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Dealspeak: Viridor/KKR shows sponsor route to waste opportunities in COVID-19 market

Dealspeak pitches forward from an announced deal to explore its ramifications and point to potential M&A activity.

There are few constants amid the disruption and anxiety engulfing lives and the markets. But we’re still disposing our waste - and electricity to power our laptops and Netflix binge has become yet more important as coronavirus-imposed isolation takes hold.

Even so, it still came as a surprise this week that listed utility Pennon Group [LON:PNN] had been able to speedily conclude its carve-out of energy-from-waste subsidiary Viridor, with the announcement of a sale to suitor KKR [NYSE:KKR] for an enterprise value of GBP 4.2bn.

Pennon had appointed Morgan Stanley and Barclays to launch a formal auction in October last year, following an initial approach by KKR. The auction kicked off properly in January, with indicative offers due on 9 March.

Bids had been expected from Macquarie Infrastructure Real Assets (MIRA), and from a consortium of CPPIB and I Squared, with other parties linked to the process also including sovereign wealth investor GIC, Cheung Kong Infrastructure Holdings, IFM Investors, Equitix and Dalmore, as reported by this news service’s sister publication SparkSpread.

Sidestepping a shortlisted second round in order to clinch the deal, the vendor returned to KKR – the original suitor. To land a GBP 4bn-plus deal in the current market environment takes some doing.

Waste management, and particularly energy-from-waste, is fast becoming an area of heated deal flow. As reported last month by the Flash, UK energy-from-waste businesses have attracted EV/EBITDA multiples of 20x, with a 2018 deal involving Cory Riverside a case in point.

Viridor’s sale was concluded on a debt-free basis, representing an EV/EBITDA multiple of 18.5x, according to the deal announcement, with net cash proceeds expected to be approximately GBP 3.7bn at completion, after taking into account debt and debt-like items that will remain with Viridor, and customary costs.

It would be easy to think KKR may be one of the few bidders keeping faith with underlying economic trends that see through COVID-19 disruption. And yet private equity famously has a huge stock of dry powder.

Air Liquide’s [EPA:AI] auction of hygiene products arm Schuelke has seen the sellside hike its price expectation, with bids now expected to top EUR 1bn, this news service reported earlier in the week. As with the Viridor deal, buyer motivation is based not only on a view of the current operating environment, but also that eyed in the post-coronavirus world.

Where sponsors are greedy when others are fearful, it will be precisely in segments perceived to be riding trends that will survive COVID-19 – including environmental services – or those thrown into relief by the crisis (hygiene, healthtech, remote working applications, etc.)

If this dynamic means a few, select competitive auctions can survive the rollercoaster, other listed players may follow Pennon’s lead and seek to unload similar arms, especially given that the COVID-19 market crash will have further widened the disparity between the private valuation of these assets relative to the parents’ share prices.

Indeed, the pool of disappointed Viridor suitors could well make overtures to other participants in the space.

Some targets are already in play. For example, French utility Suez [EPA:SEV] has interviewed advisers as it weighs the disposal of its Swedish and Benelux waste divisions, as first reported by this news service last month, as part of a wider review of its assets.

Suez peer and compatriot Veolia [EPA:VIE] is likewise embarking on a EUR 3bn programme of non-strategic asset sales.

Meanwhile, private German holding Haniel is undertaking a strategic review of its high-grade steel recycling business ELG Haniel, according to press reports this week.

Moving down the gears, but staying in Germany, plastic waste recycling company APK is looking to raise between EUR 15m-EUR 20m for its recycling plant JV with MOL Group [WSE:MOL], APK's Chief Executive Officer Klaus Wohnig told this news service in February. At the time, the executive said the company was in talks with other plastic producers, engineering companies and financial investors.

There is no escaping COVID-19 may have reduced the attractiveness of some infrastructure type investment classes, one sector banker told Dealspeak.

Such apparently defensive plays as toll roads, airports and terminals have suddenly been smashed by trade and travel restrictions.

But those bidders that would have eagerly pursued such assets may now turn to power generation and networks – electricity, gas and telecoms – as the target of choice, boosting buy side competitiveness and multiples.

Energy-from-waste exposure could smoke out bid interest from private equity – and the broader environmental services themes around all forms of recycling may yet see the brave reach for their chequebooks while others are jittery.

by Patrick Harris and John West in London.

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