Spruce Point Capital Management Founder & Chief Investment Officer Ben Axler
By Jarrett Banks
Short-seller Spruce Point Capital Management believes investors should tread carefully when considering Ontario-based GFL Environmental Inc., which went public in March amid the pandemic. The waste-management company’s IPO lock-up period, which prevents insiders from selling shares for a certain amount of time, ends Aug. 31.
In an interview with CorpGov, Spruce Point Founder & Chief Investment Officer Ben Axler said GFL has largely overpaid to implement its roll-up strategy and doesn’t accurately depict its true debt and enterprise value.
GFL Environmental CEO Patrick Dovigi recently issued a statement in response to Mr. Axler: “We are not going to be distracted by this ridiculous headline seeking short seller and I am personally disgusted by the egregious, discriminatory and unfounded attacks against myself and our leadership team.”
The full interview with Mr. Axler follows:
CorpGov: How do you respond to GFL’s Board saying your report is “deeply flawed”?
GFL has not addressed any of the specific governance, financial and operational concerns laid out in our 107-page report; instead, GFL has engaged in what we call a “shoot the messenger” defense. If GFL is not going to point out any of the so-called flaws it claims to have identified, we believe that investors need to take the Board’s response with a grain of salt. GFL tries to assure investors that its sophisticated investors have conducted proper due diligence. However, its current investor base has fallen prey to notorious stock scandals including Luckin Coffee, Valeant, and Philip Services Corp. We also believe that GFL’s Board has little skin in the game, does not have enough operational experience in the waste management industry, and is not independent enough to be looking out for the interest of all shareholders.
CorpGov: Can you elaborate on why you think GFL is growing too quickly?
GFL is not just a roll-up, but it is a roll-up of roll-ups that we contend has needed to continuously acquire businesses and raise debt to sustain itself. We have found several examples of GFL touting what appear to be highly-questionable deals that have ultimately yielded operational or financial challenges due to shoddy pre-acquisition diligence or poor post-acquisition execution. In an extreme case, GFL bought Rizzo Environmental before U.S. authorities indicted the company’s chief executive for fraud. GFL claims it is growing organically, but does not provide enough disclosure to stress test its claim. Based on our research, we believe up to half its Canadian acquisitions have underperformed post-close. GFL has also provided inconsistent disclosures about how many deals it closed, recently saying 143, but now stating “more than 130”. GFL also recently announced its intention to acquire WCA Waste for $1.2 billion, before even making due on its promise to close an $835 million asset purchase from Waste Management and Advanced Disposal Services. Both deals require DOJ approval, and are not guaranteed to close.
CorpGov: Why did you say investors can’t trust GFL’s EBITDA?
The SEC issued a comment letter to GFL about its use of “Run Rate EBITDA”. We believe its definition is very liberal, giving management wide discretion to present an aggressive EBITDA. Our research also illustrates that GFL has made unexplained revisions to revenue and EBITDA in a way that bolsters its U.S. margin, a key segment of its equity growth story. The Company’s own initial prospectus for its 2020 public offering noted a material weakness of financial controls. Although that disclosure was ultimately removed, we have uncovered numerous examples of mathematical errors tied to IPO expenses, deferred financing fees, and capital expenditures. We believe investors should tread carefully.
CorpGov: GFL’s $19 IPO valuation implies a trailing EV-to-EBITDA multiple of 12.6x, almost 2 percentage points below the solid-waste peer-group average of 14.3x. Isn’t this reasonable?
We believe GFL does not accurately depict its true debt and enterprise value. The Company’s measure of Total Gross Debt ignores capital leases, loans to the CEO, and the debt portion of its Tangible Equity Units that trade as GFLU. When adjusting the enterprise value for these factors, we believe GFL trades at a premium to peers – and that assumes its revenue and EBITDA is accurate despite unexplained revisions. We point out that GFL has $6.5 billion of goodwill and intangibles, or >90% of its market capitalization. How does a Company in the waste services industry amass such a large amount? We believe it illustrates that GFL has largely overpaid to implement its roll-up strategy.
CorpGov: Doesn’t GFL’s ability to complete its IPO amid coronavirus concerns suggest resilience?
Any company can raise capital at a punitive cost, even during the worst of times. We note that GFL also issued hybrid securities called Tangible Equity Units (GFLU) to fund itself during its IPO. We believe GFLU is misunderstood and incorrectly viewed as a “preferred” security despite the fact it converts into subordinate voting stock that even GFL admits is not preferred. We believe the ICE has used an aggressive interpretation to include it in its preferred security index, thereby allowing ETFs tracking the index to purchase the security. We have petitioned the ICE to review GFLU’s inclusion.
CorpGov: GFL has an extensive U.S. presence. Are there legitimate environmental concerns for Americans on the East Coast?
Yes, we believe GFL’s track record for environmental compliance and operational excellence is suspect. At one point the Canadian EPA brought charges against it, which were eventually dropped and levied against its business partner Earthworx. Curiously, GFL continues to do business with Earthworx owner Claudio Villa at Campus Auto Collision & Heavy Equipment Refinishing. Given the unusual circumstances, we think the Audit Committee, with the assistance of an independent investigator, should review these transactions.
CorpGov: You’ve claimed that GFL CEO Patrick Dovigi has questionable business connections. Can you elaborate?
Spruce Point’s report provides incontrovertible evidence that GFL’s CEO has modified his public biography in a manner to obscure his connections to controversial individuals that have pled guilty to a variety of regulatory and legal charges. GFL’s other long tenured executive, Joy Grahek, also fails to disclose her role advising Philip Services Corp, a similar US/Canadian environmental roll-up that had an accounting scandal and collapsed to insolvency. Our report lays out a web of connections that should be alarming to institutions and regulators assessing GFL’s expansion into the United States. Mr. Dovigi was a Director of No Good TV (NGTV), a now-bankrupt company that involved individuals such as Andy DeFrancesco (tied to Aphria and Fareport Capital scandals), Romeo DiBattista Jr. (tied to Fareport Capital scandal) and Frank Mersch (settled with the Canadian securities regulators for misleading statements). NGTV’s CFO was a key financial and administrative executive at Simon Marketing during a critical period it was engulfed in the mob-linked McDonald’s Monopoly scandal.