Shares digital

Bid speculation has lifted the shares of Shanks (SKS) by 23% to 240p since mid-November. It could be among several waste management companies to be taken over during 2008, according to Catalyst Corporate Finance.

It believes the UK must spend £9 billion on recycling and incineration facilities by 2020 to meet EU landfill targets. Government agency Defra believes at least £11 billion is needed. Such investment into the waste industry will create significant revenue opportunities for operators such as Shanks and turn them into takeover targets for private equity groups and rival trade companies.

‘The attraction in waste management groups is long-term contracts rather than large profit margins. Steady income is hugely attractive, as are defensive qualities, as waste volumes are only going to get bigger,’ says Catalyst research director Mark Wilson.

Local authorities and the government have dithered about the best technologies to treat waste and improve recycling rates. Private finance initiatives to undertake the waste management work have been slow to roll out, making those already participating in schemes likely bid targets.

Shanks has a joint venture with the East London Waste Authority to treat waste in the capital. It has since picked up a 25-year PFI contract with Dumfries & Galloway council. Biffa (BIFF) last month opened its books to private equity groups Montagu and HG Capital. The company signalled that a £1.2 billion offer would be the minimum takeover price it would accept.

Shares says: A bid for Shanks makes sense, with private equity able to invest funds to accelerate growth. Without an offer, Shanks still looks compelling on slow but steady gains.

by: Dan Coatsworth