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Covanta enters JV with Macquarie +5

The Covanta conference call has just concluded.  The partnership is for exclusive development in the UK.  In the unlikely event that either partner should wish to pull out, the other has right of first offer on any existing equity.  Management commented that there are no other options, which is good.  I think the potential growth of this seed is far more likely and exciting.  For background, GIG was created by the British government, and only recently privatized by Macquarie, which is the leading infrastructure firm in the world.  Macquarie had already had already been involved in refinancing talks for Dublin, and approached Covanta once its GIG transaction was complete.  Despite the current U.K. scope, GIG's interest does extend to other parts of the world.

That said, the partners foresee that their plate will be full in the U.K. for the next 3-5 years, adding 2M tons of waste capacity.  Rookery construction should begin 1H18, and new plants should be starting up around 2021.  Project equity returns are expected to be in the low to mid teens, and Covanta will account for them under the equity method.  More importantly, the JV will begin working with waste companies rather than municipalities, which means faster decisions and progress.

For Covanta specifically, this transaction has many positive points:
  • retired high-cost convertible preferred notes
  • values project at 13x EBITDA
  • recycles Dublin capital (transaction should close in mid-1Q18) delevering the balance sheet
  • Covanta will also be paid as an operator of the plants
  • should add $10-15M of FCF, growing at 10% CAGR to $40-50M over the long term
On one hand, it's hard for me to overstate what I positive long-term development, I think this will be.  The U.K. exports 3.5m tons of waste/yr, and has tip fees that are roughly double those in U.S.  I can only reiterate my thoughts on Covanta's management excellence with respect to the course of its expansion and partner selection.

On the other, it is a a long-term positive and time needs to be accounted for appropriately.  It's a good assumption that there will be no dividend bump until at least this time next year, and quite possibly not for two years or more.  Covanta still has significant debt, though that is already on course to be substantially reduced.  Existing NOLs should also shield the company from taxes for years to come.  I expect this partnership to continue to grow slowly over time, and more good execution will be needed in order for Covanta to realize its full potential.  That said, while CVA is still below my $16.67 price target, I think this transaction makes it one of the safest stocks out there, and I fully expect my price target to grow as we hear more over the coming year or two.
On 12/18/2017 09:24 AM, Esekla wrote:

Covanta has entered a joint venture with Green Investment Group, a subsidiary of Macquarie Group to

develop and invest in the combined project pipelines of the partners, as well as to pursue new opportunities for EfW project development or acquisitions.
The agreement includes Dublin and expands the project pipeline to six (from 2, if memory serves).  Covanta will serve as the operations and maintenance ("O&M") provider for all JV projects.  I expect this will also allow Covanta to accelerate the pace of new acquisitions and development projects.  CVA is up to about $16 in the pre-market.  I could easily see it appreciating further.  I will listen to the conference call later today.