Canadian waste management leader GFL Environmental Inc. is transforming itself into a North American giant by acquiring U.S.-based Waste Industries for $3.65-billion, including debt, capping off a chaotic run for the Toronto-based buyer that included flirting with an initial public offering.
A year ago, GFL had every intention of going public, and at the start of 2018 was preparing for a deal as large as $1-billion. By spring, however, these plans had changed and in April GFL sold itself to a new set of private-equity backers, led by BC Partners and including the Ontario Teachers' Pension Plan.
Just six months after the sale, GFL has landed a major acquisition by scooping up North Carolina-based Waste Industries in a deal that will make the combined company the fourth-largest waste management firm in North America. GFL, which stands for “green for life” and which collects, transports and disposes of solid- and liquid-waste matter, has long said that it hopes to expand through acquisitions as the North American industry quickly consolidates.
Of GFL’s potential targets, Waste Industries, which operates in the U.S. Southeast, has long been one of the most coveted. “We’ve been trying to do something with them for the last couple of years,” GFL chief executive Patrick Dovigi said in an interview. He will continue to lead the combined company, which will likely find some synergies from merging head offices and leveraging its scale during procurement.
But by buying at this point in the economic cycle, GFL is striking at a time when a growing chorus of people are warning about frothy valuations – particularly in private-equity markets, because so much capital has been devoted to buyout funds.
GFL has also been under pressure from rating agencies that have warned about its debt levels, which contributed to its decision to scrap the planned initial public offering earlier this year.
Just as GFL was prepping its IPO, debt-ratings agency Moody’s Investors Service changed its outlook on the company’s bonds to negative, particularly because GFL had said it was seeking out more acquisitions. To help fund them, additional debt likely would be necessary – but GFL’s debt at the time already amounted to 6.4 times its earnings before interest, taxes, depreciation and amortization (EBITDA).
Instead of pursuing the IPO, GFL found new owners, which gave its previous private-equity backers an exit. With deep-pocketed, longer-term capital supporting the company, Mr. Dovigi stressed debt is much less of a near-term threat and that he is focused on success over the long run.
“We’re long-term thinkers in a non-cyclical business," he said. Even though Tervita Corp., a rival Canadian waste management company, got into trouble for tacking on too much debt right before the 2008 financial crisis, Mr. Dovigi said GFL has a much different business model. Tervita, formerly known as CCS Income Trust, did a lot of industrial work for the energy sector, while GFL is largely a residential waste company. “Our business is much different than Tervita," he said.
Mr. Dovigi also stressed the long-term support of his current backers. “The problem with private-equity buyers typically is they say they are five- to six-year holders‚ but they are really two- to three-year holders," he said. The likes of Teachers, meanwhile, often think in decades. "We’re building a business that’s going to be here for the next 50 years.”
Despite this vision, GFL has bonds outstanding and ratings agency S&P noted on Wednesday the company will not be able to add much more debt before it faces a downgrade. “There is very little room for further subordination [to new bank loans] before we would consider a lower issue-level rating on the unsecured notes,” the ratings agency wrote in a report, adding it is generally supportive of the transaction and has no immediate plans to change GFL’s rating.
The new deal, which is worth US$2.825-billion, includes US$1.3-billion in equity, with the rest in debt, according to Mr. Dovigi. S&P estimates the combined company’s adjusted EBITDA will fall between $650-million and $750-million and that roughly half of GFL’s sales will now be generated in the United States.