Biffa/ECP: waste management deal is far from rubbish

Waste management is a dirty business. It is also an essential cog to making the world cleaner and greener. For Biffa of the UK, “the circular economy” might also refer to its merry-go-round of public and private equity ownership. US buyout group Energy Capital Partners has launched a £1.4bn bid for the rubbish collector. That pushed up shares by 25 per cent, where they were still below the 445p offer price.

The company’s success falls into two bins. Biffa has added new routes to its main collections business, most recently by acquiring peer Virador. It has also invested heavily in waste reduction, recycling and waste-to-energy projects.

The greener tint has rewarded early investors, lifting the shares by 80 per cent since their 2016 float. Gains would rise to 147 per cent if the buyout, which the board plans to recommend, goes ahead. Sizeable debts and a consolidated market for collections are likely to keep a lid on further returns.

The bid has yet to pass ECP’s due diligence. One concern is the UK’s industry-wide investigation into landfill tax rates. Biffa has stated this would cost it £153mn as a worst-case scenario, excluding any penalties and interest.

After just two years on the stock market, Biffa was taken private in 2006 by a consortium which included General Infrastructure Partners. A fresh set of owners, including Bain, returned it to the market in 2016. Gross debts have subsequently nearly doubled to £700mn Net debts of 3.4 times ebitda at the end of last year are nearing their limit.

That will probably limit returns for private investors. To keep leverage below six times, the buyers would have to stump up equity for half the price tag. Assuming realistic exit terms, that would give annualised returns over five years of barely 20 per cent.

Veolia’s deal for Suez is also being scrutinised by competition authorities, further limiting the pool of potential bidders. Investors should take the opportunity to clean up if ECP’s bid goes ahead.