The waste management group Shanks has received a £536m bid from the buyout firm Carlyle Group – a rare offer in a year that has seen the lowest volume of private equity backed deals since 1984.
In a statement to the stock market today, Shanks said it was in receipt of an unsolicited approach valuing the business at 135p a share. In an unusual move, the company put a figure on the price at which it would be willing to sell: 150p. According to sources close to the companies, the two sides are now locked in discussions.
If agreed it would be one of the largest private equity-backed deals this year in a market that has been in the doldrums, as the credit crunch caused banks to become more reluctant to provide debt.
According to data from Nottingham University Business School, there were only 31 private equity-backed buyouts completed in the first nine months of the year, with a combined value of £3.6bn. The figure is way below the £18.2bn worth of deals done in 2008 and £43.4bn completed in 2007, at the peak of the market.
Carlyle Group, with $87bn (£53bn) under management, is one of the world's largest private equity firms but has not done a deal in the UK since September last year. Its assets in this country include the child seat manufacturer Britax, the bank teller company Talaris, a digital media firm called Mill and Ensus, a bioethanol plant in Teesside.
In its statement, Shanks said it had support from its two largest shareholders, Legal & General and Schroders, which together own more than 30%, to hold out for at least 150p a share. Shares in the company had closed at 90.1p on Friday and today rose to 128.5p. People close to Carlyle, however, also suggest that talks with investors have been positive. Carlyle declined to comment.
If the deal with Shanks went through at the offer price, it would be the third largest completed this year, after the digital television technology firm NDS and the consulting firm Wood Mackenzie.
Rod Ball, a research fellow at the centre for management buyout research at Nottingham University, described this year as a "write-off" for the private equity industry. "Bank debt became practically impossible to raise for large deals at the start of 2008," he said. "The state of the economy has also left company cashflows unstable, so private equity firms are just sitting back and waiting. There has also been a gap in pricing expectations – vendors haven't yet brought the price of their business down enough to make a deal worthwhile."
Shanks is the last remaining independent waste management group in the UK and if the deal is successful would follow rivals Cory and Biffa, which were bought in leveraged buyouts in 2005 and 2008 respectively. In the year to March, Shanks made £34m on revenues of £697m from operations in the UK, Netherlands, Belgium and Canada. This year the business has suffered from the recession, as both the amount of waste produced and the price of recycled materials have fallen. It launched a £71m rights issue in May to reduce its debt and scrapped its dividend.
The company said it had sharpened its focus on three areas: recycling, organic processing and UK PFI initiatives.
But Nick Spoliar, an analyst at Altium Securities, said the approach could prompt counter-bids from other waste companies and private equity firms, attracted by the steady returns from a business that often has 25-year contracts: "Businesses such as this have long-term characteristics which are very attractive in terms of generating predictable returns over decades."
Top 5 2009 UK private equity deals
NDS Group: £1.25bn
Wood Mackenzie: £553m
Chesapeake: £325m
Aurora Fashions: £215m
Viking Moorings: £170m
Total: 3.7bn (first nine months only)
UK private equity-backed management buyouts/buy-ins
2005: £22.7bn
2006: £24.9bn
2007: £43.4bn
2008: £18.2bn
Source: Centre for Management Buy-out Research/Barclays Private Equity