Brass from muck hastens drive for lucrative waste deals

By David Fickling
Published: June 17 2009 03:00

The UK's waste industry has seen a frenzy of activity in recent months, as companies compete to outbid each other for billions of pounds' worth of lucrative council waste management agreements. In the past two months alone, about £2bn of contracts have been signed.
The value of these contracts depends crucially on the regulatory environment. So industry executives were relieved to hear this month that an incoming Conservative government would guarantee landfill taxes at nearly double current levels until 2020.
This commitment by Nick Herbert, shadow environment secretary, goes further than the Labour government. Alistair Darling, chancellor, announced in April's budget that the landfill tax escalator would raise rates from their current level of £40 a tonne to £72 a tonne by 2013.
"While landfill is the easy or cheap option, alternative solutions will not develop. So we have to make land-fill less attractive," Mr Herbert said.
Analysts argue that the UK's historically low levels of landfill taxes explain its low rates of recycling compared with its European peers. But that is now changing, says Nick Spoliar, a support services analyst at Altium.
Under the EU landfill directive, the UK's level of biodegradable waste sent to landfill must fall from 75 per cent of 1995 levels now to 35 per cent by 2020.
"In a year or two's time we'll generally have a situation where it doesn't make financial sense to landfill where you can recycle," said Mr Spoliar.
A further spur to re-cycling, which would underpin the value of the waste management contracts, is the issue of capacity. According to 2007 estimates by the Environment Agency, London will run out of landfill space by the end of next year, while the south-east, north-west and east of England will reach capacity by the end of 2012.
A total of 1,700 new waste facilities are needed in the UK over the next few years, according to MBD, a market research company.
The knowledge that the straightforward option of sending rubbish to a landfill site would become more expensive has prompted a wave of outsourcing deals, as councils have sought to offload the task of dealing with waste in more complex ways. In April, Manchester agreed a £640m, 25-year waste management contract with Viridor and public finance initiative specialist John Laing. Last month, Veolia signed the £640m contract to manage Merseyside's waste. Most recently, Shanks agreed a £720m contract with Cumbria.
Those agreements came in spite of fears that the credit crunch would subdue private investor interest in PFI contracts. More are on the way. Just under £2.9bn of further waste contracts are currently accepting initial tenders, according to Glenigan, a contract consultant, while nearly £5bn are being prepared for public tender.
The benign environment for the waste management sector and the prospect of stable revenues could trigger a further round of merger and acquisition activity. The difficulties of entering the industry from scratch make buying an existing company the easiest way in.
The same qualities of guaranteed income and limited competition led to an earlier wave of M&A activity that saw most independent listed waste companies in the UK snapped up by larger rivals or private equity consortia.
Of the UK's leading waste managers, Veolia, Sita and Waste Recycling Group are divisions of French and Spanish parents Veolia Environnement, GDF Suez and FCC. Cory and Biffa were sold to private equity consortia in 2007 and 2008.
Only Shanks and a few smaller specialist waste disposal companies, such as hazardous waste expert Augean, remain on the London Stock Exchange, alongside Pennon, Viridor's parent company.
But large established waste managers cannot assume they will have unchallenged dominance. Non-waste companies, such as VT, the defence and support services group, are making efforts to break into the industry.
This could be to the benefit of the few remaining independent groups. As Mr Spoliar points out: "There are some pretty high entry barriers. It's much easier to buy an incumbent company - which is ultimately what the VTs will end up doing."
Copyright The Financial Times Limited 2009