FTSE 250 utility company Pennon said today it has agreed to sell waste business Viridor to private equity firm KKR in a £4.2bn deal.
The sale represents an enterprise value of £4.2bn on a cash-free, debt-free basis at an earnings multiple of 18.5x.
KKR made an unsuccessful bid for Viridor late last year in an attempt to see off the competition ahead of an expected auction process.
Pennon said today’s agreement “recognises the strategic value of Viridor’s strong, diversified and complementary UK recycling and residual waste management platform and expected growth opportunities.”
It said cash proceeds of the disposal were likely to be approximately £3.7bn at completion, taking into account debt and transaction costs.
Pennon said there is the potential for additional consideration of up to £200m contingent on future events and outcomes.
The company said it would use the proceeds to pay down debt and make a return to shareholders, while retaining some funds for “future opportunities”.
It is understood that KKR pressed ahead with the deal despite the current coronavirus-inspired market volatility as it sees Viridor as a long-term investment.
In September, Pennon, which owns South West Water, said it was considering options for Viridor, which produces energy by burning waste.
Viridor, a major player in the energy-from-waste quarter, is contracted by more than 150 businesses and councils and has over 32,000 customers.
The division’s new plastics processing facility is on track, which would add much needed capacity to the UK market.
In Pennon’s first half results in 2019, the firm said that the business had seen consistent growth, and was “consistently outperforming” investment case returns.
The deal is subject to shareholder and regulatory approval and is expected to close during the summer.
Tara Davies, partner and EMEA head of infrastructure at KKR, said: “Viridor is a key part of the UK’s environmental infrastructure. We expect the company to play a critical role in the years ahead in helping the UK meet sustainability objectives, by reducing waste to landfill, further developing its energy-from-waste capability and building recycling capacity, particularly in plastics.
“Supporting Viridor in these aims fits with KKR’s focus on making long-term investments in companies which are addressing major sustainability challenges, and investing in critical UK infrastructure.”
Pennon chief executive Chris Loughlin said: “The transaction is great news for shareholders as it recognises the strategic value that Pennon has developed and nurtured in Viridor over many years and accelerates the realisation of that value for shareholders.”
Pennon’s shares were down half a per cent at 1,080p this afternoon.