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Market consolidation drives rising levels of M&A as waste sector evolves

According to a new Grant Thornton UK LLP report, 'An ever changing landscape: Waste and resource management review', the volume of merger and acquisition (M&A) activity in the waste sector has been steadily rising year on year since 2012, and has now reached levels close to the peak of 2011. 

2014 saw a strong finish to the year, with 15 deals completing in the final quarter, significantly more than in the same quarter of the previous three years. 2014 deals have been largely small in scale, reflecting the need for businesses to consolidate and move up the value chain.

The increasing volume of M&A activity reflects increased consolidation as the market responds to difficult trading conditions.

Larger businesses are investing in services that support their overall strategies for future growth.  For example Biffa's acquisition of collection divisions from Shanks and PHS reflected an intention to consolidate its leadership in commercial and industrial collection.

Similarly the largest deal of the year was Interserve's acquisition of Initial's facilities management business, which at £250million consolidates Interserve's position as one of the largest support services businesses in the UK.

Niche service providers are also going through a period of consolidation; the sale of a number of Augean's hazardous waste assets to Cleansing Service Group and Greenway Environmental is an example of this.

Deals in the first half of 2014 reflected an even spread across the sub-sectors.  However, waste management deals have seen the most growth this year compared to last, accounting for 29% of all deals in 2014, up from 12% in 2013. 

The well-established co-mingled recycling market has been, and remains, under considerable economic pressure. Increased recycling activity in the latter stages of 2014 resulted in the recycling sub sector accounting for the majority of waste deals by type, a 4% increase on 2013. 

Some plastics recyclers have experienced difficult market conditions with the recent fall in oil prices driving down the price of virgin and reprocessed polymers whilst still finding it difficult to obtain sufficient feedstock of waste plastics.  The sale of Eco Plastics Ltd to Aurelius AG is an example of a distressed sale in this area.

Some less mature areas of recycling are receiving interest from operators and investors including glass colour sorting [various plants announced] and WEEE where, following recently announced government targets and regulations, experts expect to see investment and consolidation in coming years.

This year has also seen an uplift in private equity investment across the sector, with a number of investors taking stakes or making acquisitions. Transactions have taken place across all subsectors, although there has been a focus on plastics recycling (German based Aurelius AG made two consecutive investments with the purchase of Eco Plastics and Continuum as part of a strategy to capitalise on the UK's growing recycling sector).

Mike Read, Head of Waste at Grant Thornton UK LLP, said: "The UK waste sector is emerging from a period of turbulent change.  The market is starting to move toward a circular economy, where any material has value – whether that's monetary or through energy recovery.  Building the ability to provide a full service offering is a key driver for M&A in the sector.

"Those businesses doing well are able to efficiently process waste to derive value, and have easy access to innovative technology and high end processing facilities.  The ones that are struggling tend to be in the mid-market, where business models are more likely to be based on a traditional model of collection services and export out of the UK.

"With no single approach from councils to waste management, and limited requirement for large, high volume energy from waste facilities, waste is increasingly being dealt with on a local basis.  This means that technologies such as gasification plants and anaerobic digestion are becoming more accepted as the norm, particularly as they can be expanded on a modular basis. Areas such as this are likely to increasingly catch the eye of investors in the short-term future."