Chinook consortium bids £520m for Biffa
August 8th, 2012
Biffa, the UK’s second-biggest waste management company by sales, has received a £520m cash offer, amid expectations of a wider bout of consolidation in an industry which has been hit by decline in waste produced because of the recession.
A consortium of Chinook Urban Mining, the London-based recycling specialist, and Clearbrook Capital, the private equity investor, is understood to have tabled a highly conditional offer for the private-equity owned company, which is wrestling with £1bn in debts and strict banking convenants.
The offer comes at a pivotal point for the fragmented waste management industry. New European directives require landfill volumes to be reduced by 25 per cent by 2020, forcing companies to invest to switch from landfill to recycling or face increased taxes.
At the same time the downturn in consumer spending has reduced waste volumes. Further compounding the problem has been a growing trend for big companies, such as Tesco, to deal with their own waste.
“This is an industry that is structurally challenged,” says Dominic Nash, analyst at Liberum. “The industrial collection business is collapsing and much like the print industry, they just didn’t see it coming. Those who didn’t see the change coming are screwed; those who have seen it will thrive.” Analysts say the industry, much of which is private-equity owned and debt laden after a series of highly priced sell-offs between 2004 and 2007, underestimated the impact of the new EU directive and failed to invest in recycling technologies such as incenerators or anaerobic digesters.
Neil Roberts, an industry specialist at Materials Recyling World, says that waste management companies have responded to the changing economic environment in different ways, with some, for example, exporting refuse or investing in new technology or benefiting from longer-term contracts such as private finance initiatives.
Adding to the industry’s problems is its fragmentation, a result of low barriers to entry, in part as a result of UK government policies that require waste to be dumped locally. Although the UK’s main operators – Veolia, Pennon (parent of Viridor), Sita and Waste Recycling Group – compete nationally, rivals also include local competitors, which can set up business with just a skip or truck.
Biffa, which has its headquarters in High Wycombe and employs 6,300 people, was acquired for £1.7bn in 2008 by Montagu Private Equity and Global Infrastructure Partners.
Biffa, whose clients include J Sainsbury and local councils, reported £850m in revenue and £150m of earnings before interest, tax, depreciation, amortisation and provisions in the year ending March 2012.
However, it is particularly vulnerable in the new environment as it is reliant on industrial waste, which accounts for 80 per cent of earnings. Its ageing rubbish trucks have also left it exposed to high fuel prices.
This year the group revealed a five-year plan to refocus the business on more profitable areas such as its commercial division, as well as recycling and the conversion of waste to energy.
The group had already expanded its recycling business with the purchase of Greenstar, which although successful has failed to reposition the company quickly enough. Analysts say that Biffa’s strategy may be too little, too late.
Moreover, the proposed bid may also face strong opposition from some banks and funds. The Chinook consortium’s offer would likely wipe out £260m of lower-ranking “mezzanine” debt, while more highly ranked “senior” lenders would take a haircut.
Talks with the consortium had been under way for weeks but details were revealed to lenders only last week, sources said. The lenders have formed a steering committee comprising HSBC, GE Capital, Dexia and Prudential M&G to consider the approach. In addition to the banks and funds on the steering committee, hedge funds including Avenue Capital and Apollo Global Management are among the creditors, traders say.