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IS Dongseo and E&F Private Equity (E&F PE) plan to create a jointly managed fund to buy stakes in waste management companies from Macquarie Korea Opportunities Management (Macquarie PE), sources said on June 8.

Macquarie PE agreed on June 4 to sell its 59 percent stake in Korea Environment Technology (Koentec) and 100 percent stake in Saehan Environment to a consortium of IS Dongseo and E&F PE for about 500 billion won ($417 million). The consortium plans to fund the acquisition with about 200 billion won in debt and the remainder in equity.

Two financiers – KB Securities and Korea Development Bank – will arrange loans for the acquisition. For the equity investment, IS Dongseo and E&F PE will jointly launch a 300 billion won project fund that will invest in a special purpose vehicle established to purchase the stakes.

IS Dongseo, a construction company, will invest 100 billion in the fund. E&F PE plans to raise the remaining 200 billion won, the majority of which is being underwritten by KB Securities.

The brokerage firm will soon likely reach out to investors to sell down the equity interest. As Koentec is considered to have a stable business model and a strong ability to generate cash flow, the sell down process will attract sufficient interest, industry watchers said. Waste companies are becoming more popular in the mergers and acquisitions market because the sector is less cyclical than average and the demand for industrial waste management continues to rise.

Koentec counts large companies such as SKC and SK Energy among its customers, with an average contract life of 11 years. The company is also one of a handful of domestic waste processors with a vertically integrated business portfolio that includes landfill and incineration.

As the sole landfill operator in Ulsan, Koentec last year obtained approval to develop a new landfill in the region. It is expected to enter operation in 2021 and contribute to an increase in revenue thereafter.

(Reporting by Hye-ran Kim)