SECTOR UPDATE SUMMER 2012

Waste and environmentalsector updateThis summer 2012 update includes:

A review of mergers and acquisitions activity in the waste and environmental sector for the fi rst half of 2012

Our thoughts on the Energy from Waste (EfW) sector

If you would like to discuss the content of this update, or any other sector issues, please contact:

Emma GriceT +44 (0)161 953 6315E emma.grice@uk.gt.com

Source: ZephyrPlease note that for comparison purposes, the deal volume charts above are for waste deals only.Source: ZephyrPlease note that for comparison purposes, the deal volume charts above are for waste deals only.

M&A updateH1 2012

M&A volumes

• Deal volumes for Q1 & Q2 have declined by a third on the precedent number in the fi rst half of 2011 and are consistently lower than the activity within the sector for Q1 & Q2 over the previous four years

• This downturn in activity is infuenced by the drop off in acquisitions made by overseas parties; only 2 of 16 acquisitions in the fi rst half of 2012, a signifi cant decline from 7 of 25 in the corresponding period in 2011

• Deal quality can also be said to be on the decline, with 1/4 of 2012 transactions involving an element of distress

• Companies who were acquired directly out of administration include; Harpers Environmental Services Ltd, Plastic Sorting Limited and Chilton Waste Services Limited

• In addition, there was the purchase of Fountains Environmental Limited (formerly Connaught Environmental Limited) who continued to trade normally but were disposed of by their parent company, Connaught PLC who themselves had previously entered administration at the end of 2010

• The debt markets also remain diffi cult, highlighted by the lack of MBO activity, with no MBO’s being completed in the fi rst half of the year

Signifi cant fall in M&A activity: From record highs in 2011 to record lows in 2012

Fig 1: Deal volumes by quarter 2008 - Q2 2012

2012 (12 deals)2011 (48 deals)2010 (37 deals)2009 (33 deals)2008 (39 deals)

19

10

6

4

11

13

6

3

11

98

9

11

14 14

9 9

7

Q4Q3Q2Q1

Sector trends

• Our sector review continues to highlight the growing importance of the consultancy space. This sub-sector now represents a 1/4 of total deals YTD

• The growing signifi cance of this sub-sector indicates that businesses continue to buy in these capabilities, despite other sub-sectors suffering a downturn in activity

• Within recycling, the market can be further split by types of materials recycled (see Fig 4 and 5). This indicates a continuing shift towards the plastics sub-sector. The two deals transpiring in the fi rst 6 months of 2012 were Regain Polymers Limited acquiring Express Recyling & Plastic Limited as well as Viridis Plastics Limited purchasing Plastic Sorting Limited, out of administration

• We also saw the fi rst deal in the textiles sub-sector since 2010, with the Salvation Army’s acquisition of Kettering Textiles Limited

Recycling 36%

Consultancy 25%

Hazardous and industrial waste 4%

Waste management 16%

Energy from waste 8%

Other environmental services 4%

Compliance and technical 4%

General 22%

Paper 22%

Organic 11%

WEEE 11%

Plastic 22%

Textile 11%

Recycling 50%

Energy efficiency 18%

Consultancy 10%

Hazardous and industrial waste 7%

Waste management 4%

Waste equipment 4%

Medical waste 2%

Energy from waste 2%

Other environmental services 2%

Compliance and technical 2%

General 26%

Paper 23%

Organic 16%

Metal 13%

WEEE 16%

Plastic 3%

Glass 3%

Fig 2: Number of deals by sub-sector Q1-Q2 2012

Fig 4: Number of recycling deals by sub-sector Q1-Q2 2012

Fig 3: Number of deals by sub-sector Q1-Q4 2011

Fig 5: Number of recycling deals by sub-sector Q1-Q4 2011

Energy from Waste (EfW)Sector update

Financing viability of EfW schemes• Substantial start-up capital is typically

required and this can be challenging to obtain, particularly where there is no credit history to support the funding application

• They generally require bespoke project fi nance rather than standard corporate loans but without other assets to secure the debt against or substantial long-term feedstock guarantees, obtaining any funding at all can be extremely diffi cult

• This therefore leads to the requirement for equity funding which is very expensive and hard to come by. This often leaves projects in “limbo” where the cost of third party equity, makes the project unviable. Financial investors have yet to get comfortable (mainly due to lack of successful precedents), that many business plans are actually low risk and deserve a lower cost of capital

Investors in the sector• Predominantly we have seen large

corporates looking to diversify into green technologies that are closely associated with their core businesses and at the other end of the scale, small start-ups backed by private investors who are willing to take technology risk

• The Green Investment Bank (GIB) has confi rmed EfW is one of their chosen investment sectors but the true potential for this funding is yet to be determined

• The banks and fi nancial investors (such as private equity) remain very cautious on the sector

Growth prospects for the sector• The UK Government’s Bioenergy

Strategy gives a clear signal on the role for bioenergy in heat, transport and electricity, which together could contribute around half of the overall 2020 Renewable energy target

• There is however continuing legislative uncertainty due to the recent review of ROCs, FITs and now a further review of RHIs

• Technology is continuing to improve in the sector and not only within incineration. We are for example seeing a lot of interest in anaerobic digestion facilities which in turn is leading to signifi cant effi ciency improvements for operators to benefi t from

• There has also been an emergence of the gasifi cation sub-sector, most notably the recent announcement by Air Products, confi rming their intention to build the World’s largest advanced gasifi cation facility in Teeside

• The demand for energy security also continues to be a signifi cant driver for this sub-sector, with a variety of feedstocks now being utilised by the various technologies

• From an M&A perspective, we forecast that the leaning towards niche/specialist companies will continue going forward with the subcategories of energy from waste and organic waste recycling accounting for the greatest number of transactions, in addition to signifi cant opportunities in energy effi ciency

Pros and cons of the sectorPros• Positive change in attitude towards

the sector combined with a regulatory environment which generally looks to support growth

• Relatively fragmented market, albeit Biffa, SITA, Veolia, Viridor and WRC equate for around 50% of the market

• The opportunity for investment into the sector should continue to grow

Cons• Financing diffi culties for start-up

operations• Continuous “moving of the goal

posts” from the various governmental directives and incentives

• Gaining planning permission for sites in the right locations

Useful EfW websitesEnvironmental Services Associationhttp://www.esauk.org/energy_recovery/

Renewable Energy Associationhttp://www.r-e-a.net/renewable-technologies/energy-from-waste

Confederation of European Waste-to-Energy Plantshttp://www.eswet.eu

WRAPhttp://www.wrap.org.uk/category/subject/energy-waste?page=1

Environment Agencyhttp://www.environment-agency.gov.uk/research/library/position/103220.aspx

DECChttp://www.decc.gov.uk/en/content/cms/meeting_energy/bioenergy/waste/waste.aspx

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At Grant Thornton, we are increasingly being asked to comment on this growing sub-sector. A selection of the key themes derived from our discussions have been provided below: