FOCUS: Interest Seen In Essent Waste Sale But Price May Lag

11 maart 2009 14:29

By Robin van Daalen Of DOW JONES NEWSWIRES AMSTERDAM (Dow Jones)--The sale of waste management firm Essent Milieu, part of Dutch energy company Essent NV, is drawing interest from both strategic and private equity parties, but the proceeds may be limited by financing constraints. The deadline for first-round bids is Wednesday. The sale is expected to attract interest from several private equity firms, but the credit crunch has led to stricter conditions for financing leveraged buyouts. Strategic buyers may be able to pay more, but may face their own hurdles such as a need for heavy future investment. People familiar with the matter told Dow Jones Newswires an equity-to-debt ratio of 1, or 50% equity to 50% debt, is most likely the maximum, limiting the price of a leveraged buyout. For a bidder using the deal's prearranged financing, this would be under EUR1 billion. "Financing leveraged buy-outs has become more difficult, and banks now set stricter conditions for leveraged buy-outs, limiting the maximum amount of debt used in such a transaction, and thus the price private equity can pay," one person familiar with the matter said. Essent Milieu focuses on waste incineration for energy production and says it's the market leader in the Netherlands in composting and the production of biofuels. The unit processed 2.8 million tons of waste in 2008 and generated 1.042 GWh of electricity. In 2008, it reported sales of EUR367 million and earnings before interest and taxes, or Ebit, of EUR86 million. Essent is owned by Dutch provinces and municipalities. The company is being advised by ING and Credit Suisse, which are putting together a staple financing of around EUR400 million to EUR500 million, giving the winning bidder an option to use a prearranged finance package to fund the deal. However, people familiar with the process say conditions still need to be worked out, with only ING so far having committed to its part of the financing package. ING declined to comment on the financing. "A lot of details are still unclear, and the size of the package limits the potential selling price to under EUR1 billion," another person familiar with the situation said. With credit scarce and financiers more risk-averse, potential buyers face a limit on how much debt banks will allow on the balance sheets of their clients' investments, limiting the potential price private equity can pay. Essent's Chief Executive Michiel Boersma last week was quoted by various media as saying he'll only sell Essent Milieu if the price is right, and that it should fetch around EUR1.3 billion. Earlier this year, Essent sold the bulk of its activities to German utilities company RWE AG (RWE.XE) for EUR9.3 billion. In 2007, Essent sold its cable unit, Essent Kabelcom, for EUR2.6 billion. That has left shareholders with the energy power grid unit and Essent's waste management, which they want to sell because it's a non-core business. The deal is expected to be finalized in the third quarter of 2009. Interested private equity firms are expected to outnumber strategic buyers, with some of them already owning substantial assets in the sector. Kohlberg, Kravis, Roberts & Co. (KKR) and CVC Capital Partners Ltd. (CVC), worked together previously to combine the operations of Dutch waste-management firms AVR and Van Gansewinkel Group. Van Gansewinkel told Dow Jones Newswires it is studying Essent Milieu. However, a subsequent deal could face antitrust hurdles. Other potential bidders are Global Infrastructure Partners (GIP), which in 2008 acquired U.K. waste management firm Biffa Ltd. in a consortium with Montagu Private Equity; a consortium consisting of infrastructure funds owned by Dutch NIBC Bank and Fortis Bank; and RREEF Alternative Investments, an investment fund of Deutsche Bank's Asset Management division, people familiar with the sale said. RREEF, GIP, NIBC declined to comment. By comparison, interest from industry bidders is looking weaker. French utility group Veolia Environnement SA (12414.FR) said Friday it wouldn't bid for Essent Milieu. U.K. waste management company Shanks Group PLC (SKS.LN)could be interested in Essent Milieu, but might be stopped by its debt burden. Shanks' Dutch director Michael van Hulst has been reported as saying he's only interested in Essent Milieu's composting activities. U.S. company Waste Management Inc.'s (WMI) Wheelabrator unit is considering a bid, its vice president Don Carpenter told Dutch newspaper Het Financieele Dagblad. Covanta Holding Corp. (CVA) of the U.S. and France's GDF Suez SA (GSZ.FR), which owns Dutch Waste firm Sita, are also weighing potential bids, people familiar with the matter said. GDF Suez declined to comment. Wheelabrator and Covanta weren't immediately available for comment. While private equity bids may be capped by troubled credit markets, strategic buyers may face their own hurdles in deciding to bid. The waste management sector is considered relatively recession-proof, but is subject to strict environmental and safety regulation and legislation. One of the consequences of this is the need for future heavy investment. "An acquisition of Essent Milieu would require substantial cash provisions to fund future investments," one person familiar with the matter said. The industry also faces increased pricing pressure, since contracts need to be publicly tendered and competitiveness increases, pushing prices down. In general investments in more durable - and often more expensive - energy, like waste-to-energy production, have become less interesting in the short term, after the sharp fall in oil prices over the past year. Unless they recover soon, end-market energy prices will come under increased pressure. In addition, lower commodity prices are putting pressure on the proceeds from recycling, while the recession is pushing down the amount of industrial waste available. Nonetheless, industry bidders are expected to be able to pay a higher price than private equity buyers. "Strategic buyers have a more long-term investment horizon, and since the condition of a leveraged buy-out seem to be more strict, limiting returns on the short-term, they should be able to outbid private equity," one person close to the deal said. -Robin van Daalen, Dow Jones Nieuwsdienst; +31-20-5715200; robin.vandaalen@dowjones.com