Thread by @DownunderValue

Cleanaway $CWY.AX $CWY has put pen to paper on a bid for Suez $SEV Australia's recycling and recovery business. Does this change our valuations?

Let's quickly revisit our deep dive. 👇

https://twitter.com/DownunderValue/status/1367345807859408897

The bid is for $2.52bn to be paid from debt and capital raising:
♻️+45% enterprise value
♻️+42% EBITDA ($216m+$515m)
♻️+$70m synergies
♻️Price of x11.7 EBITDA, or x9.1 EBITDA inc synergies

Cheaper than $CWY current 12.9 EV/EBITDA, though will result in significant leverage.

If successful the full suite of assets to be acquired will complement the new growth areas for CWY (e.g. waste to energy - a national priority), provide scale and footprint, though also be at high risk of ACCC (see below).

The deal is pretty clever. Because ACCC may be a real problem with CWY becoming the clear #1 in Australian waste, a second part of the deal is for assets in Sydney only... this will much more likely pass, and avoid a $45m penalty from CWY to Suez if ACCC rejects the offer.

Pros and cons on the Sydney deal:
♻️$501m is cheap at x6.9 EBITDA ($73m)
♻️Less synergies as these are add-on post-collection services
♻️Landfill has only ~15yrs of life without more CAPEX
♻️Unlikely to face ACCC challenges

The takeover bid aligns really well with Cleanaway's Footprint 2025 Strategy. It's a complementary / accretive acquisition at a reasonable price. A significant part of the price will need to be capital raising to prevent future organic growth in other high-yielding areas.

CWY remains highly valued relative to growth prospects. EPS growth slowed to 2.7% (revenue flat, EBITDA +2.9%) in 1H21, while PE is >35.

I continue to have a holding position, but even with this news, I won't be increasing my position unless the price drops +20%.