Waste and environmental sector update - covering key sector activity, deals and updates.

1. SECTOR UPDATE AUTUMN 2012
Waste and environmental
sector update
This 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
Contents
2 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
If you would like to discuss the content
of this update, or any other sector
issues, please get in touch with us:
Emma Grice
T +44 (0)161 953 6315
E emma.grice@uk.gt.com

2. M&A update
Q3 2012 M&A volumes
• Deal volumes in Q3 have seen a
small level of growth after lower
levels of activity in the first half of
the year, bringing the total number
of transactions up to 26 for 2012. If
Relatively steady levels of M&A activity continues the recent increase in the number of
transactions continues into Q4, 2012
Number of waste sector deals Q1 2008 to Q3 2012 will represent a reasonable overall year
Fig 1: Deal volumes by Q1 2008 – Q3 2012 for M&A activity within the sector.
• This slight increase in activity for
19 Q3 is a result of a marginally larger
proportion of overseas acquisitions
made compared to the first two
quarters of 2012, as 20% of the deals
14 14 included a foreign acquiror. However,
13
this represents a much lower figure
11 11 11 when compared to Q3 of the previous
10 10 year when 8 out of 14 deals had
9 9 9 9
8 internatonal involvement.
7
6 6
• The quality of deals in Q3 has
4 continued the trend for 2012 of a
3 higher proportion of distressed deals
in comparison to 2011. Two more
distressed deals in the third quarter
2008 (39 deals) 2009 (33 deals) 2010 (37 deals) 2011 (48 deals) 2012 (26 deals)
now contribute to 23% of deals in 2012
having a level of distress.
Q1 Q2 Q3 Q4
• Recent companies acquired out
of administration include CRT
Fig 2: Disclosed deal segmentation by value (£m) Recycling Limited and Loddon Waste
Management limited.
2012 • Fig 2 highlights the deal values seen in
2011 2012 when compared to previous years.
2010 While 2012 has not seen any deals
2009 over £60m in enterprise value, a much
2008 higher proportion of deals ranged from
2007 £10 to £59m have been completed in
2006 comparison to 2011.
0% 20% 40% 60% 80% 100%
Below 10 10 to 59 60+ • It should also be noted that the number
of deals completed with a disclosed
Soure: FactSet
value has also increased significantly in
Please note that for comparison purposes the deal volumes charts above are for waste deals only. 2012 to 42% vs 23% in 2011.

3. Fig 3: Breakdown of deals by Fig 4: Breakdown of deals by
sub-sector Q1-Q3 2012 sub-sector Q1-Q4 2011
Sector trends
• Recycling and consultancy deals
represent the majority of transactions
seen this year with 58% of deals
being derived from these sub–sectors.
• There has been a noticable increase
in the significance of the consultancy
sub-sector after the third quarter saw
three more deals being completed Recycling 35% Recycling 50%
making up nearly a quarter of all Consultancy 23% Energy efficiency 18%
waste and environmental sector deals
Waste management 12% Consultancy 10%
in 2012.
Energy from waste 7% Hazardous and industrial waste 7%
Energy efficiency 7% Waste management 4%
• Within recycling, the market can be
further split by types of materials Hazardous and industrial waste 5% Waste equipment 4%
recycled (Fig 5 and 6). We can see Compliance and technical 5% Medical waste 2%
that recycling in 2012 so far has Other environmental services 2% Energy from waste 2%
predominantly been focused on paper Medical waste 2% Other environmental services 2%
and WEEE, with over 50% of deals
Environmental offsets trading 2% Compliance and technical 2%
in this sub-sector.
• Electrical and electronic equipment
recycling saw a noticeable jump
in Q3 with three deals: Mercury Fig 5: Breakdown of recycling deals by Fig 6: Breakdown of recycling deals by
Recycling Group plc, Loddon Waste sub-sector Q1-Q3 2012 sub-sector Q1-Q4 2011
Management Ltd and CRT Recycling
Ltd.
• 2012 has not yet seen any activity
within the glass recycling sub sector,
but has seen an increase in plastic
recycling which has had a 10%
increase on the first half of the year.
Paper 27% General 26%
WEEE 27% Paper 23%
General 13% Organic 16%
Plastic 13% Metal 13%
Metal 7% WEEE 16%
Organic 7% Plastic 3%
Textile 7% Glass 3%

4. Trends and challenges in the
anaerobic digestion (AD) sector
Funding and Incentives: (as can be the case with surplus food waste that was expected, and this is directly
from schools). linked to the quality of the feedstock.
The principle drivers that have
encouraged developers to take an interest
in developing AD plants have been
Technology: There are many different Consideration for funders:
competing technologies available in a
Government incentives in the form Three key elements need to be considered
market that is still in the early stages of
of Renewable Obligation Certificates in order to ensure a fundable AD project:
development. While there are currently
(ROCs) for larger plants, Feed-in Tariffs
circa 50 AD projects in the UK, these
(FITs) for smaller plants and more recently 1) Feedstock: Where does the feedstock
have been built by circa 40 developers,
the Renewable Heat Incentive (RHI) come from? What is the composition?
using up to 35 different technologies.
scheme. All of these support mechanisms Is supply guaranteed for the life of
This means the market is relatively fragile
are complex and subject to constant the project? What are the implications
with no market leader, and the operators
change but without them it is unlikely for the business case if feedstock
are relatively small companies that may
that the growth of AD schemes would composition were to change?
not be around in a few years. This can
continue.
adversely affect any guarantees that may
2) Technology: Is the right technology
have been given.
Potential pitfalls - Why being applied to the type of feedstock at
hand? Who is going to commission the
projects fail Land, planning and operations: It may
plant and who is going to build it? Who
Feedstock: Considerations of which take longer than originally anticipated
will the operator of the facility be?
feedstock to use and how to secure its to secure planning permission and the
availability long term is paramount and connection to the transport network
3) Markets: Who is going to take the
should be the starting point for any is crucial. The digestate output is very
products? What price are the products
project. Unfortunately, we see many heavy due to its water content and
likely to achieve? How will the
projects starting out with a decision on this can result in transport costs being
products change with the feedstock?
which technology to use with subsequent significantly higher than planned. In
attempts to match the feedstock to the addition, the operation of an AD plant is
technology. Problems arise when changes likely to require dedicated, specialist staff Our sector credentials:
in feedstock occur and these may have to minimise downtime and breakages. Grant Thornton is currently involved in the
far-reaching implications: a change in Industry voices are warning farmers procurement, fundraising and due diligence
feedstock may not be allowed for in the that the running of an AD plant is not of AD projects across the country.
original business case as the electricity something that can simply be tagged on to Grant Thornton’s National Advisory
output may be adversely affected by the day job of running a farm. practice has wide experience in helping
a change. Moreover, changing the emerging technology businesses raise
composition of what is input can cause End markets: Finally, potential problems capital, offering clients commercial and
damage to the system, including the need lie ahead when considering the end market financial advice on how to structure deals.
to clean out the digester completely and that has been envisioned for the project.
start anew. Considerable damage can also Prices achieved for outputs may be less
For further details contact
be caused by small stones or rocks not than anticipated, due to insufficient
market research having been carried out. Ian Carr on 01223 225600
being detected in the feedstock (mixed in
with potatoes for example) or pieces of Moreover, there is the risk that the plant or on ian.carr@uk.gt.com
cutlery being contained in the feedstock may not produce the quantity or quality

5. Waste PPP/PFI schemes are
transforming how residual household
waste will be processed in this country
• We are advising on a number of schemes that will begin
construction over the next 12 months which will see waste
increasingly diverted from landfill through greater recycling and
recovery of energy.
• These projects typically see a special purpose entity deliver the
works through an Engineering, Procurement and Construction
(EPC) subcontract covering the civil construction combined with
provision of the waste technology.
• Funding is either on a corporate loan from the sponsor or project
finance from banks. These EPC contracts have not escaped the
impact of the global financial credit crisis with an increasing focus
on the financial standing of contractors and their guarantors.
• As project finance is increasingly reliant upon non-UK banks
to provide long term debt, these may inevitably have weaker
relationships with UK based civil engineering contractors and
therefore may seek stronger security packages to satisfy their
credit committees.
• It is also common for the waste processing technologies to be
imported from the Eurozone and for Foreign Exchange swaps to
be required. These can provide price certainty by hedging against
foreign exchange risk, either directly where dates are firm or
through use of options where timing is less certain, for example
where construction can only occur once planning and permitting
approvals are secured.
• Given the on-going uncertainties in the Eurozone the FX hedging
arrangements at the EPC level can be a key issue, particularly
when considered alongside joint and several guarantees. Plenty to
consider as such projects are rarely as easy as EPC!
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