Energy Capital Partners’ (ECP) journey to acquire UK waste management company Biffa took nearly as circuitous a route as one of the target’s bin lorries, with a change in offer price and in the debt/equity split. But the work was justified as the High Wycombe-headquartered Biffa was a good fit for ECP’s focus on the power, renewables and environmental sectors, partner Andrew Gilbert told PE Hub Europe.
“Waste is a huge problem that’s been ignored a bit by the ESG investing universe,” he said. “That’s in part because it’s a difficult one to solve. Building solar panels is relatively easy. Minimising waste and maximising recycling or reuse is hard. That’s a big reason why we like this investment.”
The move for Biffa involved several iterations for ECP, headquartered in Summit, New Jersey with around $17 billion of AUM.
Via its fifth fund, ECP offered 445p per share, for a total value of around £1.4 billion ($1.7 billion; €1.6 billion), which the Biffa board recommended to shareholders in June. But with debt markets coming under stress and interest rates rising, ECP negotiated with the board and its financing partners and in September the parties agreed a lower price of 410p per share, or £1.3 billion in total, with the deal being completed last week.
The debt/equity split also evolved.
“We had attractive proposals a year ago for more debt than we will end up with,” said Gilbert. “But we started with a relatively conservative capital structure, something that looks more like an investment grade business. Had we used a more aggressive LBO-type capital structure, I don’t think this deal would have happened.”
Biffa’s enterprise value in the sale was around £2.1 billion and its covenant basis net debt was £578.8 million according to its last annual report, in August. That represented 2.9x covenant basis EBITDA, giving “significant headroom” against its covenant limit of 4.5x, although its covenant limit is due to fall to 4.0x in September.
A plan to restructure Biffa’s debt “is in progress. The capital structure will largely involve participation from the existing lender group”, said Gilbert.
Another potential liability is a UK tax authority investigation into landfill tax payments by Biffa. The hit could range from around £170,000 to around £168 million plus penalties and interest, according to the annual report, a rise from the £153 million figure quoted by the board in June.
“We did extensive diligence, so we’re comfortable with the company’s position and absolutely believe it didn’t do anything wrong around the landfill tax,” said Gilbert.
ECP first met Biffa during its ownership of Wheelabrator Technologies, a US waste-to-energy company based in Portsmouth, New Hampshire, that it bought in 2014.
Much of ECP’s efforts went into building the firm’s UK waste-to-energy business, of which Biffa became one of the biggest suppliers. That was not long after Biffa’s former private equity owners handed control to its lenders in a restructuring, as affiliate site Infrastructure Investor reported at the time.
ECP and Biffa’s management stayed in touch after ECP sold Wheelabrator to Macquarie Infrastructure Partners in 2019. During the height of the covid pandemic, Biffa’s management – which will remain largely intact – impressed ECP with its resiliency.
“We like to invest in market leaders that have valuable, defensible market positions,” said Gilbert. “In both the collection and recycling business, Biffa has that. In particular, it’s not easy to turn plastics into a reusable pallet that is food-grade. But these guys have done it for a long time and that know-how is really valuable. Additionally, part of the difficulty when trying to recycle is knowing what the input looks like. Biffa controls that, so that’s a really distinct advantage.
Polyethylene terephthalate (PET) products are a potential source of growth. “A Biffa recyclable plastic pellet goes into most of the milk bottles produced in the UK. We hope that over time that model will be similar for water bottles, soft drink bottles and various PET products.”
While Biffa will mainly focus on the UK, Biffa’s expertise in advanced polymer recycling could be an international opportunity, potentially via joint ventures, Gilbert added.
ECP will stick to management’s existing plans but believes it can offer a longer term vision than was available as a listed company, especially in the recycling vertical, as well as being a reliable source of equity capital. That will allow the management team to focus on growth, whether by M&A or recycling investments – something that would also have been harder with a leveraged capital structure, said Gilbert.
“When ECP has to exit, we will be selling a business that is a lot more recycling-, circular economy-focused than the one we’re buying today. The company is already on that path and we hope to accelerate it.”
There has been scrutiny from the UK’s Competition and Markets Authority (CMA) over consolidation in the waste management sector. Last year, French utility group Veolia sold the UK waste business of Suez – a smaller French rival it had recently bought – to Australia’s Macquarie Asset Management to quell objections made by the CMA.
The CMA’s concerns centred on the fact that many UK local authorities relied heavily on either Veolia or Suez – something that is unlikely to affect Biffa’s potential acquisitions, according to ECP.
“Most of what the company does is collecting waste from businesses,” said Gilbert. “That is extremely fragmented. Biffa is one of the leaders, but it’s a very small share of a very large market.”
ECP also has no immediate plans to offload any part of Biffa.
ECP is also confident that its eventual exit won’t be affected by competition concerns, with Gilbert citing merger candidates as one option. An infrastructure buyer or public relisting were other possibilities.