A €944m acquisition of a Dutch waste-to-energy business (CKI:35%; PAH:20%)
CKI and Power Assets (PAH), together with Cheung Kong Holdings (CKH) andLi Ka Shing Foundation (LKSFL), have agreed to acquire AVR-AfvalverwerkingB.V. – a waste-to-energy business in the Netherlands – for a consideration of€944m (35%/20%/35%/10% split for CKI/PAH/CKH/LKSFL, respectively). Thetransaction represents a c.9x 2012 EV/EBITDA multiple and would suggestc.2%/1% upside to our 2014E CKI/PAH earnings on our estimates, respectively.
Likely higher equity IRR vs. the regulated utilities business
The acquisition marks the first foray for CKI and PAH to invest in continentalEurope and management expect a low to mid-teen equity return can beachieved (60%/40% equity/debt). This is slightly higher than the UK regulatedutilities business, as the waste-to-energy (WTE) business is subject toadditional risks such as fluctuations in on-grid electricity tariff and wasteprocessing charges. New competing WTE capacity can be a threat longer-termbut we don’t think this is likely in the next couple years due to industryovercapacity (in fact, AVR has to utilize >20% of its capacity to process foreignwaste currently).
Dutch WTE business seems to have reached the bottom of the cycle
We note that EBITDA of AVR has been on a steady declining trend in the pastyears due to overcapacity in the waste processingmarket in the Netherlands and partly on lower on-grid electricity tariff.However, such situation seems to have reached a bottom with more importedwaste from other countries. With a c.75% of the waste processing capacitycontracted till 2019-20, and a potentially more revenue from the districtheating business, the business should be able to generate a relatively stableEBITDA of €110-120m in the next couple years.
Background information of AVR and Dutch’s waste-to-energy market
AVR was the WTE arm of Van Gansewinkel Groep (a vertically integratedwaste company in waste collection, recycling and waste-to-energy businessesmajority-owned by KKR and CVC Capital). AVR has c.20-25% market share inthe Dutch incineration market (vs. 20-25% market share each for Attero andAEB) and operates two WTE plants in Rozenburg and Duiven with a processingcapacity of 1.82m tons. Both of those two plants have obtained the R1 statusin 2010 and 2011, respectively, which allow them to process waste fromcountries outside Netherlands.