Shanks Group plc has sold 49.99 per cent of its equity in the financing and infrastructure special purpose vehicle (SPV) in its £750-million private finance initiative (PFI) contract with Wakefield Council.

The announcement was made by the company yesterday (3 February) as it released a trading update that suggested that weakening commodities in the municipal waste market would lead to a financial year performance ‘slightly below’ its previous expectations.

The equity share, along with 100 per cent of the company’s subordinated debt, has been sold to project developer and asset management company Equitix.

Peter Dilnot, Group Chief Executive of Shanks, explained that the move will enhance the company’s ability ‘to redeploy capital for accretive acquisitions or investments where accelerated growth and returns can be delivered’.

Under the terms of the sale, the gross cash consideration of £30 million will be payable on completion, and costs to Shanks will be approximately £1 million. The sale requires the formal approval of Wakefield Council, and will be considered at the council’s cabinet meeting in March.

Shanks will retain 50.01 per cent of the equity in the 25-year contract, which expires in 2038, and will therefore still carry out its ongoing delivery, which includes the development of the South Kirkby waste plant.

In November, the company announced that a four-month delay to the South Kirkby waste plant due to the liquidation of its anaerobic digestion facility supplier meant that it would have to pay £5 million in extra costs. The plant, which will be able to process up to 230,000 tonnes of municipal waste every year, subsequently hit full operation at the end of December.

As a consequence of the sale, however, Shanks will deconsolidate its investment, resulting in £88 million of associated non-recourse debt being removed from the group’s balance sheet and simplifying the presentation of the group’s consolidated accounts.

Following the disposal, the group’s core net debt as at 31 March 2016 is now expected to be around £195 million.

By the end of December 2015, the gross assets of the SPV amounted to £113 million, with the profit before tax associated with them projected to be £1.5 million in the financial year ending March 2017. The sale will therefore result in a profit on disposal of approximately £11 million.

However, Shanks says that after writing off other associated assets on the basis that the group will no longer be fully consolidating the SPV, the sale will result in a loss of approximately £10 million as a non-trading item.

‘Committed to success’ of Wakefield contract

Commenting further on the sale, Dilnot said: “This transaction is consistent with our strategy of actively managing the group’s portfolio. The proceeds will be used to reduce borrowings and support our ongoing investment in infrastructure projects.

“Shanks remains wholly committed to the success of our flagship Wakefield contract as both an operator and an ongoing investor.”

Geoff Jackson, CEO of Equitix, commented: “Equitix continues to invest in the heart of local communities and in line with their funds’ investment criteria. We are pleased to be building on our portfolio of local authority waste projects, which have long-term concessions in place to deliver sustainable solutions to extract recyclates and divert household waste from landfill to build a greener local economy.”

Trading update

Covering the period from 1 October to the beginning of February, the trading update found that while market conditions in the group’s commercial division have remained unchanged, the oil, gas and electricity sectors have continued to experience significant price declines, ‘with consequent direct and indirect impact on Shanks’. In addition, the sharp fall in commodity markets, the group says, has had an impact on the recyclate prices and offtake markets for waste recyclers.

Therefore, while the group has delivered ‘strong improvement’ in its commercial division through increasing volumes of construction and demolition waste and solid recovered fuel in the Netherlands and Belgium, ‘it has not been possible to compensate fully for the impact of more challenging conditions in the hazardous waste and municipal markets’.

As a result, the Shanks board expects the group to deliver a result for the financial year 2015/16 that is ‘slightly below’ its previous expectations.

However, the update says that, assuming current market conditions continue, the increase in capacity commissioned this year will position the company to deliver ‘strong growth’ in the next financial year.

More information about Shanks’s work with Wakefield Council can be found on the group’s website.