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Spruce Point Capital Management, a U.S. short-seller with a fondness for Canadian targets, has set its sights on GFL Environmental Inc., casting doubts on the debt-heavy company’s ability to ever show consistent profits.

GFL trucks at the Solid Waste Transfer Station in Toronto, on Aug. 18, 2020.

Melissa Tait/The Globe and Mail

Shares of the Vaughan, Ont.-based waste company, which went public earlier this year, were down as much as 12 per cent in Tuesday’s trading before closing at $25.53, down 9 per cent from Monday’s close. In a statement after the market closed, GFL called the report “baseless” and said it contained “numerous inaccuracies and mischaracterizations.” GFL did not specifically identify inaccuracies or respond to any details in the report.

Short-selling is a bet that shares will drop, with an investor borrowing the shares, selling them and repaying the loan by returning new shares, preferably bought at a lower price. Spruce Point has a string of Canadian wins, but its two most recent short picks have shown resiliency.

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Spruce Point chief executive Ben Axler declined Tuesday to say how large the firm’s short position in GFL is.

Spruce Point’s 107-page report questions past business connections of CEO Patrick Dovigi and members of the board and executive team. It also raises financial questions about the company’s profits and heavy debt load – something on the minds of Bay Street when the company tried, and failed, to go public in 2019. At the time, Toronto’s Veritas Investment Research raised questions about the company’s offering.

GFL ultimately relaunched its initial public offering and sold shares in March at US$19 amid the COVID-19 market turmoil. All the while, it’s continued its business plan of acquiring waste-management companies across the United States and Canada. It said last week it will pay US$1.2-billion for Houston-based WCA Waste Corp. On Monday, it said it increased a debt offering to US$750-million, from US$600-million, because of heavy investor demand.

Spruce Point believes GFL is overpaying for acquisitions that it’s having difficulty integrating. It questions whether GFL can achieve economies of scale, as it says costs per employee seem to be growing as quickly as revenue per employee.

It expressed concerns about GFL’s accounting, identifying a number of places in the company’s financial reports where it said numbers seemingly did not add up. Spruce Point noted that GFL said prior to its IPO that it had weaknesses in its internal financial-reporting controls, but has since stopped making that particular disclosure.

And Spruce Point believes that GFL’s metrics comparing its debt with its profits and cash flow understate the burdens of its borrowings.

“Based on our research and conversations with former GFL employees, we believe it will be unlikely that GFL stems its cash burn and turns a profit any time soon while it continues its torrid acquisition pace,” Spruce Point wrote.

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GFL’s reported results, based on International Financial Reporting Standards, show a string of net losses, according to S&P Global Market Intelligence. In the past 12 months, it posted an operating loss of $88-million on $3.7-billion in revenue. Then, it paid $475-million in interest on more than $5-billion in debt. Its free cash flow – operating cash flow minus capital expenditures – was negative $175-million.

Ontario Teachers’ Pension Plan, one of the company’s owners when it was privately held, remains a big public stockholder with 50 million shares, more than 15 per cent of GFL’s outstanding stock. In a statement Tuesday, Jane Rowe, Teachers’ executive managing director of equities, said “we continue to believe in the business and its ability to create long-term shareholder value.”

Spruce Point’s 2018 short on Maxar Technologies Corp. worked out well, with the shares collapsing 90 per cent in the months to follow. Maxar and three previous Canadian shorts fell an average 77 per cent, Spruce Point says.

However, its subsequent targets – Dollarama Inc. in October, 2018, and Canadian Tire Corp. Ltd. in December, 2019 – have not shown as much damage: Dollarama is trading well above where it was when Spruce Point issued its reports, and Canadian Tire has largely recovered from its decline during the COVID-19 market collapse.

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