Taking out the trash

Cleanaway Waste Management (ASX: CWY) has made a formal bid for French Suez Groupe’s (EPA: SEV) Australian recycling assets. The bid for these assets is worth $2.5 billion and was initially cheered by the market, with Cleanaway shares closing up 11% on the day of the announcement. However, there are a few hurdles the company will need to jump through before acquiring the asset.

Firstly, it will require the thumbs-up from the Australian Competition and Consumer Commission (ACCC) and New Zealand’s Overseas Investment Office (OIO). Secondly, the bid sets up a bidding war with domestic French rival Veolia (EPA: VIE), which holds a 29.9% stake in Suez. Suez can terminate the deal with Cleanaway if Veolia were to lob a higher bid. In February this year, Suez rejected a $13.3 billion takeover bid by Veolia for its global operations. Since then, the two French waste companies have been locked in a heated tussle, unable to come to any agreement and even clashing in court over it. Veolia has openly stated that it will “legally challenge any deal that could derail its bid for Suez’s French parent” and do everything in its power to prevent the sale to Cleanaway. A summary of the deal is as follows:

• Suez has until May 6, 2021 to terminate the deal, if it reaches an agreement with Veolia.
• Suez can terminate the deal by April 26, if a higher bid is received by Veolia and is NOT matched by Cleanaway.
• In the event that the Suez Australia Acquisition is terminated due to other events where Cleanaway is not at fault, Cleanaway and Suez have agreed that Cleanaway will acquire a portfolio of strategic post-collections assets in Sydney (comprising two landfills and five transfer stations) for $501 million.

Cleanaway’s bid has thrown another log on burning fire, but it’s a win-win situation for the Australian waste company. CWY has said it will require a capital raising to complete the deal.

Morgans has a Hold recommendation with a target price of $2.37. The broker says the takeover bid with French Suez Groupe “is in-line with the company’s Footprint 2025 strategy and is significant in terms of size, complementary assets, growth options and potential synergies.” However, the transaction is a conditional agreement to acquire the Australian recycling and recovery business OR a portfolio of its Sydney post-collection assets. Morgans estimates a $1.95 billion capital raising will be required to part-fund this deal, and is entirely possible.

• The $2.5 billion Australian recycling assets is net present value (NPV)-per-share-accretive by 18 cents
• The $500 million Sydney asset portfolio assets is NPV-per-share Neutral.

Ord Minnett has an Accumulate recommendation, with a target price of $2.60. The broker is largely positive on the bid, describing it as “compelling, as these are priced infrastructure assets, particularly the Sydney metro post collection, and they fill a hole in the Cleanaway national footprint.” To add to it, Ords highlights the fact that Cleanaway has also entered into a “separate transaction to acquire two landfill sites, and five transfer stations in Sydney from Suez for $501 million should the takeover bid for Suez from Veolia Environment proceed. Accumulate retained.”

Macquarie (which is advising CWY on this deal) has a Neutral recommendation with a target price of $2.50. The broker says the deal has a “potential valuation range of 9-12x EV/EBITDA may be possible and the combined business is expected to reap significant synergies via network/fleet optimisation and overhead cost reductions.”

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.