Carlyle interest in Shanks shows waste is no longer down in the dumps

The recycling revolution makes Tom Drury's firm very attractive to buyers

Nick Mathiason
The Observer, Sunday 13 December 2009
Confirmation that private equity is a dirty business came last week when the Carlyle Group approached Shanks, the quoted British waste management firm, with an unsolicited bid of £536m.
Ask Shanks's well-regarded chief executive, Tom Drury, whether he shares the opinion beloved of conspiracy theorists that Carlyle, a US private equity firm, represents an extension of neo-conservative American foreign policy and he politely suggests: "They're your words. Not mine."
In the City office of Shanks's joint broker Investec, Drury is careful not to ratchet up hostilities in what could yet turn into a protracted bidding war that many believe will see his company taken over in the first quarter of next year.
Last Monday, shares in the Milton Keynes-based company leapt 40% after it revealed the approach. It is strongly believed that Carlyle will not be a lone bidder.
Drury's response to the situation typifies two attributes from his Yorkshire upbringing: a direct style fused with caution. "The approach is slightly opportunistic," he says. "The share price was relatively low and I guess the waste market has declined through the recession. It will pick up and when it does we'll be in a good position to grow. I suspect the private equity approach suggests it's not a bad time to buy into a company like Shanks."
Drury, a 47-year-old rugby fan and real ale drinker, responded to Carlyle that a 135p-a-share bid undervalued the company. But in a move that surprised the City, he suggested an offer pitched at 150p (£600m) or more would be well received. Crucially, Schroders and Legal & General, who between them speak for 25% of Shanks' share register, were on board with him.
Drury has in effect set a reserve price for Shanks, which could spark an auction. Other possible bidders include French industrial group Suez, which owns waste disposal business Sita, and AVR, another waste rival owned by private equity giants KKR and CVC.
"We wanted to indicate we don't have a closed mind to an approach," Drury explains. "But we didn't see the point of going through the normal 'dancing around the handbags'. We wanted to give a clear level to the market that at that [price] or more we would engage. We accept it's an unusual thing to do, but the vast majority of feedback is that it's a bold and sensible thing to do."
Shanks is reckoned to be valuable because under Drury it has tidied up its balance sheet and rid itself of its landfill holdings – a sector that will soon be obsolete thanks to tough environmental legislation. It is considered well positioned in Europe, and in particular the UK, to take advantage of growth in recycling and in creating power from waste.
The company suffered after it bought into waste businesses in Belgium and Holland in 2000 with a view to bringing advanced recycling technologies to the UK; the timing was wrong, because the UK failed to tax landfill at high enough levels to allow recycling to take off. That is why 56% of Britain's waste is dumped in landfill sites, against 3% in Holland and 1% in Germany. Shanks's recycling divisions failed to win enough business.
But this is changing. Any company or local authority dumping waste in a landfill site now has to pay a tax of £48 per tonne. By 2013 this will grow to £72. "If you add on what the landfill operator needs you're going to pay £90 per tonne by 2013," Drury says. "To their credit, this government has pushed landfill tax to a level where they are actively discouraging landfill as a solution [and] I think very clearly the Conservatives are aligned with the same approach."
It will allow Shanks to open its first anaerobic digestion plant in Scotland next year, taking food waste and turning it into electricity. Four more facilities are planned.
The tax increases are required to bring the UK into line with European regulation. To bring change about, Britain must also invest £10bn in new waste management facilities and local authorities are now offering 25-year PFI contracts.
"People see the UK as the fastest growing waste market in Europe because we have got a lot of people, we've got the biggest change to make – and that creates opportunities for this company," Drury says. That is why the waste sector, which for so long has been about burying rubbish underground, is now a very visible target.