Fund manager urges GFL to go private

ADW Capital Management, LLC, which owns 1,650,000 shares of GFL Environmental Inc. ) together with its affiliates, issued an open letter to GFL’s board of directors and management team 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 0H9
Attn: 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 CAD 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/EBITDA to roughly 3.61x our expected 2024E EBITDA. In contrast, we estimate the Company has gone from trading at approximately 15.0x its NTM Consensus EBITDA figure at the time of its IPO to approximately 10.5x our internal estimates of 2024E EBITDA. 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. 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.

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), 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).

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 Wyden
ADW Capital Management, LLC