ADW Capital Management Sends Letter to GFL Environmental’s Board and Management Encouraging it to Undertake a Strategic Review Process
06 Novembro 2023 - 11:00AM
ADW Capital Management, LLC, which owns 1,650,000 shares of GFL
Environmental Inc. (NYSE: GFL) (TSX: GFL) (the “Company”) together
with its affiliates, today issued an open letter to GFL’s board of
directors and management team regarding opportunities to maximize
value for all shareholders and urging the Company to undertake a
strategic review process.
A full copy of the letter is below:
November 6, 2023
GFL Environmental Inc.100 New Park Place, Suite 500 Vaughan,
Ontario, Canada L4K 0H9Attn: Board of Directors and Management
Dear Members of the Board and Management:
ADW Capital Management, LLC, together with its
affiliates (collectively, “ADW Capital” or “we”) are significant
and long-term shareholders of GFL Environmental Inc. (“GFL”, or the
“Company”), currently owning 1,650,000 of the Company’s shares.
We begin this letter with the following quote: “The
definition of insanity is doing the same thing over and over again
and expecting a different result.” ADW Capital has been a
shareholder of the Company since shortly after its initial public
offering (“IPO”) and in many ways, today GFL is an entirely
different Company and yet its valuation and discount to peers is
EXACTLY the same or WORSE.
We believe GFL is an extremely valuable company
that the public markets are unable to appreciate today and perhaps
never will be able to. GFL is simply too cheap a stock on an
absolute basis given the quality and durability of its future
growth especially in this uncertain economic / inflationary
environment. The multiple differential relative to its competitors
is even more perplexing given its faster growth profile and
prospects for future margin expansion. We think your
experiment with the public markets should end and the Board should
immediately seek to maximize value for shareholders through either
selling or merging the company or disposing of assets bringing down
leverage materially.
Financially, the Company has seemingly made
great progress. The Company has increased its EBITDA from
approximately $1.1 billion CAD1 in 2020 to what we expect to be
$2.4 billion CAD in 2024E.2 Over the same period, we calculate the
Company has reduced its leverage from around 5.87x Net Debt/EBITDA3
to roughly 3.61x our expected 2024E EBITDA.4 In contrast, we
estimate the Company has gone from trading at approximately 15.0x
its NTM Consensus EBITDA5 figure at the time of its IPO to
approximately 10.5x our internal estimates of 2024E EBITDA.6
We find that as a general rule, companies that more than
double their EBITDA in 4 years and de-lever over 2 turns do not see
a contraction in their EBITDA multiple of ~4.5x over the same
period.
So, the question one might ask is, “Why has the
discount persisted?” We will acknowledge that with rising interest
rates, investors worry more about the quantum of leverage that
companies carry. On the Company’s most recent earnings call it laid
out the effect of interest rates at the time of maturity based on
existing spot funding rates.7 We believe it is entirely possible
that with a rating move to investment grade, the Company’s blended
interest rate might even be able to go down. What the
“market” tends to ignore, in our view, is that if spot rates stay
as they are, it is fair to assume that economies are experiencing
above average inflation that would disproportionately advantage
waste management companies, such as GFL, over the long
term. Waste management companies are extremely
high fixed-asset businesses that own property that is functionally
not duplicable (i.e. landfills). We believe this economic paradigm
allows companies like GFL to raise prices at rates materially in
excess of inflation and KEEP THEM. Why would investors price in
higher interest rates/re-financing risk at GFL and not price in the
higher EBITDA/margin expansion that will almost certainly accompany
persistent elevated inflation?
It's actually quite simple in our view.
Investors appear to be ignoring the facts here and only seeing what
they want to see. We believe GFL’s “stock story” has turned into an
edition of the National Enquirer or People Magazine. Soon after the
Company’s IPO, it was the target of a long short-selling report
that effectively accused GFL’s founder and chief executive officer,
Patrick Dovigi, of being Italian and in the mob and being a
profligate spender because he owned a yacht. To be fair, we
understand that Patrick grew up in a small town in Canada playing
competitive hockey and bootstrapped this entire business from one
single asset. Mr. Dovigi has partnered with multiple private equity
firms, sovereign wealth funds, and pension funds since the Company
was founded in 2007 – each of whom has earned multiples on their
investment according to our research.8
We believe traditional public market
waste investors have a hard time investing in the Company as they
are both slaves to beating their public market indices (GFL is not
a member of the TSX 60 or any of the US Indices due to its foreign
domicile) and leery of investing in GFL knowing its largest
investors are private equity investors who may have an alternative
agenda or investment objectives. Given that background, we
believe short-sellers and fear mongers see GFL’s public stock as
susceptible to hit and run attacks and therefore continue to spread
false stories and narratives around about the Company’s leverage
profile and character assassinations of the Company’s CEO to take
advantage of the spineless nature of traditional long only waste
investors.
GFL continues to operate in an ivory
tower, thinking it can just tell the market what the Company is
worth and the market will believe them. Frankly, we believe the
Company should return to the private markets. It is clear
to us that GFL is in a unique position based on its portable
capital structure and is a generational/inflation-proof asset for a
large-scale private equity firm or a “collector of trophies”, such
as a sovereign wealth fund, holding company, or similarly situated
investor. On the same note, we believe one of the larger waste
management companies could execute a stock for stock merger with
the Company and get the best operating team in the space and
realize material synergies. Absent the aforementioned options, in
our view, the only other strategy would be to divest a large
portfolio of assets where the Company is not as active in tuck-in
M&A or the returns are not as good as other investments the
Company sees in front of it – renewable natural gas (“RNG”),
tuck-in, et. al. When the Company announced its first round of
major asset divestitures (at approximately 15x EBITDA),9 the
prospective de-leveraging was initially very well received by the
market, and then later shares immediately deflated after the
Company announced additional internal investments in environmental
initiatives/RNG at multiples far lower than any other capital that
could be deployed in their portfolio (1-5x EBITDA).10 This
Company is the definition of guilty-until-proven-innocent and the
broader investing public just “does not want to believe.” We
believe the interests of the private equity firm that exercises
significant influence on the Company’s board of directors (the
“Board”) are misaligned with the rest of the shareholder base
because the investment sits in a fund that is in the money based on
our research and all they would be doing is handing back future
earnings / carry by relinquishing / selling the investment today.
We are sure it is not lost on anyone that private equity firms are
having a challenging time raising capital for new funds. So, why
not just hang on to old investors’ capital as a call option on free
money?
The Board and management have a fiduciary
obligation to maximize value for ALL shareholders and we encourage
them to immediately engage a financial advisor to pursue a review
of strategic alternatives.
ADW Capital has a longstanding history of
working constructively with boards of directors and management
teams to unlock value in “orphan” companies in the public market
and would appreciate the opportunity to present to the Board and
management.
We look forward to hearing from you.
Best Regards,Adam WydenADW Capital Management,
LLC
1 Company filings.2 Company filings and ADW
Capital internal estimates. 3 Capital IQ and ADW Capital internal
estimates.4 Company filings and ADW Capital internal estimates.5
Capital IQ and ADW Capital internal estimates.6 Company filings and
ADW Capital internal estimates.7 Company earnings call, November 2,
2023. 8 ADW Capital internal research.9 Company filings and ADW
Capital internal estimates.10 Company filings and ADW Capital
internal estimates.
Contacts
For Investors:
adam@adwcapital.com
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