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The tightening of the regulatory environment in the traditional waste sector has caused local authorities to re-think their waste disposal strategies; opening up opportunities for new entrants and driving M&A.

The £1.4 billion acquisition of the Waste Recycling Group (WRG) by Spanish water and waste giant Fomento de Construcciones Contratas (FCC) is one of a number of deals that reflect consolidation of the sector. The mega-deal positioned FCC as one of the largest players in the UK’s waste management sector.

Stephen Shergold, head of environmental law at Denton Wilde Sapte, provided specialist advice to backer, BBVA, on the deal. He explains: “At times, my role as the regulatory lawyer in the transaction subsumed that of the other disciplines as the regulatory risks associated with the target had the potential to affect the valuation of the business.”

Shergold believes understanding regulation is key to the waste industry, and the broader cleantech sector, as companies require the expertise of legal advisers who can not only document the deals but also understand the regulation that the target business is faced with every day.

And the similarities between waste and clean energy don’t end there, nor the lessons that can be learnt and transferred from one to the other.

“I believe M&A activity in the traditional waste sector is a forerunner of what will be seen in renewables. There are an increasingly large number of smaller so-called ‘cleantech’ companies out there each attracting substantial investment interest, which will most likely lead to consolidation in time,” adds Shergold who is also co-head of the firm’s cross-departmental Climate Change and Renewables team.

Feel the force

Higher carbon-based energy prices and the EU’s target of generating 20 per cent of all energy through renewable sources by 2020 are the driving force behind the renewables market as new, cleaner technologies appear to tackle climate change.

“There’s no doubt that this is a regulatory-driven sector. If you have a product, you have to know how it fits in with regulation because if you don’t understand the framework there is the potential that you could lose out on some of the margin,” he adds.

The sector is also being fuelled by early-stage investment and Cleantech findings show that VC funding in cleantech companies across North America and Europe reached $5.18 billion (£2.6 billion) in 2007, up from $3.6 billion (£1.8 billion) in 2006.

Matt Bonass, a corporate partner and co-head of the Climate Change and Renewables team, says: “We like to get to know our clients at an early stage, understand their industry, their technologies and processes, and put some regulatory scrutiny on them. Time and expertise invested at this early stage enables us to set them off in the direction of investors, and quite often recommend them to our investor clients, such as the Virgin Green Fund. For example, one of our clients, Sindicatum Carbon Capital, has attracted investors, such as CVCI, Black River Asset Management and AIG. A number of clients have now completed first and second round fundraisings and are looking at moving to AIM or at some other exit.”

IP protection is also an important consideration for the Climate Change and Renewables team. By successfully protecting IP rights for these businesses, their competitive edge is secured, allowing them to establish global rights in their technologies.

“Invariably, the first question an investor will ask these companies before investing is what rights to the technology do they have and how have they protected them,” Bonass adds.

Proven technology

Recent M&A points to activity in traditional more high profile sectors, such as wind and biofuels, which are perceived by some to be less of a risk. At the larger end of the deal spectrum is Irish wind farm Airtricity’s sale of its North American business to E.ON, followed by the sale of its remaining business to Scottish & Southern Energy.

Bonass comments: “There has been less M&A activity in sectors, such as wave and solar power because they are less developed technologies. I would say that the two main areas for M&A are currently in the more established sectors of wind and biofuels.

“With biofuels people tend to think bigger is best – the VeraSun and US Bioenergy merger in December 2007 is an example of this. Chief executives seem to feel that consolidation can enable companies in this sector to ride out the ups and downs of the industry,” claims Bonass.

He describes renewables projects and investments in Africa as an area where the firm’s Climate Change and Renewables team can "add real value". “We have had a number of VC firms approach us about investing in, for example, biofuels projects in various African countries. We have one of the largest network of associate offices in Africa, so we are able to work with our contacts locally who can diligence whether the opportunity is there. On some occasions, we have had to say, ‘this doesn’t stack up as a proposition’, which clients can find equally valuable as confirming that there is a deal to be done.”

Despite plans to increase the EU biofuel target to 10 per cent of transport fuels by 2020, biofuels has come under fire in the last 12 months owing to questions regarding its sustainability. This is mostly down to difficulties in calculating the exact carbon release from field to fuel tank in addition to public perception regarding the impact of biofuel-feedstock on deforestation, the food chain and labour rights.

Dirty comes clean

With power generators having to sell a certain percentage of energy generated from renewable sources, utilities are engaging in the acquisition of renewable energy assets – once the companies are sufficiently mature and have proven they can generate electricity from renewable sources.

Tanya Nash, a partner in the firm’s corporate group with particular expertise in natural resources M&A, says: “The acquisition of smaller, renewable energy companies will help the big guys to meet their regulatory obligations. Regulation is driving people to investment decisions and companies are paying top dollar for them.

“These types of company have a value to industrials that they wouldn’t have to a financial buyer, to generators in particular who have the cost of meeting these obligations aside from their intrinsic investment value,” says Nash.

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