SECTOR UPDATE AUTUMN 2012

Waste and environmentalsector updateThis Autumn 2012 update includes:

A review of mergers and acquisitions activity in the waste and environmental sector for Q1- Q3 of 2012

Trends and challenges in the Anaerobic Digestion (AD) sector

How PPP/PFI schemes are transforming residual household waste processing in this country

If you would like to discuss the content of this update, or any other sector issues, please get in touch with us:

Emma GriceT +44 (0)161 953 6315E emma.grice@uk.gt.com

Contents2 M&A update

4 Trends and challenges in the Anaerobic Digestion (AD) sector

5 Waste PPP/PFI schemes are transforming how residual household waste will be processed in this country

M&A updateQ3 2012 M&A volumes

• DealvolumesinQ3haveseenasmalllevelofgrowthafterlowerlevelsofactivityinthefirsthalfoftheyear,bringingthetotalnumberof transactions up to 26 for 2012. If therecentincreaseinthenumberoftransactionscontinuesintoQ4,2012willrepresentareasonableoverallyearforM&Aactivitywithinthesector.

• ThisslightincreaseinactivityforQ3isaresultofamarginallylargerproportion of overseas acquisitions madecomparedtothefirsttwoquartersof2012,as20%ofthedealsincludedaforeignacquiror.However,thisrepresentsamuchlowerfigurewhencomparedtoQ3ofthepreviousyearwhen8outof14dealshadinternatonal involvement.

• ThequalityofdealsinQ3hascontinuedthetrendfor2012ofahigherproportionofdistresseddealsincomparisonto2011.Twomoredistresseddealsinthethirdquarternowcontributeto23%ofdealsin2012havingalevelofdistress.

• RecentcompaniesacquiredoutofadministrationincludeCRTRecyclingLimitedandLoddonWasteManagement limited.

• Fig2highlightsthedealvaluesseenin2012whencomparedtopreviousyears.While2012hasnotseenanydealsover£60minenterprisevalue,amuchhigherproportionofdealsrangedfrom£10to£59mhavebeencompletedincomparison to 2011.

• Itshouldalsobenotedthatthenumberofdealscompletedwithadisclosedvaluehasalsoincreasedsignificantlyin2012to42%vs23%in2011.

Relatively steady levels of M&A activity continues

Number of waste sector deals Q1 2008 to Q3 2012Fig 1: Deal volumes by Q1 2008 – Q3 2012

2012 (26 deals)2011 (48 deals)2010 (37 deals)2009 (33 deals)2008 (39 deals)

19

10

6

4

11

13

6

3

11

98

9

11

14 14

9 9

7

Q4Q3Q2Q1

10

Fig 2: Disclosed deal segmentation by value (£m)

Soure: FactSetPlease note that for comparison purposes the deal volumes charts above are for waste deals only.

0% 20% 40% 60% 80% 100%

2006

2007

2008

2009

2010

2011

2012

Below 10 10 to 59 60+

Fig 3: Breakdown of deals by sub-sector Q1-Q3 2012

Recycling 35%

Consultancy 23%

Waste management 12%

Energy from waste 7%

Energy efficiency 7%

Hazardous and industrial waste 5%

Compliance and technical 5%

Other environmental services 2%

Medical waste 2%

Environmental offsets trading 2%

Fig 4: Breakdown of deals by sub-sector Q1-Q4 2011

Recycling 50%

Energy efficiency 18%

Consultancy 10%

Hazardous and industrial waste 7%

Waste management 4%

Waste equipment 4%

Medical waste 2%

Energy from waste 2%

Other environmental services 2%

Compliance and technical 2%

Fig 5: Breakdown of recycling deals by sub-sector Q1-Q3 2012

Paper 27%

WEEE 27%

General 13%

Plastic 13%

Metal 7%

Organic 7%

Textile 7%

Fig 6: Breakdown of recycling deals by sub-sector Q1-Q4 2011

General 26%

Paper 23%

Organic 16%

Metal 13%

WEEE 16%

Plastic 3%

Glass 3%

Sector trends• Recyclingandconsultancydealsrepresentthemajorityoftransactionsseenthisyearwith58%ofdealsbeingderivedfromthesesub–sectors.

• Therehasbeenanoticableincreaseinthesignificanceoftheconsultancysub-sectorafterthethirdquartersawthreemoredealsbeingcompletedmaking up nearly a quarter of all waste and environmental sector deals in 2012.

• Withinrecycling,themarketcanbefurthersplitbytypesofmaterialsrecycled(Fig5and6).Wecanseethatrecyclingin2012sofarhaspredominantlybeenfocusedonpaperandWEEE,withover50%ofdealsinthissub-sector.

• ElectricalandelectronicequipmentrecyclingsawanoticeablejumpinQ3withthreedeals:MercuryRecyclingGroupplc,LoddonWasteManagementLtdandCRTRecyclingLtd.

• 2012hasnotyetseenanyactivitywithintheglassrecyclingsubsector,buthasseenanincreaseinplasticrecyclingwhichhashada10%increaseonthefirsthalfoftheyear.

Trends and challenges in the anaerobic digestion (AD) sector

Funding and Incentives: Theprincipledriversthathaveencouraged developers to take an interest indevelopingADplantshavebeenGovernmentincentivesintheformofRenewableObligationCertificates(ROCs)forlargerplants,Feed-inTariffs(FITs)forsmallerplantsandmorerecentlytheRenewableHeatIncentive(RHI)scheme.AllofthesesupportmechanismsarecomplexandsubjecttoconstantchangebutwithoutthemitisunlikelythatthegrowthofADschemeswouldcontinue.

Potential pitfalls - Why projects failFeedstock: Considerationsofwhichfeedstocktouseandhowtosecureitsavailabilitylongtermisparamountandshouldbethestartingpointforanyproject.Unfortunately,weseemanyprojectsstartingoutwithadecisiononwhichtechnologytousewithsubsequentattemptstomatchthefeedstocktothetechnology.Problemsarisewhenchangesinfeedstockoccurandthesemayhavefar-reachingimplications:achangeinfeedstockmaynotbeallowedforintheoriginalbusinesscaseastheelectricityoutputmaybeadverselyaffectedbyachange.Moreover,changingthecompositionofwhatisinputcancausedamagetothesystem,includingtheneedtocleanoutthedigestercompletelyandstartanew.Considerabledamagecanalsobecausedbysmallstonesorrocksnotbeingdetectedinthefeedstock(mixedinwithpotatoesforexample)orpiecesofcutlerybeingcontainedinthefeedstock

(ascanbethecasewithsurplusfoodwastefromschools).

Technology: Therearemanydifferentcompetingtechnologiesavailableinamarketthatisstillintheearlystagesofdevelopment.Whiletherearecurrentlycirca50ADprojectsintheUK,thesehavebeenbuiltbycirca40developers,usingupto35differenttechnologies.Thismeansthemarketisrelativelyfragilewithnomarketleader,andtheoperatorsarerelativelysmallcompaniesthatmaynotbearoundinafewyears.Thiscanadverselyaffectanyguaranteesthatmayhavebeengiven.

Land, planning and operations: It may takelongerthanoriginallyanticipatedtosecureplanningpermissionandtheconnectiontothetransportnetworkiscrucial.Thedigestateoutputisveryheavyduetoitswatercontentandthiscanresultintransportcostsbeingsignificantlyhigherthanplanned.Inaddition,theoperationofanADplantislikelytorequirededicated,specialiststafftominimisedowntimeandbreakages.Industry voices are warning farmers thattherunningofanADplantisnotsomethingthatcansimplybetaggedontothedayjobofrunningafarm.

End markets: Finally,potentialproblemslieaheadwhenconsideringtheendmarketthathasbeenenvisionedfortheproject.Pricesachievedforoutputsmaybelessthananticipated,duetoinsufficientmarketresearchhavingbeencarriedout.Moreover,thereistheriskthattheplantmaynotproducethequantityorquality

thatwasexpected,andthisisdirectlylinkedtothequalityofthefeedstock.

Consideration for funders: ThreekeyelementsneedtobeconsideredinordertoensureafundableADproject:

1) Feedstock:Wheredoesthefeedstockcomefrom?Whatisthecomposition?Issupplyguaranteedforthelifeoftheproject?Whataretheimplicationsforthebusinesscaseiffeedstockcompositionweretochange?

2) Technology:Istherighttechnologybeingappliedtothetypeoffeedstockathand?Whoisgoingtocommissiontheplantandwhoisgoingtobuildit?Whowilltheoperatorofthefacilitybe?

3) Markets:Whoisgoingtotaketheproducts?Whatpricearetheproductslikelytoachieve?Howwilltheproductschangewiththefeedstock?

Our sector credentials: GrantThorntoniscurrentlyinvolvedintheprocurement,fundraisingandduediligenceofADprojectsacrossthecountry. GrantThornton’sNationalAdvisorypracticehaswideexperienceinhelpingemergingtechnologybusinessesraisecapital,offeringclientscommercialandfinancialadviceonhowtostructuredeals.

For further details contact Ian Carr on 01223 225600 or on ian.carr@uk.gt.com

© 2012 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to ‘Grant Thornton’ are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients.

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Waste PPP/PFI schemes are transforming how residual household waste will be processed in this country

• Weareadvisingonanumberofschemesthatwillbeginconstructionoverthenext12monthswhichwillseewasteincreasinglydivertedfromlandfillthroughgreaterrecyclingandrecoveryofenergy.

• Theseprojectstypicallyseeaspecialpurposeentitydelivertheworks through an Engineering, Procurement and Construction (EPC)subcontractcoveringthecivilconstructioncombinedwithprovisionofthewastetechnology.

• Fundingiseitheronacorporateloanfromthesponsororprojectfinancefrombanks.TheseEPCcontractshavenotescapedtheimpactoftheglobalfinancialcreditcrisiswithanincreasingfocusonthefinancialstandingofcontractorsandtheirguarantors.

• Asprojectfinanceisincreasinglyreliantuponnon-UKbanks

toprovidelongtermdebt,thesemayinevitablyhaveweakerrelationshipswithUKbasedcivilengineeringcontractorsandtherefore may seek stronger security packages to satisfy their credit committees.

• ItisalsocommonforthewasteprocessingtechnologiestobeimportedfromtheEurozoneandforForeignExchangeswapstoberequired.Thesecanprovidepricecertaintybyhedgingagainstforeignexchangerisk,eitherdirectlywheredatesarefirmorthroughuseofoptionswheretimingislesscertain,forexamplewhere construction can only occur once planning and permitting approvalsaresecured.

• Giventheon-goinguncertaintiesintheEurozonetheFXhedgingarrangementsattheEPClevelcanbeakeyissue,particularlywhenconsideredalongsidejointandseveralguarantees.PlentytoconsiderassuchprojectsarerarelyaseasyasEPC!