GFL Environmental takeover could be only a matter of time

Investing.com — The fast-moving waste management industry is consolidating again. After recent news that Waste Management Inc (NYSE:) was moving forward in a $7.2 billion deal to acquire Stericycle Inc (NASDAQ:) last Monday, the new target seems to be Canada-based GFL Environmental Holdings (TSX:) (NYSE:).

On Monday, news broke across the media that the waste-management giant had contacted JPMorgan to evaluate two potential bids, one for its full business and another strictly for its environmental services division.

The company jumped on the news, gaining a hefty 21% – as of this writing – over the last three market sessions, closing in on a $14.5 billion valuation.

Both sell-side and event-driven analysts have evaluated the deal as ‘highly probable’ mostly due to GFL’s combination of leveraged balance sheet and low PE level when compared to the industry’s peers.

Adding fuel to the fire, GFL’s largest shareholder, BC partners – which owns roughly 25% of shares outstanding – stated publicly that it would be open to taking the company private should valuation multiples continue to disappoint.

Clean Harbor Shows Interest in GFL’s Environmental Services Division

During an open Q&A session yesterday held by Clean Harbors (NYSE:) – a leader in the waste management business in the US – at the Stifel Cross Sector Insight Conference, Eric Gerstenberg, Clean Harbors’ Co-CEO, said that the GFL’s environmental services unit “could be” a good fit for Clean Harbors.

He added that the potential sale of the division “sounds very interesting.” “They have a nice footprint, some past management that used to be part of our team, so that’s very interesting.”

Indeed, sources tell that an eventual deal between the two companies would be highly synergetic due to the Toronto-based company’s roughly $465 million strong EIBDTA in Canada, a market in which the Norwell, Massachusetts-based Clean Harbors would find significant room to expand due to its massive firepower.

In fact, CLH has been hitting the M&A route extensively over the last few years, albeit acquiring more small– to mid-sized companies. The move is part of the company’s plan of doubling its EBITDA from $1 million to $2 million in five years, a plan for which GLF’s margins would be highly constructive.

Another tailwind for the deal is the favorable exchange rate for the Americans against the Canadian dollar in historical terms.

Consulted by Investing.com, GLF hasn’t yet responded as of this writing.

Take-Private Also an Interesting Route

Reports also say that the offer for the full takeover could come from a private equity giant looking to increase exposure in the waste management industry, given its stable business model and high operational margins.

Analysts at Jefferies note that, except for Macquarie, none of the large infrastructure funds own waste management assets that are not waste-to-energy plays. This means that such funds could feel compelled to

enter the market for high-quality asset diversification.  

“These funds lack the large, scalable route density models,” noted the research firm.  

Still according to the report, due to the deal’s high cost, a consortium of infrastructure funds and sovereign wealth funds were to join in an eventual full takeover bid.

While the values for such transaction remain uncertain, the company’s low PE level on the last trading date unaffected by M&A rumors indicate that a 20-25% premium would not be farfetched.

Moreover, the take-private option could also be used for the company’s disputed environmental services division. According to Jefferies again, the potential buyer has indicated an offer of about 15 times the division’s EBITDA, which sits at around $365 million, pushing the deal to around $5.5 billion.

Our Takeaway

While no concrete offer has materialized so far, we consider this to be a deal with a high probability of success.

For one thing, the interest has been vocal on both sides of the table, which is certainly an important catalyst. However, even more significantly, the numbers make sense for several parts involved, particularly for GFL, which can cash in on a value unlikely to be reached by its stock in the mid-term due to its high debt level.

On the business side, the potential synergy between GFL Environmental and Clean Harbors is a fundamental factor that could tilt the scale toward Massachusetts-based businesses in an eventual bidding with private equity firms should the environmental services unit sale be the path forward. 

Conversely, should the company opt for a full sale of its assets, we see the private-equity route as the most likely outcome.