South West Water piles into landfill business

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South West Water yesterday became the country's largest waste disposal group when it bought Terry Adams, an Exeter-based landfill operator, for a maximum sum of pounds 105m. Peter Thal Larsen explains how the utility plans to make brass from muck.

The water utility will initially pay pounds 77m for Terry Adams, which operates 12 landfill sites in Somerset, Manchester and Derbyshire. A further pounds 28m payment depends on the group receiving planning permission for another five sites.

The company's founder and managing director - also called Terry Adams - and his family stand to make pounds 95m if the full amount is paid. Although South West Water executives will run the enlarged business, Mr Adams will carry on in an advisory role

Terry Adams currently has spare space for 49m cubic metres of landfill, but has planning permission for just 17m cubic metres. If South West Water gets planning approval for all its void space it will overtake Shanks & McEwan, currently the country's largest landfill operator.

Analysts said the price South West Water paid for the space looked cheap when compared with recent deals in the industry. However, South West Water's shares closed down 1p at 929p as investors concluded that the group was now less likely to mount a share buyback.

The company said that uncertainty over the forthcoming regulatory review of the industry would limit its ability to gear up its balance sheet. "We are keeping our powder dry," said Colin Drummond, managing director of South West Water's enterprise division. Analysts believe the company will not buy back shares while the review is going on, suggesting the group will not make a move before 1999 at the earliest.

The new landfill sites complement South West Water's existing landfills, which are mostly in East Anglia and along the South Coast. All these regions are expected to experience a shortage of landfill space in future.

South West Water is likely to raise Terry Adams' prices. "In our view the price Terry Adams charges per tonne of waste, in areas where demand is strong, is rather low," said Mr Drummond. He said Terry Adams would also benefit from South West's ability to win planning applications. The group has won four of the last five applications it has submitted.

An added advantage is that Terry Adams's landfills only accept active waste like domestic rubbish. They enjoy better margins than sites which accept so-called inert waste such as building rubble.

Mr Drummond said the introduction of the government's landfill tax had not affected demand for active waste landfill - which is largely supplied by local authorities - despite a doubling in charges. In contrast, demand for inert landfill has fallen sharply as a result of the tax.

Mr Drummond said the acquisition was part of South West Water's strategy of building up its profits from unregulated activities. In the year to last March the divisions which fall outside the industry regulator's control made operating profits of pounds 12.9m, compared to a pounds 111.7m contribution from the regulated Water & Sewage business.