GFL workers collect recycling in Toronto last winter. Analysts at JPMorgan Chase & Co. told their institutional investor clients last week to short sell shares in the Canadian waste disposal giant.Cole Burston/The Globe and Mail
As the board of GFL Environmental Inc. GFL-T weighs private equity offers to acquire the waste disposal giant, Wall Street’s biggest bank predicted GFL will turn down buyout offers and recommended hedge funds bet against a deal.
Last week, analysts at JPMorgan Chase & Co. told their institutional investor clients to short sell shares in GFL – an investment that only pays off if the company’s stock price drops – and buy shares in U.S. rival Casella Waste Systems Inc., which is the target of an activist shareholder campaign.
The recommendation is a classic hedge fund investment strategy, known as a long-short position, that is meant to make money no matter what happens in the markets. And a great deal could happen at both GFL, the largest waste company in Canada, and Casella, one of the few publicly-traded mid-tier garbage collectors.
In July, GFL announced its board launched a strategic review after receiving what founder and chief executive officer Patrick Dovigi called “unsolicited preliminary expressions of interest from multiple parties to take the company private.”
The overtures came after GFL’s share price dropped sharply after the company launched a friendly $5.4-billion takeover of Calgary-based Secure Waste Infrastructure Corp. At least two private equity fund managers approached GFL with take-private offers that would value the company at more than US$20-billion.
Since the review was announced in July, GFL’s share price has risen by 18 per cent. On Friday, GFL shares closed at US$45.56 on the New York Stock Exchange, which gave the company a US$19.86-billion market capitalization.
On Wednesday, GFL is scheduled to release quarterly financial results, which may include an update on the board’s negotiations with private-equity suitors.
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Last week, the price of shares in Rutland, Vt.-based Casella jumped by 11 per cent after activist fund manager Jana Partners LLC launched a campaign against the company at a conference in New York. A Jana executive called for Casella to take steps to improve profitability, returns on invested capital and the alignment between executive compensation and shareholder returns.
JPMorgan made its hedge fund trade recommendation on a thesis that GFL is unlikely to cut a deal with private equity funds, while Casella will improve results in the face of activist pressure, or be acquired at a premium price.
“We are unsure when, and if at all, the GFL take-private deal will be reached,” said a team of JPMorgan analysts led by Tami Zakaria.
“The current share price suggests investors are skeptical GFL will receive the media reported US$50-US$55 offer from a PE consortium,” said the analysts.
Last week, GFL shares traded for between US$43 and US$45 on the New York Stock Exchange, which is above JPMorgan’s target price of US$42 per share. The bank’s analysts said: “Should GFL’s take-private deal fall though, we would expect GFL to [decline] more than Casella, due to its much higher leverage.”
If private equity funds do acquire GFL, JPMorgan said Casella’s share price will rise even more than those of its Canadian peer. They said the acquisition of GFL “could pave the way for a leveraged buyout of Casella.”
Casella has a US$6.2-billion market capitalization, making it a small player in a sector dominated by rivals that have expanded through acquisitions. JPMorgan said Casella has relatively low debt levels and the potential to improve profit margins. The analysts said a takeover of Casella could come at a 30-per-cent premium to the current share price.
Last week, prior to the Jana announcement, Casella shares traded at prices between US$86 and US$88 on the Nasdaq. JPMorgan’s target price on the stock is US$99 and its analysts said Casella could command US$120 per share in a takeover.