The waste industry is attracting a lot of investor interest, most recently from big private equity infrastructure investors, with a potential buyout for Cleanaway the latest deal to hit the headlines.
Rapid industry transformation can be a tough deal for small businesses, but can present a lucrative opportunity for investors.
In Australia, small to medium enterprises make up around 60 per cent of the waste industry. But this may be set to change.
There looks to be big moves in the waste sector, with the industry swept up in recent times into the crosshairs of infrastructure equity investors thanks to the huge sums of capital needed to establish waste processing facilities. And clearly, the opportunities on offer.
The latest potential deal to hit the rumour mill is for Cleanaway, with Macquarie Asset Management last year recently bought Bingo Industries for $2.3 billion and Igneo Infrastructure Partners which recently bougjht NZ’s largest waste collector Waste Management NZ for $NZ1. 9 billion tipped to be front runners.
But TPG which bought a 5.3 per cent stake of Cleanaway for about $300 million in early November last year has also been mooted as a potential suitor.
What’s driving all the interest in this industry?
Well, to put it bluntly, garbage is the latest darling in the green circular economy orbit.
While only a few years ago recycling people bemoaned the lack of a viable commercial production stream for waste (“someone has to want the products badly enough to pay for them”) today there’s no problem with the concept of mining our waste to shore up our stock of depleting natural resources.
And that’s before we get to the energy from waste potential, which a highly complex other world, that’s also rapidly evolving.
According to Frank Klostermann, director of Full Circle Advisory, and a regular contributor to The Fifth Estate, the hurdles to creating the viable waste/recycled products that can make commercial sense are massive. It’s often out of the realms of relatively smaller companies to take on the challenges, which typically involve big infrastructure scale investments.
The time scale alone is offputting. It can take up to six years to gain planning approvals for these recycling and processing facilities, he says, and that’s before facing the huge sums of capital involved.
So here comes private equity. As Kloseterman puts it, there’s a lot of money swirling around the globe looking for a home. But a lucrative home of course.
And a big reason for the appetite in this particular field of dreams, he says is because “all the states have under invested in the sector, for years and years.”
We’re running out of landfill space, Klostermann says and there’s virtually no space left in the Sydney basin for processing facilities.
“It takes six years to get a licence.”
In NSW he blames a state government that doesn’t have sufficient control of the Environmental Protection Authority which is essentially a regulator and “not a strategic planner, so they don’t understand what it takes to build large scale infrastructure and that’s exactly what’s needed.”
In Victoria planning for these big investments takes half as long, Klostermann says.
Other industry commentators point to the EPA’s extreme sensitivity to any “contamination” in the waste stream which means entire truckloads of material need to go to landfill instead of being recycled. The fear of toxins and other contaminants seems fair enough but according to our other sources it goes too far and is too extreme.
The consequence is that this tough stance inevitably hits licensed operators who are easy to patrol while rogues or criminal elements get off scot-free, under the radar.
So the big infrastructure equity players can see opportunities that a strong balance sheet and perhaps a patient capital attitude might overcome to create a commercially viable product. And build the infrastructure to manage all the risks.
A big attraction also is the waste stream. To create recycled materials you need a steady source of your feedstock. Whether in city or rural areas waste companies have long-term contracts with councils and governments, which underpins the investment.
Also, Australia has nowhere else to go to fix the problem. Other countries have banned taking our rubbish, so there’s a captive market.
The growing demand for solutions to our pollution crisis is pushing waste management companies further into resource recovery territory, rather than big holes in the ground or oil wells to make more plastic.
Despite increased awareness of the need for a circular economy, metropolitan solid waste (MSW), commercial and industrial (C&I) and construction and demolition (C&D) waste continue to grow as the population increases and consumption with it.
It’s estimated that Australia will need to deal with an additional 645,000 tonnes of waste by 2024 – equivalent to nearly a third of all of Australia’s current waste problem, according to PwC Australia.
Small to medium businesses will be hard-pressed to deal with the burden of all those bins, so investors are stepping in to unlock the transformation of Australia’s waste sector.
Private capital has already snapped up smaller waste groups such as Bingo Industry so it is no surprise that they are sniffing around Cleanaway as well.
Cleanaway is bigger, second only to Veolia in Australia. It operates a number of waste collections and disposal and material recovery facilities throughout Australia, including waste to energy.
The company has a number of ongoing partnerships including with Veolia, TOMRA, Asahi Breweries, and Pact Group Holdings.
It has not been without its problems, with a series of fatal accidents, EPA infringements and internal workplace conduct payouts over the years, but investors are seeing it as an enterprise with promise.
According to S&P Global Ratings markets intelligence data, the company’s shares are at 12.5-times the forecast EBITDA (earnings before interest, taxes, depreciation, and amortisation), valuing it at $8 billion including debt. 30 per cent premium would imply 16.5-times 2022 forecast EBITDA, around a $10 billion deal.
But there is a risk in this industry that the big investors may find convenient to skirt over for now. And that’s the growing call to stop waste at the source. To stop producing the scandalous amount of plastic wrapping and other packaging that is so ubiquitous. Imagine a world where you take your own containers to the supermarkets.
In fact the supermarkets are starting to cotton on to this potential now. And already we have companies offering to recycle products when they’re reached their use by date, from whitegoods to jeans – at least in Europe. And it’s a movement that will only grow.