Waste management will quite literally become a burning issue in the UK over the next few years, writes Andrew MacLeod

As landfill falls out of fashion, and even outside of EU law, incineration will be one of the alternative technologies that must be embraced to deal with the nation’s ever-growing trash pile.

And this, say the experts, is likely to trigger a rash of acquisitions by the sector’s giants, who may have been wrong-footed by Europe’s future ban on tipping, and will begin casting around for high-tech alternatives to the bag-it-and-dump-it solution.

Better mousetraps are being invented all the time – low-emission incinerators, anaerobic digesters, and autoclaves sterilisers – massively up-sized versions of the familiar hospital steam cleaners among them.

Soon, deep-pocketed conglomerates will be beating a path to the doors of the ‘techie’ entrepreneurs who may hold the key to the secret of waste disposal post-2020, the deadline by which the EU demands a significant reduction in landfill.

Consolidation

The sector has already reacted in the conventional way to the bad news, getting into an M&A flap that is forecast to see the industry contract by 20 per cent in the next three years, according to the accountancy firm Grant Thornton.

This will entail the disappearance of around 200 firms – and a fair proportion of these will succumb to the M&A process. The activity has already started, according to figures from Catalyst Corporate Finance, which reports that the UK waste management industry saw a 35 per cent increase in transactions in the first quarter of the year, compared to the same period in 2007.

Catalyst says there were 11 M&A deals completed in the period, with a further six development capital investments, involving a range of recycling and treatment businesses. By far the biggest of these was the £1.2 billion take-private of Biffa by Montagu Private Equity and Global Infrastructure Partners.

Biffa, SITA, and one or two other giants dominate the top end of the sector, but by no means tell the whole story. Beneath them are sizeable regional companies, which could be ripe for acquisition, and under them is the plethora of small companies – right down to one-man-and-a-van operations on which the whole pyramid is balanced.

New order

Nick Eva, a consultant with WasteRecruit, a specialist recruitment firm supplying manpower to the sector, sees the way the business has changed in response to the EU ruling, but believes its fragmented nature means there will always be a fresh crop of smaller companies coming through at local level.

That, and the willingness of venture capitalists to risk their money in the sector indicates that it is far from stagnant, although he concedes that by its nature it will never be busy, because the industry is not subject to peaks and troughs.

It could be argued that, no matter how few operators there are, the bottom line is that the time-honoured process that has made a millionaire of anyone who owns a large enough hole in the ground, is on the way out.

Technology holds the key to the future, says Julie Gillespie, a director in Deloitte’s government and infrastructure team. She notes that M&A activity in the past two or three years has been rife, but reports a slowdown in recent times. She also detects a vibe that the industry is racing to come to terms with the new order.

“There has been a huge change in the waste management business, because up until two or three years ago almost everything went to landfill,” says Gillespie, who points out that the owner of the biggest landfill site is no longer king of the heap.

Bright Spark

Its time for the newcomers to step up to the plate, and incineration is the obvious favourite as it leaves no residue, other than ash, which is relatively easy to dispose of.

However, despite assurances that it is now a clean technology, the image of the filthy smokestack casts a long shadow.

Incineration provokes virulent “Nimbyism” – not just among residents, but also between local authorities, who would all happily use a neighbouring council’s facility to dispose of their own rubbish, but would rather not have the furnace inside their own boundaries.

Other solutions, such as anaerobic digesters, are known to work on a small scale, but are unproven at high-volume levels, says Gillespie.

Meanwhile envious eyes are watching the UK from across the water – including the USA where there are those who would like to see the super autoclaves that they have developed given their day in the sun. Once again, says Gillespie, we are talking of a relatively untried and unfamiliar technology.

Since it is cheaper for big business to buy its way into the technological world, she foresees a time, not too distant, where the acquisition of promising new processes, developed by enterprising techies, begins to gather pace.

“I would say that, having been through a period where companies that do pretty much the same thing have consolidated their activities, we are entering a period where the pattern will change because of technology,” Gillespie predicts.

“At the moment, however, everything is up in the air because no-one really knows which of the technologies will work.

“Once one of them emerges as being dominant, I am sure it will find a market.”

DONE DEALS

The acquisition of Biffa by a consortium led by Montagu Private Equity and Global Infrastructure Partners, advised by Linklaters along with Uberior Co-Investments, was by far the biggest deal the waste management sector has seen for some time, but there have been a number of others.

The first quarter of 2008 witnessed 11 transactions, and according to Mark Wilson of Catalyst Corporate Finance, metal recycling businesses were the main targets.

The first quarter of the year saw three acquisitions of scrap metal companies, and among the hungriest acquirers was the Irish firm One51, which swallowed up two scrap businesses as part of its strategy to build a UK-wide concern. Other deals are believed to be in the pipeline.

Royal Bank of Scotland and Venture Finance backed the management buy-out of R&M Metal Powders.

Wilson says trade and financial buyers are expected to remain active in the sector because of the strength of commodity prices. At the same time, a number of private equity investors – he cites Barclays Private Equity, which has been in Metal & Waste Recycling since February 2006 – may be looking for an exit.

Meanwhile, Sims Group and Pennon Group both bought businesses involved in the recycling and disposal of electrical equipment.

Wilson notes: “We are not surprised by the upturn in activity. High commodity prices are obviously sustaining interested in the metal recycling market.”