EQT unearths a $7 bln Aussie trash-to-cash deal
RPT-BREAKINGVIEWS-EQT unearths a $7 bln Aussie trash-to-cash deal The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.
By Antony Currie
MELBOURNE, Aug 13 (Reuters Breakingviews) - EQT EQTAB.ST is about to put to test in Australia an old Yorkshire adage, "where there's muck there's brass" - in other words, trash means cash. The private equity firm run by Per Franzén has offered to buy Cleanaway Waste Management CWY.AX at an enterprise value of A$9.4 billion ($6.6 billion), the two confirmed on Thursday, with the target's board intending to recommend the deal once its suitor has trawled through its books. The price is punchy at 10 times this year's expected EBITDA and a 32% premium to where shares closed on Wednesday. But solid growth and EQT's garbage nous suggest the buyer can dig out some far from stinky returns.
Cleanaway is the largest provider of garbage, waste and recycling services in Australia, shifting everything from general household, municipal and industrial trash to hazardous materials. Revenue probably grew 9% in the 12 months to the end of June, with EBITDA outpacing it at 13%, LSEG data show. That tempo may moderate in the next couple of years, per analyst estimates, but not by much - and the operating leverage is likely to remain.
That ought to leave an EQT investment sitting pretty. Assume the investment firm finances the deal by leveraging up the target's debt to six times this financial year's expected EBITDA of almost A$1 billion. That would leave it handing over an equity cheque just shy of A$3.5 billion. If EBITDA grows at an average of 7% for each of the following five years to A$1.4 billion and the business can be sold at the same EV/EBITDA multiple EQT is offering, that would throw out an internal rate of return of 15%.
That might not suit a pure private equity deal. But EQT would pick up Cleanaway with its infrastructure fund and the return would be at or near the top of the heap for what such players target.
Even if the leverage were to drop to five times EBITDA the return would still be in double digits. And the wannabe acquirer should be able to squeeze more out of the business. Its dealmakers have waded into 10 garbage companies over the past 15 years, including Urbaser, one of Spain's largest, and the biggest waste-to-energy firm in the U.S., Reworld.
There are risks, of course, not least a big enough economic downturn to tip even usually quite resilient garbage revenue into the dump. But EQT looks better insulated than many.
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CONTEXT NEWS
EQT Infrastructure has offered to buy Cleanaway in a buyout that values the Australian waste management company's enterprise at A$9.4 billion ($6.64 billion), the two companies said on August 13. The target's board has granted the private equity firm exclusive due diligence for up to nine weeks and currently intends to recommend that shareholders accept the bid.
At A$3.13 a share, the offer represents a 32.1% premium to Cleanaway's closing price on August 12.
(Editing by Una Galani; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))