KKR sells Cleanaway to Transpacific

Less than 12 months after completing a leveraged buy-out of Cleanaway, KKR sells the Australian waste management business for $1 billion.
In one of the fastest asset flips in private equity history, Kohlberg Kravis Roberts (KKR) yesterday sold part of its Australian waste management business to a trade buyer for an estimated return-on-equity of around 60%.

Queensland-based Transpacific Industries purchased the Cleanaway business from KKR for A$1.25 billion ($1 billion) in cash, less than 12 months after KKR won a bidding war to buy the asset from its original owners Brambles. At the time, KKR stunned the market by paying A$1.83 billion for both the Cleanaway and Industrial Services Australia businesses û well above the price offered by other bidders, including Transpacific.

Though KKR hasnÆt confirmed how much it stands to make from the flip, it is assumed that of the A$1.83 billion paid in June last year, about A$1 billion of this was for the Cleanaway business (the rest was for Industrial Services Australia). By applying private equity leverage mathematics to this, it is estimated about A$400 million would have been equity and the rest debt. So, with Transpacific paying A$1.25 billion for the Cleanaway business (it isnÆt buying Industrial Services Australia), KKR has made A$250 million in profit and a return-on-equity of about 60%.

With Transpacific still in expansion mode and still interested in Cleanaway, the trade sale seemed like a logical exit for KKR. TranspacificÆs executive chairman, Terry Peabody, told FinanceAsia yesterday that the Cleanaway business had never left the companyÆs radar. ôThe timing has worked well for us and we are buying Cleanaway under a different set of circumstances û it is totally debt free and we are purchasing a company rather than an asset.ö

Asked how much Transpacific had been prepared to pay for the business back in June 2006, Peabody says he had received board approval to offer up to A$1.1 billion for the combined Brambles assets.

Analysts speculate that KKR decided to sell Cleanaway in record time because other large-scale waste management acquisitions were proving difficult to secure, therefore limiting its growth options. Two of the other large players in the Australian market, Collex and SITA, have resisted acquisition approaches.

ôKKR was never going to be able to extract the same synergies out of the [Cleanaway] business that we can,ö says Peabody. ôIt wasnÆt a natural fit for them like it is for us.ö

However, Peabody dampened rumours that KKR wasnÆt meeting its targets with Cleanaway, saying that the company has performed well over the last 12 months. ôBrambles said the business would make A$100 million in Ebitda for the 2007 financial year and it is on target to make A$102 million, so the overall business is performing according to expectations.ö He says Cleanaway signed several new waste management contracts with municipal customers under KKRÆs watch.

Using the Ebitda target of A$102 million and accounting for synergies, Transpacific is paying a multiple of 7.8x for Cleanaway. This is in line with the 7.7x paid for WAM and the 7.9x paid for Baxter û two of the companyÆs more recent bolt-ons.

Transpacific says the acquisition will be earnings accretive by 10% in the 2008 financial year, and that it expects to achieve synergies of A$63.8 million in the same period, with the bulk of this coming from the removal of cost duplication and the addition of new customers and cross-selling opportunities.

Transpacific will pay for the purchase with a series of bridge loans totalling A$3.18 billion and provided by ANZ, Commonwealth Bank and National Australia Bank. Over the next few months, these bridge loans will be refinanced with A$430 million taken out by an equity placement, A$250 million via a hybrid/bond, A$400 million in a US private placement, and A$2.1 billion in a syndicated loan.

Once some of the debt has been converted to equity, Transpacific will have a net-debt-to-net-debt-plus-equity ratio of 53.4%, well below its banking covenants and a stated target of 60%. ôThis gives us about A$500 million in extra headroom to make further acquisitions,ö says CFO Trevor Coonan.

The purchase of BIS Cleanway in June last year marked KKRÆs first deal in the Australian market and held the rank as the largest private equity deal for a time. But it also helped to kick off a series of billion dollar transactions in the country including the now-defunct A$11 billion bid for Qantas, and KKRÆs own stab at retailer Coles Group. KKR's first bid for Coles was rejected last October, but the firm is now involved in a competitive auction for the A$20 billion business. Its closest competitor for the asset is a consortium headed by retail conglomerate Wesfarmers, which owns 11% of Coles shares and has the highest bid on the table so far.

KKR has not indicated what it plans to do with the Industrial Services Australia business that it purchased from Brambles along with Cleanaway. That business now trades as BIS Industrial Logistics.

KKR was advised by boutique firm O'Sullivan Pullini on this recent deal, while Transpacific did not use an advisor.
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