016 Games and boost its revenues in the region by c.£60 million.
The specialist energy services business, which provides temporary power across 100 countries, has a strong track record in providing power at major sporting events – it is the exclusive supplier of temporary power to London in 2012 and was in Beijing and South Africa for the world cup.
This deal however is not just driven by access to two global sporting events. Global power consumption is growing in non-OECD countries (and Brazil is one of them) at three times the level (or 6.2% CAGR) of OECD countries such as the UK and the US. It is clear that Aggreko is targeting long term growth in a country who’s power infrastructure will struggle to keep up with demand of its consumers and industries.
Aggreko paid c.9x Poit’s operating profits, which reflects the strength of Poit Energia’s position in the market and their long standing client relationships with Petrobras and Votorantim to name a few. Investors in Aggreko took the news very positively and continued to boost the company’s share price, which has now increased 13% since the beginning of the year.
Aggreko set the bar high in terms of ROCE (28% in 2011); we expect that this will help them push it higher!
Brazil's economy leapfrogs the UK
Official information released this week showed that the Brazilian economy is now worth £1.6 trillion, leapfrogging the UK into sixth position globally and set to catch France and Germany as growth continues above 2.7% annually.
This alone should be ample reason for British management teams to make sure that they include Brazil in their plans when considering overseas growth strategies.
It is fair to say that many listed FTSE 100 companies have had Brazil in their sights for several years now, however our experience suggests that this is often rather opportunistic especially when approaching JVs and acquisitions. An additional observation is that transactions often fall over when traditional diligence processes uncover ‘value’ issues too late in the deal process, which lead to irreconcilable differences between vendors and buyers. Success seems to come from being utterly focused, getting good local advice and engaging early in the difficult conversations.
And there have been clear success stories! IMI plc, the Birmingham based international engineering group, acquired Grupo InterAtiva in February for an initial cash consideration of £22m plus a deferred consideration up to £21m. InterAtiva is a private business based 100km from Sao Paulo which designs, assembles and distributes isolation valves to various end markets including oil and gas. Underlying EBITDA of £3m in 2011 suggested ‘day one’ acquisition multiple of around 7x EBITDA. IMI want to benefit from global investment in the petrochemical industry and have been compelled therefore to acquire businesses in faster growing markets such as Brazil. All the better if they are very established (InterAtiva is 19 years old) and have deep relationships with key customers, such as the omnipresent Petrobras amongst others.
The time has come for the rest of British industry to seize this Brazilian opportunity, so make sure Brazil reaches the top of your to-do lists as you prepare next year’s budget!
Major consolidation in the European packaging sector
Anyone involved in the packaging sector must have raised an eyebrow when they heard DS Smith had acquired SCA Packaging, a key competitor in the global packaging sector headquartered in Belgium. After a short period of disposing of non-core businesses, DS Smith under the direction of CEO Myles Roberts has firmly fixed on acquisitive growth especially in the industrial heartland of Europe.
By acquiring one of its major rivals in a £1.4 billion deal (SCA employs 13,500 people at 172 sites in 25 countries) DS Smith has made a significant move to become a leading supplier of recycled corrugated paper and plastic packaging for consumers.
The deal does not look cheap however at c. 13x operating profit and is being funded through a rights issue (£466m) and loans (£700m), arranged by HSBC, JP Morgan, Lloyds and RBS and expected to be immediately syndicated on completion.
Unlike some of its other major competitors such as Smurfit Kappa, DS Smith has maintained a relatively low level of gearing, which has given it capacity to do a deal this size.
Half of international trade buyers in 2011 were North American
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.
As the lights go out for UK solar, opportunities emerge elsewhere
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.
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!
No (Waste)ing time....!
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.
Return of the serial acquirer to the UK waste industry
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.
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.
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.
UK's solar PV roll out now has proper balance sheet backing
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...
Localism and the 'zero waste' economy
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.
Waste infrastructure ownership opening up - really?
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!
The CSR tackles waste
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.
Why Indian growth matters to UK plc
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.
Industry welcomes demise of price fighter!
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.
Blueprint for the NHS austerity programme?
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.
Is Biffa wasting away?
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.
Unlocking energy from waste projects
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.
Acquirers will take advantage of weakness in sterling
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.
Special relationship - you bet!
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.
Will an end to PFI boost M&A in the waste sector?
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!
M&A activity rebounds on both sides of the Atlantic
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.
Next phase - cash generation
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!
NHS funding slowdown must drive outsourcing to private sector
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.
Government's renewables strategy presents path to 2020
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
Funding gap widens for UK's renewables programme
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.
Tentative signs of recovery in the housebuilding sector could stimulate M&A
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.