Where There’s Muck, Is There Still Brass?

LONDON (Reuters) – The planned sale of a big Dutch waste manager will test how much appetite remains for the unglamorous but dependable business of garbage treatment, which enjoyed its own mini-boom during the credit bubble.

Essent Waste, a unit of Dutch utility Essent, is likely to draw interest from private equity, infrastructure funds, and bigger rivals, bankers and analysts say.

But tough debt markets and a fall-off in energy and commodity prices are likely to limit the sale value.

“Essent Waste could be a bit of a barometer for the whole infrastructure market — to see where funding’s moved to after the turmoil of last Autumn, where multiples have fallen to, and who’s interested,” said Mark Wilson, a partner at British merger adviser Catalyst Corporate Finance.

The sale could interest all of the big players in UK waste management, Wilson said, including Shanks (SKS.L), Veolia Environnement (VIE.PA), Suez Environnement (SEVI.PA), and Biffa, which was bought last year by a consortium led by Montagu Private Equity and Global Infrastructure Partners.

Although the sale has not formally begun, prospective bidders got detailed due diligence before Christmas, and Essent Waste has already attracted interest from about eight serious bidders, banking sources told Reuters Loan Pricing Corp.(RLPC).

Essent hopes to fetch more than 1 billion euros ($1.36 billion) from the sale of the unit, or more than 6.7 times its earnings before interest, tax, depreciation and amortization (EBITDA) of about 150 million, the sources said.

Essent — which is also separately selling its commercial production and delivery business — declined to comment.

TOUGHER LAWS

Essent Waste processes about 3 million tonnes of waste a year, burning some for electricity, composting other waste and managing landfills.

Waste management’s appeal lies in the fact that unlike water and power companies, regulators generally do not cap the returns made by the businesses that collect, bury, burn or recycle Europe’s rubbish.

And although they are not immune to a weakening economy, since commercial waste volumes tend to drop, waste firms also benefit from tougher environmental laws, said analyst Richard Rae at RBS.

“Waste is becoming more and more valuable because of the regulation that surrounds it, forcing more and more waste to be recycled,” he said.

When debt was cheap, all this helped companies sell for “absolutely huge” prices, Rae said, often 10 to 12 times EBITDA.

“QUITE PLAUSIBLE”

In 2007 there were 132 deals in Europe’s wider water and waste management sector, for a total of more than $33 billion, according to Thomson Reuters data.

But Rae said a multiple of 6 to 8 times EBITDA “sounds quite plausible in today’s credit-constrained market,” — implying a value for Essent Waste of about 900 million to 1.2 billion euros.

And Wilson at Catalyst said some deals in Britain were now being struck at just four times EBITDA, with firms hit by a drop in the value of the materials they recycle.

Despite this, and tougher debt markets, private equity funds are still likely to take an interest, bankers and analysts say.

In particular, CVC and Kohlberg Kravis Roberts are big players in the sector, having together already bought and combined two big Dutch waste firms, AVR and Van Gansewinkel.

“The general feeling is it’s AVR’s to lose,” said a senior M&A banker in London who advises private equity funds. KKR declined to comment, while a spokeswoman for CVC was not immediately available to comment.

Still others have been able to realize profitable exits over the last couple of years — such as Terra Firma, which sold the waste disposal division of Waste Recycling Group to Spain’s FCC (FCC.MC) for an enterprise value of 1.4 billion pounds ($2.09 billion) in 2006.

“A lot of sponsors will look at it because a lot of people made a lot of money in waste,” the senior banker added.

Credit Suisse and ING are advising on the sale.

By Quentin Webb
(additional reporting by Tessa Walsh of RLPC and Catherine Hornby in Amsterdam; Editing by Richard Hubbard)