Photo courtesy of GFL Environmental Inc.
GFL Environmental Inc., headquartered in Vaughan, Ontario, has entered into a definitive agreement with funds managed by affiliates of Apollo and BC Partners to sell a majority stake in its Environmental Services business for an enterprise value of CA$8 billion ($5.6 billion) which significantly exceeded management’s initial expectations, according to the company.
GFL will retain a CA$1.7 billion ($1.2 billion) equity interest in the Environmental Services business, which will allow for future value accretion, and the company expects to realize cash proceeds from the transaction of roughly CA$6.2 billion ($4.3 million) net of the retained equity and taxes.
Under the terms of the transaction agreement, which is outlined in a Jan. 7 investor update, GFL will retain a 44 percent equity interest in the Environmental Services business, and the Apollo Funds and BC Funds each will hold a 28 percent equity interest.
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The transaction is expected to close in the first quarter of 2025 and is subject to certain customary closing conditions but is not subject to any financing conditions.
The company’s strategic rationale for the sale includes its ability to accelerate balance sheet deleveraging to investment grade levels, the opportunity for share repurchase and future dividend increases, reignition of its M&A engine and allowance for incremental organic growth investments in core solid waste with immaterial impact to leverage and the maintenance of synergies between GFL’s Environmental Services and Solid Waste businesses with ability to cross-sell offerings.
GFL's board of directors (with interested directors having recused themselves) unanimously approved the transaction upon the recommendation of a special committee comprised solely of independent and disinterested directors, according to the company. The special committee considered several factors in arriving at its decision to recommend the transaction, including a fairness opinion delivered to it by its independent financial advisor, Canaccord Genuity Corp., that the consideration to be received under the transaction is fair to the company from a financial point of view.
GFL intends to use up to $3.75 billion of the net proceeds from the transaction to repay debt, making up to $2.25 billion available for the repurchase of GFL shares, subject to market conditions, and the balance for transaction fees and general corporate purposes. Net leverage, pro forma for the planned use of proceeds, is expected to be 3X, according to the company.
In early November 2024, GFL’s stock rose 2.5 percent after a report that initial interest and bids for its environmental business were above expectations.
As reported by CTFN, a merger and acquisition and regulatory reporting news agency, the environmental division received interest from more than 25 parties in bids that were due at the end of October of last year. Initial offers were beyond earlier valuations of between $6.5 billion and $7 billion.
The company reported Environmental Services revenue of $460.5 million for the third quarter of 2024 compared with $447 million in the prior year’s third quarter, which included approximately $20.6 million of revenue associated with an unseasonably high level of large-event-driven business, GFL says. Excluding the impact of this outsized activity in the third quarter of 2023, revenue increased by 7.9 percent.
"The sale of our Environmental Services business at an enterprise value of $8 billion is substantially above our initial expectations and is a testament to the quality of the business that we have built," GFL founder and CEO Patrick Dovigi says in a news release announcing the sale. "The transaction will allow us to materially delever our balance sheet, which will accelerate our path to an investment-grade credit rating. A deleveraged balance sheet will provide ultimate financial flexibility to deploy incremental capital into organic growth initiatives and solid waste M&A and allow for a greater return of capital to shareholders through opportunistic share repurchases and dividend increases while maintaining a targeted net leverage in the low 3s.
"The transaction allows us to monetize the Environmental Services business in a tax-efficient manner while retaining an equity interest that will allow us to participate in what we expect to be continued value creation from these high-quality assets. In addition, GFL will maintain an option, not an obligation, to repurchase the Environmental Services business within five years of closing."
Dovigi adds that the repayment of debt is expected to reduce GFL’s annualized cash interest expense by approximately $200 million, significantly improving free cash flow conversion. Additional details on the financial impact of the transaction will be provided when GFL reports its financial results for 2024 in February and hosts its Investor Day on Feb. 27 at the New York Stock Exchange.
"After a long, robust and highly competitive process, we are excited to have selected the Apollo Funds and BC Funds to partner with on this transaction,” Dovigi says. “We have a long-standing relationship with BC Partners, to whom we have delivered significant returns on their capital. We also look forward to working with Apollo, a leading alternative asset manager, with deep expertise and a demonstrated track record of value creation for its stakeholders."
New York City-based Apollo partner Craig Horton says, "GFL Environmental Services is a leading North American provider of increasingly essential industrial and waste management services, with a broad customer base and exposure to attractive and growing end markets. We believe this transaction will provide the Environmental Services business with greater flexibility to pursue organic and inorganic growth opportunities as an independent business while also taking advantage of the strategic, value-added resources and structuring capability of the Apollo platform. This is a great example of partnership capital from the Apollo Funds, including our Hybrid Value and Infrastructure strategies, and we look forward to working with the talented management team as well as GFL and BC Partners to accelerate growth and drive value creation."
"Our long and successful relationship with Patrick and the GFL team underlines BC Partners' true partnership approach, supporting entrepreneurial leaders at high-growth businesses in defensive sectors to scale and grow,” adds Paolo Notarnicola, partner and co-head of services at BC Partners, based in London. “Under Patrick's leadership, we have seen GFL's Environmental Services business grow from a small franchise in Ontario in 2018 to a leading operator with over $500 million in adjusted EBITDA [earnings before interest taxes, depreciation and amortization]. Going forward, we are excited about the growth potential of this business, which is best placed to capitalize on the significant consolidation opportunity in the environmental services industry, including further expansion in the United States. In addition, we look forward to working with the management team of GFL Environmental Services and our partners at GFL and Apollo to accelerate the delivery of the margin-enhancing and growth opportunities we have identified together."
Brown, Gibbons, Lang & Co. Securities Inc. and J.P. Morgan Securities LLC served as financial advisors, and Latham & Watkins LLP and Stikeman Elliott LLP served as legal counsel to GFL in connection with the Transaction. Canaccord Genuity Corp. served as independent financial advisor, and Cassels Brock & Blackwell LLP served as legal counsel to the special committee in connection with the transaction, while Sidley Austin LLP served as legal counsel to the Apollo Funds in the United States, Kirkland & Ellis LLP served as legal counsel to BC Partners in the United States and Osler, Hoskin & Harcourt LLP served as legal counsel to the Apollo Funds and BC Partners in Canada.
