How lockdown affected M&A in waste management

Based in County Antrim, ISL Waste Management was in the business of collecting, treating and disposing of commercial and industrial waste across Northern Ireland, writes Graham Clarke, investor for Scotland and Northern Ireland, BGF.

Facing significant challenges, the company appointed administrators in June. The same day, RiverRidge, another waste management company based in Northern Ireland, announced it had reached a deal to acquire the business, taking on all the firm’s staff and its treatment facility in the townland of Mallusk.

In many ways, the deal was typical of the type of merger and acquisition activity that has been seen this year. The rapid changes brought about by the Covid-19 crisis – enforced home working, a decline in commercial and industrial activity – created significant difficulties for many businesses. For well capitalised companies with the necessary resources, that disruption brought the opportunity to acquire competitors at distressed valuations.

More consolidation expected across the sector

RiverRidge is one of seven waste management companies in which BGF is currently an investor. It is also a good example of a firm that has used BGF funding for acquisition finance. Since 2016, we have invested £16 million in the company. It used part of this funding, alongside finance from the Bank of Ireland, to acquire Belfast-based Wastebeater. That deal followed a series of acquisitions and investments made before BGF was an investor.

RiverRidge isn’t the only company that has made acquisitions in this sector. Across the industry, BGF sees significant opportunities for consolidation, both as a direct result of Covid-related challenges and due to long-term market trends.

The uptick in deal activity has been noticed by industry observers, such as accounting giant Deloitte. In its third-quarter corporate finance update on UK waste, Deloitte noted that “data generally supports anecdotal evidence of a pick-up in M&A activity since the trough in Q2, with M&A teams busy on a range of auction and bilateral processes”. The firm counted seven announced deals in the UK waste sector in the third quarter, bringing the total for the year to 34.

A fragmented market

One reason we are seeing healthy levels of consolidation – and are predicting more in future – is because the waste management sector is highly fragmented. Historically, waste has been collected and processed by dozens of small businesses up and down the UK and Ireland.

Local knowledge and local connections are still very important in the waste business, and although there are a number of large companies in the market – such as Biffa, Veolia and Viridor – these big players do not have the kind of dominant market share seen in other industries.

However, while the UK market remains fragmented, it is increasingly well-regulated and professionalised, and that has drawn the interest of institutional investors, such as BGF, which are helping to provide capital to fund M&A activity.

Not only that, but the development of new technologies has created opportunities for innovation and disruption. RiverRidge, for example, is a key stakeholder and supplier into an energy-from-waste plant in Belfast and has led the way with its own in-house research and development of new waste processing infrastructure at its site in Garvagh. There are clear benefits for forward-thinking waste management firms seeking to differentiate themselves by adopting new technologies and processing methods, making a valuable contribution to achieving tough new targets which will require 65% of our waste to be recycled by 2035 and landfill reduced to 10% of the waste we produce.

Buy and build is a promising strategy

All these factors together mean there are plenty of opportunities for enterprising management teams to expand their operations by acquiring competitors. A “buy and build” strategy, in which a business receives funding to use for acquisitions, can be an effective model. Essentially, this strategy allows a management team of a medium-sized business to accelerate its growth by acquiring other businesses in its market.

These kinds of bolt-on acquisitions can allow a company to expand its operations and geographical reach, acquire new equipment, become more efficient, and potentially increase profit margins. Across all sectors, more than 75 companies have used BGF funding for acquisition finance, and we see significant opportunities for this strategy in the waste management sector.

These kinds of acquisitions are likely to continue alongside the activities of larger firms such as Biffa and Veolia, which are buying companies to add to their network. A recent example of this kind of deal was evident with Biffa acquiring Simply Waste, an industrial and commercial waste collection business, in October.

For Biffa and other larger companies, acquisitions tend to focus on filling in gaps in their network, and on ensuring they have sufficient volumes to justify their investments in its processing infrastructure and large facilities. In contrast, medium-sized businesses may look for complementary business models, additional innovative technology and underlying growth potential.

Not Covid-proof, but more resilient than most

M&A activity has clearly been affected by the coronavirus. With a number of waste management businesses being adversely impacted and some struggling to survive during the crisis, there has been an increase in acquisitions of distressed businesses, such as ISL Waste Management.

At the same time, acquisitions of non-distressed businesses have often been put on hold during the year. These delays were partly due to buyers exercising caution amid an uncertain landscape, but also due to practical considerations. During strict lockdowns, it was challenging to complete the necessary diligence required to get these deals over the line.

The good news is that, while waste management is not immune to Covid-19, the sector does seem to be more resilient than much of the economy. Many of the non-distressed acquisitions that were paused during the spring and summer are now progressing, leading to the recent pick-up in activity noticed by Deloitte.

For BGF, this is an encouraging development. So far, it has invested £48 million in the waste management sector. Although it is proud of this contribution to this crucial and thriving industry, this is only the start. The company continues to seek out ambitious, enterprising management teams with the will and determination to expand their businesses. We believe there is plenty of M&A yet to come in waste management.

This article was first published in Materials Recycling World in November 2020 under the title A professional industry is attractive to investors