GFL GFL Environmental Inc

ADW Capital Management, LLC, which owns 1,650,000 shares of GFL Environmental Inc. (NYSE: GFL) (TSX: GFL) (the “Company”) together with its affiliates, today issued an open letter to GFL’s board of directors and management team regarding opportunities to maximize value for all shareholders and reiterating its call for the Company to undertake a strategic review process.

A full copy of the letter is below:

June 12, 2024

GFL Environmental Inc.100 New Park Place, Suite 500 Vaughan, Ontario, Canada L4K 0H9Attn: 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 same quote that we began our last letter with: “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 a substantially improved Company yet its valuation and discount to peers is EXACTLY the same or WORSE.

Not much externally has changed since we wrote to the Board roughly seven months ago in November 2023. Before an ‘impatient third-party’ likely leaked their interest in the Company’s Environmental Solutions division or “ES”, the Company’s shares were trading at roughly 9.5x our estimate of 2025E EBITDA CAD1 – THE LARGEST DISCOUNT TO THE BROADER NORTH AMERICAN WASTE INDUSTRY SINCE THE IPO.2

But the Company’s persistent undervaluation hasn’t forestalled the Company’s largest shareholder – BC Partners – from doing its ‘seasonal’ follow-on offering. Not to mention, BC Partners has recently rubber stamped a new retention compensation program for Company management ahead of an even more robust PSU program that the Company’s Board of Directors (the “Board”) and management has been working on so assiduously.3 It’s very simple, it appears to us that the Board and management do not care about creating shareholder value in the short, intermediate, and possibly even long term. From recent actions, we believe the Board and management have clearly shown they are more focused on themselves and are NOT ALIGNED WITH MINORITY SHAREHOLDERS.

The third-party likely leaked their interest to show that there is an alternate path for the Company’s shareholders that both creates immediate value and sets up the Company for long term success. As set forth below, we believe the sale of ES at a 14-15x EBITDA multiple,4 as rumored in the press, would have a multi-pronged benefit to the Company:

1. By our estimates, the sale of ES will result in minimal tax leakage and leave the Company with the lowest leverage in the broader North American waste industry at roughly ~1x before capital allocation.5

2. A sale of ES would create a solid-waste ‘pureplay’ when paired with the Company’s RNG/EPR/Tuck-in program that would likely have a better ‘go forward’ growth algorithm and potentially trade at a higher multiple than the Company’s often mentioned pure-play peer --- Waste Connections (“WCN”). Various sell-side reports have cited ‘NewCo’ would likely trade at approximately 15x PF 2025 EBITDA,6 but internally we wouldn’t be surprised if the Company could trade at 16-17x PF 2025 EBITDA with the right capital / margin structure – in line with WCN.7

3. GFL’s new business mix would be solidly US-centric and open up a path to a US domicile and listing. GFL has long been reviled by Canadian investors who eschew leverage and have historically been skeptical about the owner operated attitudes of the Company. While we understand the Company has publicly communicated the merit of joining the TSX60, we do not expect that to happen any time soon. We believe the US is where the Company belongs with more open-minded investors and a far deeper base of passive capital and opportunities for multi-index inclusion for which the Company would immediately qualify.

4. But most importantly, the sale of ES allows the Company to remove most, if not all, of the overhang from their lead sponsor, BC Partners, who has shown a willingness to sell the stock at basically any price / multiple of NTM EBITDA. We think the Company can comfortably sit in the 2.75x range of NTM EBITDA8 and repurchase the vast majority of BC Partners’ stake and facilitate a swap on the remainder if need be.

In summary, a lower leverage pureplay listed / domiciled in the United States with no sponsor overhang has a shot at trading at ~16x 2025 PF EBITDA and, based on our estimates, assuming a ~70% repurchase of BC Partners’ total stake (representing 65 million shares), would result in GFL’s shares trading at up to $65.00 USD.9

We cannot think of any reason why the Company would explore any other path than to sell its ES division. While we would be in favor of an ‘outright’ sale of the entire Company, we recognize the scope and scale of such a transaction. Given the minimal tax leakage, the Company does not lose much by doing a ‘two step’ take private in our view and leaves the door open to see if the Company can achieve a true public company cost of capital that a business of this quality merits.

While we understand that management has said publicly all options are on the table, we believe management’s preferred solution is a ‘sponsor-to-sponsor’ swap of public equity absent a sale of ES. This belief is driven by management’s historical focus on growth / perceived desire to run a larger business. We believe a ‘sponsor-to-sponsor’ sale accomplishes absolutely nothing and is detrimental to shareholders. A new sponsor might not actually be aligned with minority shareholders and would prefer the shares trade at a discount ahead of a future take private they may inevitably end up leading.

Let us remind you, the Board has a fiduciary obligation to maximize value for ALL shareholders and at this juncture, we could argue that there could be legal consequences for not pursuing real offers for all or some of the Company’s assets. We encourage the Company to finally do the right thing for minority AND majority shareholders and immediately engage a financial advisor to pursue a sale of the ES division or the entire Company.

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 WydenADW Capital Management, LLC

________________________1 Capital IQ and ADW Capital internal estimates.2 Capital IQ and ADW Capital internal estimates.3 Company filings.4 Various Media Outlets and Sell-side reports. See for example: CFTN, GFL: Company mulling transactions with private equity, June 3, 2024; Jefferies, Equity Research, GFL, June 10, 2024.5 Capital IQ and ADW Capital internal estimates.6 See for example: Jefferies, Equity Research, GFL, June 10, 2024.7 Capital IQ and ADW Capital internal estimates.8 Capital IQ and ADW Capital internal estimates.9 Capital IQ and ADW Capital internal estimates.

Contacts

For Investors:
adam@adwcapital.com