ATB Resuming coverage of GFL Environmental Inc. following the close of its $500-million note issuance, ATB Capital Markets analyst Chris Murray does not see the sale of the entire company as “feasible, barring a significant premium that reflects the remaining earnings potential of operational improvements and RNG and EPR-specific investments.”
On June 4, the Globe and Mail reported the Toronto-based waste management company has retained J.P. Morgan to assess two buyout offers – one for the entire business and another for its environmental services division.
“We believe the Company should fetch 17 times to 18 times 2024 estimated EBITDA in a takeout scenario, an enterprise value of $41.0-billion reflecting the value of executing the current strategy, implying a fair value of $76 per share (approximately US$55 per share),” said Mr. Murray. “More interesting to us is the idea of selling the ES division, which could accelerate deleveraging and permit a sizeable buyback. The key in this scenario is the market response to the remaining solid waste business earnings and the multiple expansion driven by a more conventional capital profile.”
“In light of several other significant transactions, including the Waste Management (WM-N, NR) announcement offering to acquire Stericycle (SRCL-O, NR) for US$7.2-billion, a 24-per-cent premium to SRCL’s 60-day VWAP and an implied 15.7 times forward EBITDA, we believe that these types of inquiries come as part of the normal course of business, particularly as we see GFL’s shares trading at a significant discount to peers, while the Company continues to deleverage and optimize the margin profile primarily through adding proven and sound strategies common in many other parts of the solid waste industry, maturing and optimizing a diverse group of assets built from several acquisitions over the years.”
Mr. Murray also stressed the importance of GFL’s dual share capital structure with “majority voting shares controlled by the founder and key private equity holders (10:1 vote to share ratio), ensuring that their agreement is required for any transaction to occur.”
“We find it challenging to make the case, however, for a transaction as post sale, GFL may need to re-lever, which could challenge a potential private equity buyer’s exit strategy, given concentrated industry conditions would likely eliminate strategic buyers while a new IPO would be difficult without significant deleveraging,” he said. “With that said, at the right price, a transaction is possible.”
Seeing the debt rollover stemming from the note issuance continuing to improve its balance sheet, Mr. Murray reaffirmed an “outperform” recommendation and Street-high $66 target for GFL shares. The average is $53.27.