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GFL was aiming to dual list on the Toronto Stock Exchange and the New York Stock Exchange.

CARLOS OSORIO/Reuters

After marketing its initial public offering to potential investors for two weeks, GFL Environmental Inc. had heard the same feedback over and over: it needed to slash its heavy debt load.

As a company that has made a number of acquisitions and completed a $5-billion leveraged buyout in 2018, GFL’s balance sheet is full of borrowed money. Some investors who looked at the IPO wanted to see the debt burden lowered to less than four times GFL’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), down from its current level of about seven times.

Anticipating this concern, GFL and its lead private-equity backers, BC Partners and Ontario Teachers’ Pension Plan, devised a deal they hoped would price the shares between US$20 and US$24 and also satisfy the debt demands. The deal was set to raise as much as US$2.4-billion.

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But by the time markets closed on Tuesday, it was clear to GFL it would have to lower the price to get the offering done. This posed a major problem because GFL was planning on selling a fixed number of shares. At a lower price, the IPO wouldn’t raise enough money to repay the debt necessary to appease more conservative investors.

At that point, the company’s only other option was to increase the number of shares it issued, to make up the shortfall. However, doing so would dilute the stakes of its existing owners – and the largest of these backers, BC Partners, refused.

Rather than take amended terms, BC, Teachers and GFL walked away – catching Bay Street by surprise. When the decision to scrap the deal was published by The Globe and Mail Tuesday evening, multiple underwriters had not yet been told by the company.

This account of events comes from conversations with seven people who have intimate knowledge of the offering. The Globe and Mail is keeping the sources confidential because they were not authorized to speak publicly.

“As a disciplined investor with a high quality asset such as GFL, we believe there is no reason to compromise on valuation," Paolo Notarnicola, BC’s lead partner on GFL and a director on the company’s board, wrote in a statement to The Globe Wednesday.

"GFL has been a standout investment for BC Partners since our initial investment 18 months ago, delivering strong free cash flow coupled with significant near-and-long-term growth prospects and led by an entrepreneurial management team. As such, GFL is in no rush or in any need to access the public markets.”

Teachers echoed this sentiment, noting in its own statement that the pension fund “did not believe that the proposed IPO pricing adequately reflected GFL’s current and expected prospects.” GFL declined to comment.

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In the aftermath, there is a mixture of confusion, frustration and, ultimately, disappointment on Bay Street.

When the IPO launched in October, markets were hot and U.S. waste-management companies were trading at extremely lofty valuations. The hope was that this would be an easy sell.

This was also set to be one of Canada’s largest-ever IPOs, and the deal would have delivered as much as US$90-million in fees to underwriters, many of whom have been starved of financings this year.

But in the end, GFL scrapped the deal and few people knew why.

The seeds of Bay Street’s confusion were first laid early Tuesday when the deal’s lead underwriters quietly sent a message that there would likely be a deal around US$18 per share. By the time markets closed, something had changed.

Some people believe there never really was a deal at this price and that GFL had simply bluffed to see how much demand it could drum up at this level. Others say there was a deal, but after some reflection, the current owners – and chiefly, BC Partners – decided the math didn’t satisfy them.

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What is certain is that quality investors had balked at the original marketing range.

GFL was aiming to dual list on the Toronto Stock Exchange and the New York Stock Exchange, and when building an order book in the United States, it is common for hedge funds with short-term investment horizons to put their orders in first. These buyers tend to be more flexible about valuations and debt levels, because they are not buy-and-hold types.

Value investors, however, tend to have different mindsets – and their opinions matter because these buyers are likely to be long-term owners who develop deep relationships with the company’s management team. This group was adamant that GFL’s debt-to-adjusted EBITDA multiple should be between 3.5 and 4 times as a publicly traded company.

These investors also haven’t had much time to assess GFL’s growth potential in its current form. The company is well-known for being a serial acquirer, but a year ago, it struck its largest deal ever, buying North Carolina-based Waste Industries for $3.65-billion, including debt. While GFL is now the fourth-largest waste-management company in North America, the company lost $161-million in the first six months of fiscal 2019.

Ultimately GFL wasn’t satisfied with the order book. However, the company has yet to say if its existing owners will now inject more equity into the business. The debt is currently eating into cash flow, with interest and other financing costs amounting to $251-million in the first half of fiscal 2019, larger than its total loss.

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