Circular economy trends are boosting M&A in the waste management sector

Written by: Ian Guilfoyle | Published:
Ian Guilfoyle is associate director at Livingstone

The EU recently set out its Circular Economy EU action plan which aims to energise Europe’s transition towards a low waste economy, boost competitiveness, foster sustainable economic growth and generate new jobs.

In particular, the plan sets out ambitious targets for waste reduction and aims to establish a long-term waste management and recycling infrastructure.

Proposals include a target for recycling 65% of municipal waste and 75% of packaging waste by 2030, a binding landfill target to reduce landfill to a maximum of 10% of municipal waste by 2030, and economic incentives for producers to put greener products on the market and support recycling schemes.

A circular economy provides an alternative to the traditional ‘make, use, dispose’ nature of a linear economy, aiming to prolong product lifespans through greater re-use by extracting the maximum value from resources before regeneration at the end of service. This has benefits for both the economy and the environment.

The UK government is striving to continue to support the EU’s action plan as it develops, embracing its central tenants in a post-Brexit world. In order to satisfy high European standards, the UK must work hard to incorporate circular economy practices into government’s Industrial Strategy.

Generating industry opportunities

Statistics have shown that the UK is lagging behind European averages. The EU recycling rate target stands at 50% by 2020, but with UK’s efforts remaining static at c.44% between 2013-2016 and only showing modest increases to 45% in 2016/17, catching up will require a clear, specific strategy.

Transitions towards a circular economy represent a systemic shift to build long-term resilience, generating business and economic opportunities to deliver environmental and societal improvements. On the global stage, these benefits are beginning to be taken seriously. Wider market trends such as an increasing demand amongst business for shifts towards a circular economy reflect this newfound appetite.

The renewable advances that a circular economy cultivates, including movements towards sustainable energy and materials, as well as re-thinking the way products are manufactured, stimulates a wealth of new industry opportunities, particularly for those involved in product redesign and waste reduction. Impacts are not limited to topic-specific areas either; the Ellen MacArthur Foundation has mapped out 11 different industries that are set to benefit from regeneration shifts alone.

Businesses can benefit

A circular economy works on the idea that economic activity builds and rebuilds the overall health of the system and therefore places a lot of emphasise on ensuring that it can serve at every level to incorporate the needs of large and small businesses, organisations and individuals both globally and at a local level.

The adoption of circular economy practices has value on both a micro and macroeconomic level as it provides operational as well as strategic benefits. The short and long-term financial outlook of businesses can be improved dramatically, with the drive for a restorative economy yielding high returns.

The 2017 Amplifying Action on Resource Efficiency report produced by the Aldersgate Group found that the implementation of resource efficient business models across the key sectors of the UK economy alone will have delivered a total increase of up to £77bn of gross value added by 2030.

These shifts are triggering developments such as the growth in M&A activity within the waste management sector as a consequence of an elevated international focus on recycling and reuse.

What's happening to M&A

Acknowledging the value of a resource efficient, circular economy to underpin future economic success by both the private and public sector has led to a strong M&A environment with several structural themes.

One emerging development has been that cash rich corporates are becoming increasingly acquisitive in order to attain certain strategic goals including: achieving critical economies of scale to stay competitive in volatile pricing environments and gaining access to higher quality materials or entering new geographies.

Transactions indicative of this include:

  • Biffa’s acquisition of O’Brien Waste Recycling Solutions in July 2017
  • EMR’s acquisition of Metal and Waste recycling in August 2017

Furthermore, positive investment trends are increasingly taking the form of private equity. There were several mid-market transactions involving private equity investors last year, highlighting the growth potential of the industry. These include:

  • The Environmental division of DCC pls sold to Exponent Private Equity for £219m
  • First Mile recycling, a London based recycling company, completing a management buyout with Growth Capital Partners

An additional trend appears to be an increase of Chinese players approaching the European market, marked by several recent high-profile transactions including:

  • Beijing Enterprises Holding’s acquisition of EEW Energy form Waste for £1.1bn
  • Chengdu Technet Environment’s acquisition of the recycling and services segments of ALBA group for £216m

The expansion of Chinese interest in European assets appears to be driven by several factors, including the desire to pursue expertise in waste treatment technologies to tackle China’s environmental problems as well as ambitions to harness the high-growth, energy-from-waste market.

The future

The pursuit of circular economy practices is rapidly becoming a greater priority for businesses both in the UK and globally, so it's likely that positive M&A trends within waste management and recycling industries will continue to reflect this.

Fuelled by cash rich corporates seeking access to higher quality material, new materials and economies of scale, along with private equity firms with an appetite for differentiated technology-led offerings and large amounts of capital available to deploy, the M&A market remains buoyant.

Provided a favourable political and legislative environment prevails, this trend looks set to continue throughout the remainder of the year.

Ian Guilfoyle is associate director at Mergers & Acquisitions and Debt Advisory firm Livingstone.

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