Deal focus: ADV’s Asia hygiene platform play

Paul Chan, Hong Kong’s financial secretary, promised to “mobilise all available manpower and resources” to contain COVID-19 in his recent budget speech. This includes HKD 67.5bn (USD 8.6bn) in additional spending in 2022-2023, of which HKD 500m is for hygiene control measures: from street cleaning and refuse collection to rodent controls and oversight of public markets.

It creates a favourable backdrop for ADV Partners’ recent acquisition of ISS Environmental Services, a significant provider of portable toilets and sewage management and mechanical street cleaning services in Hong Kong. However, tailwinds that helped shape the underwriting of the approximately USD 50m deal predate the pandemic.

“We like the industry in general and we have been looking at it for a while across different geographies. And we see the Hong Kong government increasing its focus on hygiene and sanitation, driven by rising public awareness,” said John Malliris, a managing director at ADV.

“People’s attitudes shifted on the backend of the SARS outbreak in 2003. There was more mask-wearing and more wiping of elevator buttons. This continued for a few years afterwards and in some cases never stopped. COVID has served as another trigger.”

King of convenience

The overall budget for the Food & Environmental Hygiene Department (FEHD), which is tasked with putting the extra HKD 500m to work, is HKD 10.5bn. The allocation for a wide range of hygiene services, including street cleaning and the management of public toilets, is HKD 6.44bn. It has risen steadily. Ten years ago, this line item was just HKD 2.66bn; five years ago, it was HKD 3.67bn.

ISS is a well-positioned and consistently tenured contractor. In portable toilets, its largest business area, the company has been awarded six government contracts since 2018. Three are territory-wide mandates: two spanning 2018-2021 of HKD 45.1m and HKD 43.9m; and a third, worth HKD 174.6m, for 2021-2024. The other contracts, for country parks, are smaller but this is where ISS enjoys its highest brand-name recognition as the default convenience for hikers.

An Audit Commission report from 2019 stated that the HKD 45.1m contract for 2018-2021 covered 145 long-term service locations, without specifying the number of units. Overall, ISS is responsible for more than 2,500 portable toilets. These include not only government facilities – the government is described as a significant revenue source – but toilets for construction sites and events as well.

“There are stable cash flows from strong clients, including the government segment, which has remained strong through COVID. Construction and events have been impacted but we expect a reflation in the next couple of years,” said Rahul Bhargava, a managing director at ADV.

The private equity firm – currently deploying its second fund of USD 637m – is not a classic buyout investor. It describes its strategy as “solution capital,” which often entails resolving corporate and shareholder dislocations in middle-market companies as well as supporting growth. The conviction around ISS was strong enough to make it ADV’s third control deal.

The business was part of ISS World, a Denmark-headquartered facility management services company with a global footprint and revenues of DKK 71.4bn (USD 10.7bn) in 2021. ISS World has been divesting assets at a considerable pace over the past 18 months, as part of efforts to simplify operations, and ADV picked up the Hong Kong unit through a limited competitive process.

The bigger picture

While ISS is the dominant player for portable toilets and sewage in a Hong Kong market otherwise populated by smaller, family-run companies, ADV pursued the business with larger ambitions in mind. First, it wants to deliver organic growth by broadening the product portfolio. Synergies have been observed in services lines such as industrial sludge and grease trap cleaning for restaurants.

Second, ISS was always envisaged as the seed asset in a regional platform. The likes of Qool Enviro and Porta Pumper have similar offerings in Singapore, but hygiene services in Southeast Asia is highly fragmented. Existing customers in Hong Kong have already asked ISS to help them elsewhere in Asia and this is expected to add impetus for industry consolidation.

“We want to create a broad platform that is diversified across geographies and service lines,” said Bhargava. “One of the attractions of this business is that it came out of a global market leader with good processes. We can use that intellectual property and knowhow to improve some of these smaller operators in Southeast Asia. We have already started talks with two or three targets.”

The most logical global reference point, albeit on a much larger scale, is US-based United Site Services (USS). Bhargava added that ADV would like to replicate the company’s M&A-driven expansion in Asia, while noting that the continuity of landmass in North America represents a distinct advantage.

USS lists 60 bolt-on acquisitions on its website, which have helped solidify its position across portable toilets, sinks, and showers as well as grease pumping, dumpsters, and temporary power. At least 36 of these deals came after Platinum Equity bought the business in 2017, contributing to a doubling in revenue and a tripling in EBITDA as of December 2021.

USS is said to have seen a surge in demand for its services in the wake of COVID-19. For ADV and ISS, however, it is more about long-term structural trends, which have been accelerated by the pandemic but are defined by a positive correlation between rising incomes and hygiene awareness.

“We want to get ahead of the inevitable movement across ASEAN on healthcare, sanitation, waste management, and environmental services generally,” said Malliris. “A lot of corporates are taking ESG [environment, social, and governance] a lot more seriously. They are thinking not just about environmental impact, but also the social element and looking after employees.”

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• Topics
• Greater China
• Buyouts
• Industrials
• Support services
• Hong Kong (China)
• ADV Partners
• ESG
• Southeast Asia