Crystal ball 2024: the UK waste sector

January 15, 2024
Andrew Clegg

Quercus Head of Waste Management Mark Whelan writes:

At this time of year, it is customary to review the events of the year that has just past and to consider what might unfold over the next 12 months.

In 2023 the UK waste industry has largely seen business as usual in the field of M&A. Despite an uncertain economic backdrop, the sector has continued to prove almost irresistible to investors. What I consider to be a profound restructuring of the sector continues apace with three major buyer groups emerging.

Firstly, traditional consolidators like Biffa, Suez, Beauparc and Reconomy continue to acquire smaller operators to strengthen their geographical or functional presence. They are highly experienced at capitalising on synergies through margin internalisation and operating cost optimisation.  The most recent example of this being Suez’s acquisition of long-established family business F&R Cawley in December 2023.

The second group comprises new entrants looking to consolidate the more fragmented segments of the sector. Notable examples include Sortera focusing on Construction & Demolition waste, with their acquisition of GBN Services which followed on from their acquisition of O’Donovans in 2022, and Augean expanding its hazardous waste and specialist treatment activities through the acquisition of Future Industrial Services.

Finally, perhaps most significantly, the global infrastructure funds. KKR’s £4.2 billion acquisition of Viridor in 2020 provided a blueprint for a range of subsequent deals almost unimaginable at that time. In 2023, these included the takeover of Biffa by Energy Capital Partners and the acquisition of Enva by I Squared Capital. The Enva sale generated a reported 3.5x return for the seller, Exponent Private Equity, and illustrates the potentially highly attractive rewards available.

Looking ahead to 2024, the UK economy is expected to grow modestly and current opinion polls suggest a Labour government for the first time since 2010. Inflation has peaked and interest rates are now expected to fall. Cop 28 reminds us that the environment remains a global priority and the UK will continue to play its part regardless of who takes power. The waste sector plays an important role in meeting the country’s environmental targets and has historically demonstrated remarkable adaptability to successive legislative and regulatory change.

Against this backdrop, it is difficult to imagine what will stop consolidators and new entrants continuing to expand their reach and I predict another busy year for mid-market M&A.

At the heart of these businesses is a need to move quicker than the competition. Securing additional material volumes or specialist processing and treatment capabilities, either to enhance their current service offering or to ensure business readiness for regulatory change such as EPR, Reg 61, a landfill ban or DRS. We are also likely to see further interest in data capture and analytics and businesses with strong ESG credentials as this increasingly moves up the boardroom agenda.

Whilst potential targets abound, the recent review of Veolia’s takeover of Suez by the Competition and Markets Authority (CMA) underscores the importance of careful target selection.  The scale of that deal meant it was always going to come under scrutiny, but the CMA may increasingly intervene as concerns arise about the creation of potentially dominant positions.

Five years ago this article would probably not have mentioned infrastructure funds, but their influence in the UK waste market is now significant and I do not see this changing in the near-term.

This class of investor increasingly views waste management as part of their core infrastructure focus; an essential service where there will always be a requirement from local councils, businesses or individual consumers, underpinned by regulatory and legislative agendas, and recycling targets. They are motivated by the defensive qualities of waste collection/processing and the control of materials, and similarities with other more traditional essential utility type services that they invest in such as water provision/treatment and energy supply.  Moreover, acquisitions can often secure volumes of waste to feed other assets in their portfolios, such as EfW and AD plants.

The robustness of revenues and the predictability of cash flow in many waste businesses makes it easier to fund deals with leverage and this in turn can help support higher valuations, especially for high quality assets.

In 2024, infrastructure investors will continue to move for larger assets which meet their investment criteria, despite a shrinking pool of eligible targets, and I predict further significant developments.

Trends at the top end of the market are likely to filter down into the SME sector through smaller private equity firms as illustrated by Palatine Impact Fund’s recent investment in Roydon Recycling and Highgate Capital’s investment in Hopkinson Waste.

Over the past 30 years, working in the waste sector as principal, investor and adviser, I have often been well served by the words of the late US consultant Peter Drucker who said, ‘The best way to predict the future is to create it’. A considerable number of hungry investors are apparently thinking the same way and whilst predicting the future is not without its risks, it seems certain to me that 2024 promises to be another transformational year for the UK waste sector.

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