Analysis: what would a Veolia purchase of Suez mean for the UK recycling market?

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Veolia's cardboard recycling service

Since summer last year, a Veolia purchase of Suez has been on the cards and now appears to be heading towards a conclusion – whether it succeeds or fails is still not clear.

After Veolia bought a 29.9% stake in Suez from Engie in October, it has been pursuing a strategy to persuade the Suez board to accept its takeover proposal, but has been rebuffed.

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Veolia has now, however, decided to engage in a hostile takeover bid. While this has been stopped by the courts, Veolia is confident it can overcome the legal barriers. It may still have to overcome the French Government though, which is against these hostile takeovers, as culturally bids of this kind are not viewed with favour in France.

If Veolia gets its way, it will create a giant. So how will this affect the UK market for recyclable materials if the takeover goes ahead?

Size

Clearly, these are two very large companies. According to 2017/18 data from statista Veolia’s revenue in that year was £1.5 billion, while Suez had revenue of £798 million. Based on this data, this would create a £2.3 billion revenue company in the UK.

This would dwarf current second place Biffa, which had revenues of £1.076 billion in 2017/18 and fourth placed Viridor with income of £788 million. FCC Environment is fifth on this list with £670.4 million.

While there may be a sale of Veolia/Suez assets as part of a takeover (more on this below), the combined company would have a huge amount of material to sell.

According to 2019 Defra data, Veolia handled 9.49 million tonnes of household, industrial and commercial waste in that year, plus an additional 1 million tonnes of inert construction and demolition waste and 368,000 tonnes of hazardous waste.

In the same year, Suez received 8.56 million tonnes of household, industrial and commercial waste. It also collected a further 0.85 million tonnes of inert construction and demolition waste and 9,000 tonnes of hazardous waste.

However, in its draft offer document on its purchase of Suez, Veolia says that the combined company globally would not actually be that big. It says:

“The market of solutions for ecological transformation (combating global warming, pollution treatment, recycling and circular economy to fight against the increasing scarcity of raw materials, digitalisation of uses, etc.) is growing strongly but today also very fragmented: as an illustration, the new combined entity will have a market share of around 5% worldwide.

“Consolidation of the sector appears to be inevitable, particularly in order to meet the challenges of financing the increasing Research & Development efforts essential to developing of new environmental technologies, of mobilising the capital necessary to launch operations for the treatment of hazardous waste or the protection of water resources – both strongly growing sectors, or of developing solutions to enable industries to meet environmental standards – which are bound to become stricter in the next few decades. This consolidation has already begun, especially with the acquisition of strategic assets in Europe (Spain, Germany and the United Kingdom) by Chinese stakeholders and American investment funds.”

Synergies

In this same document, Veolia is at pains to point out that it and Suez often have complementary operations.

For example, it says it has a complementary client base with Suez. While Veolia has major industrial clients including Shell, Danone, Unilever, Arcelor Mittal, Sinopec and PSA, Suez has contracts with L’Oreal, Arkema, BP and Airbus.

On plastic recycling, Veolia notes the different expertise of the two. It says:

“Suez has developed the recycling of plastics such as LDPE and PVC, as well as recycled/virgin hybrid plastics, while Veolia has stepped up the pace in food-grade plastics, particularly PET and HDPE.”

Veolia also believes that synergies will be created by rationalising waste collection systems, but also through having a stronger international network of treatment options.

For the United Kingdom, Veolia suggests there are significant complementary ways in which the two will work, but also synergies too. It says:

“In the United Kingdom, Veolia is a major player in waste management, operating in the municipal sector as well as in the tertiary and industrial sectors. It is also present in municipal water, energy services to buildings and services to industry.

Suez has a portfolio of around ten private finance initiative (PFI) or public-private partnership (PPP) contracts in waste, comparable to that of Veolia but geographically complementary, and a significant presence in the collection of ordinary industrial waste (OIW), again complementary to that of Veolia. The potential for value creation through operating synergies (internalisation, plant availability rates, electricity sales, etc.) resulting from these geographical complementarities is significant.”

Sale of assets

Veolia has recognised that there could be significant competition issues in territories in operates in if it is able to buy Suez. It says:

With respect to waste, assets will likely have to be sold, and the exact scope of these sales will be established during discussions with the antitrust authorities. This activity breaks down into different markets (collection, treatment, for public and private customers), each of which will be analysed in detail and locally. Numerous expressions of interest have been expressed for the acquisition of the assets to be divested, notably by leading French companies active in the relevant businesses. In any event, the choice of the buyer(s) will be made jointly with the joint committee described in paragraph 1.3.4 on the basis of the four criteria above-mentioned: (i) social guarantees, (ii) the quality of the industrial project and the capacity for investment and innovation, (iii) the acceptability of the buyer by customers and the capacity to develop real and serious competition on the market, and (iv) the sale price.

Next steps

French finance minister Bruno Le Maire has asked the country’s market regulator to look into the Veolia purchase of Suez.

Suez has also challenged the validity of the Veolia filing of the offer saying Veolia is in breach of an enforceable order rendered by the President of the Commercial Court of Nanterre. This order specified how Veolia should submit its offer to the French regulator AMF and that Veolia should not issue a tender offer without the approval of the Suez board.

Veolia’s chief executive Antoine Frérot is confident that these legal and regulatory challenges will be overcome.

If this is the case, the takeover will still need to be approved by AMF and the European Commission. Veolia would hope to complete this process by May 2022.

Although there are still a lot of hurdles to overcome, if Veolia gets its way, the UK recycling industry will have a vastly larger entity to deal with when trading with the combined group.

For those trading paper and cardboard, plastics, glass, metals and other recyclables, by the summer of 2022, Veolia could be a lot more powerful than it is now if its bid for Suez completes.

In the UK, Veolia would likely be the biggest operator by far, with Biffa, Viridor, and FCC only slightly larger combined (£2.3 billion for Veolia compared to £2.5 billion for Biffa, Viridor and FCC based on 2017/18 turnover figures).

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