Toronto-based waste management company GFL Environmental Inc. GFL-T is ruling out a sale of the entire company to private buyers, but is considering running an auction for its environmental services division.
In early June, The Globe and Mail reported that GFL had retained J.P. Morgan to assess two buyout offers – one for the entire business and another for the environmental services unit.
Late Wednesday, GFL killed the prospect of a complete sale as part of its second-quarter earnings report. Because management sees strong organic growth potential, “we do not believe that taking GFL private at this time is in the best long-term interest of our shareholders,” founder and chief executive officer Patrick Dovigi said in a statement. “At its current disconnected market valuation, we are a buyer of GFL, not a seller.” As of Wednesday’s market close, the company’s market capitalization is $20.1-billion.
However, Mr. Dovigi said a sale of GFL’s environmental services division, which offers liquid waste management and soil remediation services, was a possibility, adding that the proceeds from such a sale could be used to pay down debt.
“We have received current preliminary expressions of interest in a transaction that supports our valuation perspective and are actively engaged in implementing preparatory steps required to potentially complete such a transaction,” he said of the division. Mr. Dovigi added that any sale would be completed through a formal auction.
GFL became vulnerable to buyout offers in recent months because its shares sold off amid concerns about its debt load. The company has expanded through debt-fuelled acquisitions and, with interest rates remaining elevated in the United States, which is where GFL issues most of its capital, investors had grown worried about borrowing costs and the potential to fund future acquisitions.
In March, rating agency Moody’s Investors Service affirmed GFL’s debt rating at B1, which is deemed junk status, noting that the company’s adjusted debt has hovered between five and 5.5 times its earnings before interest, taxes, depreciation and amortization (EBITDA) since going public in March, 2020. Moody’s also noted that GFL’s plans to pay down debt had slowed, with the total burden sitting at 5.2 times EBTIDA, compared with expectations of around 4.6 times in fiscal 2023.
As concerns about the debt load mounted, GFL’s shares traded down and the company lost its premium valuation relative to rivals, which trade around 15 times EBITDA. However, news of a potential sale gave GFL’s stock a bump and since the start of June the company’s shares have gained 25 per cent on the Toronto Stock Exchange.
Because GFL expanded rapidly through acquisitions, and its deals were often financed with debt, there was some skepticism as to whether a private buyout would make sense for the company. Such takeovers involve adding even more debt to the balance sheet.
Selling the environmental services division, meanwhile, would help GFL lower its debt burden – and the company could also use some proceeds to buy back stock. In 2023, the division reported adjusted EBITDA of $383-million, and GFL estimated it could fetch a “mid-teen multiple,” suggesting a value around 15 times EBITDA.
Before going public in 2020, GFL was privately controlled by British private equity firm BC Partners, Ontario Teachers’ Pension Plan and founder Patrick Dovigi. BC Partners is still GFL’s largest shareholder and has two seats on its board of directors.