European plastic recycling M&A update 2023

What a difference a year makes! Last year saw transaction activity (by number of transactions) fall by 60% from the prior year (see Figure 1)! Transactions involving plastic recyclers, MRFs and EPR / collection schemes fell from 23 in 2022 to only 9 in 2023.

Interestingly, the fall in completed transactions coincided with a large number of sellers seeking an exit but failing to find a buyer. Indeed, the year may also mark an all-time high in incomplete or failed acquisition transactions.

Having ourselves evaluated several opportunities over the past year, we can understand the reasons behind this. We see the nature of investment activity as having changed over the past year.

1.?Focus of large players on organic growth and portfolio optimization.

The business environment for recyclers was negative for much of last year. This led to more recyclers seeking an exit, esp. those without the balance sheet to sustain themselves through the current environment. Yet, quality recyclers are few and far between – many assets are either old, poorly located vis-à-vis availability of waste, or only process high-quality or industrial waste. Thus, they either cannot be profitable or require significant upgrades to bring them up to today’s industry standards.

Simultaneously, the industry downturn forced larger buyers to review their earlier acquisitions and to focus on optimizing their production assets – divesting or shutting down assets that are old or non-performing and expanding current assets where it makes sense.

2.?The UK was a particular hotspot of investment and M&A activity.

Transaction activity was not evenly spread across Europe. The UK, in particular, accounted for almost a third of all transactions, and its share of transactions has grown each year since 2020. The last year confirmed that the country remains one of the most dynamic in Europe for mechanical plastic recycling, with a large pool of plastic feedstock, a high historical dependency on exporting waste that led to relatively low sorting and recycling capacity, and supportive legislation that will make more plastic feedstock available while encouraging infrastructure investments.

3.?Minority or co-control transactions share in total transactions grew significantly.

This reflects two developments. First, the emergence of smaller companies that are growing with outside capital and usually targeting more difficult to process waste streams. Examples include Impact Recycling in the UK and ETW in the Czech Republic. Second, it illustrates a greater flexibility amongst corporates in how they aggregate production capacity, with LyondellBasel for instance only acquiring 50% of De Paauw Recycling in the Netherlands.

4. Valuations came back to reality.

Transaction multiples had expanded in 2021-2022 to well above their average. Last year, valuations fell, with multiples coming back to levels last seen in 2018-2019. This is inline with other sectors and a broader correction in the market.

What lies ahead??

We see this downturn as likely temporary, reflecting a pause from the hectic pace of dealmaking over the last few years. In the?mid-term, growth of recycling in Europe is almost inevitable and dependent on two factors. In the short term, the fortunes of recyclate prices and of recycling will depend on virgin plastic and oil pricing. In the mid-term, however, it depends on when the European Plastic and Packaging Waste Directive is revised (PPWR), which will require high levels of recycled plastic content across Europe.

Despite the high M&A and expansion activity of the past 5 years, Europe’s recycling industry does not have sufficient capacity to deliver the volumes or quality targets set by the PPWR. Recycling still remains a fragmented and small-scale industry, with average recycling capacity of c. 10kT across Europe. Establishing new projects continues to be a painfully slow process, due to long permitting timelines. Thus, we expect acquisitions and brownfield expansion via minority/JV investments to return to favor once the industry pricing environment improves and after corporate acquirers have pursued organic expansion to the extent possible.

About our work

This is an extract from our market mapping of plastics recyclers and the M&A and investment transactions in that sector across Europe and since last year also Turkey and India. This database has been revised and expanded annually since 2019 and today includes over 600 companies and transactions going back over 10 years covering waste managers, sorting companies, collection systems, and mechanical and chemical recyclers.