Buyout investors at home and abroad are zeroing in on waste management companies in South Korea, as they hope to enjoy rising income over soaring demand for their services, according to market watchers on Monday.

Such buyout bids, in turn, present exit opportunities to foreign capital holding majority stakes in such companies, they said.

Last week, international investment firm Kohlberg Kravis Roberts closed the acquisition of 100 percent in medical and industrial waste management firm ESG Co. and 77.84 percent of its affiliate ESG Cheongwon for a combined 875 billion won ($735 million) from Hong Kong-based Anchor Equity Partners.

The news comes as Singapore-based Affirma Capital inches closer to selling its entire stake in EMC Holdings, which controls the Korean waste management firm formerly known as Kolon Water & Energy, for at least 1 trillion won. Proposed buyer SK Engineering & Construction is expected to sign a binding deal later in August. It was selected as the preferred bidder last week.

Both ESG Co. and EMC Holdings are the outcome of the respective stakeholders‘ “buy-and-build” strategy for portfolio firms they acquired in 2016.

In the meantime, the IS Dongseo-led investor group’s proposed acquisition of listed waste management firm Koentec is awaiting the approval of antitrust authorities. The consortium agreed in June to buy Koentec’s 59.29 percent stake for 421.7 billion won from Macquaire Korea Opportunities Fund.

The series of deals demonstrates the room for domestic waste management firms to serve as a source of stable income for investors.

Analysts point to the recent spike in the cost of waste disposal -- both by burying and burning -- which means waste management firms’ revenue rises accordingly. From January 2017 to June 2020, the cost of burning waste surged nearly 40 percent, while burying costs jumped threefold, according to Koentec’s financial statement.

This stems from a chronic supply shortcoming in the Korean waste management industry, due to the entry barrier posed by high initial capital expenditure and government regulation under the Wastes Control Act, wrote Shinyoung Securities analyst Park Se-ra in a note Monday.

Coupled with this, Koreans’ demand for waste disposal is on a constant rise, as China has restricted the import of waste since 2017 and other countries like the Philippines and Vietnam are moving in tandem. Moreover, the coronavirus outbreak this year contributed to increasing domestic waste, Park added.

All three firms that invited new shareholders were in the black in 2019. EMC Holdings‘ consolidated net profit came to 22.2 billion won, up over fourfold on-year. ESG Co.’s net profit came to 1.8 billion won, while that of Koentec marked 24 billion won.

The proposed deals also indicate that sellers can achieve returns from their bets on the waste management industry.

Anchor Equity Partners spent a combined 180 billion won to buy ESG and its waste management affiliates. Macquarie Korea Opportunities spent 147.3 billion won to buy Koentec‘s majority shares.

Also, Affirma Capital -- a spinoff of Standard Chartered Group -- took over what was formerly a wastewater management operation of Kolon Water & Energy for 120 billion won. The entity turned itself into EMC Holdings, which carried out acquisitions in return for over a combined 260 billion won in spending.

By Son Ji-hyoung (consnow@heraldcorp.com)