There is money in those rubbish mounds. Pennon, the FTSE 250 water and waste group, reportedly hopes to sell the latter part of its business, Viridor, for around £4bn. Recycling is all the rage. Even so, a mooted enterprise value of 18 times last year’s adjusted ebitda looks rich. Talks with private equity house KKR did not result in a deal.
Viridor burns waste and puts out energy. Bulls characterise it as an infrastructure asset with a steady stream of profitable, index-linked long-term contracts. Those are attractive in an era of ready cash but low returns. Viridor’s £1bn in net debt leaves scope for more leverage.
There is potential for growth, too. Pennon predicts long-term demand for “energy recovery facilities” (ERFs) will exceed UK capacity by about seven million tonnes a year to 2035. Some new 23 ERFs are needed to close the gap, it says, with more sites still if recycling rates do not improve.
Viridor’s valuation is going up almost as quickly as rubbish in an incinerator, however. Before the £4bn price tag was rumoured on Sunday, analysts put Viridor’s enterprise value at around £3.1bn. Three months ago after Pennon announced a strategic review the consensus figure was closer to £2.7bn. Listed waste management peers trade on less lofty multiples: Veolia at 9 times trailing earnings, Biffa at 8 times and Renewi at 6 times.
Is that implicit price inflation just hot air? Earnings at Viridor have been rising. That could justify a fuller valuation. After five years of sucking up investment from South West Water, Pennon’s other business, Viridor is starting to generate cash. At a price of £3.5bn, Investec’s Martin Young puts it on a 14 times multiple, not out of line with other utilities such as National Grid and Severn Trent.
That should be the top price of any buyer. Energy from waste is a more volatile business, for now, than the established utilities. Competition could impact future growth. Private equity investors may have cash to burn. They should not throw it all at Viridor.
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