GFL Environmental Inc.
Retains financial advisor to assess two buyout offers, according to G&M article
NYSE: GFL | USD 37.00 | Outperform | Price Target USD 46.00
Sentiment: Neutral
What happened – According to an unconfirmed article in the Globe and Mail, GFL has retained a financial advisor to assess two buyout offers. The first potential offer is for the entire business and comes from a consortium of infrastructure and sovereign wealth funds looking to split the cost of the acquisition (discussions are currently “preliminary”). As to the second potential offer, according to the article GFL has received a bid for its Environmental Services business that values the unit at ~15x EBITDA (implying a ~C$6.9B value based on segment EBITDA of C$458.7MM in 2023).
Interest from financial sponsors not surprising given GFL’s valuation and the attractive characteristics of Waste businesses –
Overall, we are not entirely surprised that GFL is receiving buyout interest given the company’s discount vs. peers combined with the inherent characteristics of the Waste industry (both of which would make GFL attractive to a private buyer, in our view). On valuation, GFL currently trades at 12.6x and 11.4x our 2024 and 2025 EBITDA estimates, respectively, which compares to averages of 16.2x and 14.5x our 2024 and 2025 EBITDA estimates for the other Waste Majors, respectively.
As we noted in our recent GFL initiation, we believe the company has an opportunity to close this valuation gap vs. peers as it executes on the strategic initiatives that management has previously outlined (most notably, leverage reduction). On the characteristics of Waste businesses, recall that Solid Waste management tends to be highly cash generative (the Majors tend to have stable/recurring revenue streams, ~25–30% EBITDA margins, and ~40–50% FCF conversion in any given year), and GFL’s run- rate numbers fit this profile (see our recent Waste Sector Primer for more details). At a high level, we think private buyers looking to acquire Waste businesses with leverage would find this cash generation profile attractive.
Too early to tell what might happen, but selling Environmental Services could be interesting – While the price range that the offer for the entire business reflects is unclear, we think a takeout of the full business would likely need to occur at a meaningful premium to the current/recent share price given the valuation discount vs. peers. The article notes that the offer for the entire business is from a consortium of buyers, which is not surprising given GFL’s scale (fully diluted market cap of nearly ~C$19B as of today would necessitate substantial financing) combined with its existing debt load (Adjusted Net Debt/LTM Run-Rate Adjusted EBITDA of 4.3x exiting Q1/24).
As to the potential sale of the Environmental Services business, this could serve the dual purpose of: 1) reducing GFL’s debt load (a sale at ~C$6.9B and assuming a loss of run-rate Adjusted EBITDA of C$458.7MM would reduce leverage to ~1.3x based on Q1/24 LTM results, before any tax/other leakage considerations and assuming all proceeds were directed toward debt reduction); and, 2) allowing the company to accelerate capital deployment toward core strategic organic/M&A objectives in the Solid Waste business. In other words, while it is still too early to tell what might happen, we think the sale of the Environmental Services business could be an interesting catalyst. Having said that, the article notes that the offer is in the ~15x EBITDA range (unclear if LTM or NTM), but we note for context that Waste Management has offered to acquire Stericycle for ~16.9x LTM EBITDA/~13.2x NTM EBITDA (see here for our note following the acquisition announcement), while Republic acquired U.S. Ecology at ~14x EBITDA.