What do PE fund managers see in GFL?

Public-market investors don’t seem to get Patrick Dovigi.

The founder and chief executive officer of GFL Environmental Inc. GFL-T is listening to offers from private-equity suitors after last summer’s sharp sell-off in shares of the country’s largest waste-disposal company.

GFL’s stock tanked after announcing plans to buy Calgary-based Secure Waste Infrastructure Corp. SES-T for $5.4-billion in cash and its own shares.

Mr. Dovigi, already a candidate for the business hall of fame at age 47, snapped up Secure to become the oil patch’s dominant player in processing hazardous waste, chemicals and scrap metal. GFL closed the acquisition earlier this month.

For investors who bought into GFL as an easy-to-understand garbage collector, the owner of the bright green trucks that pick up their trash, the Secure purchase added complexity and perceived cyclicality to the stock story.

GFL’s share price dropped 10 per cent the day the Secure deal was announced in April and continued to decline in the weeks that followed. That’s when the PE funds showed interest.

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In late July, when GFL announced its financial results, the company revealed its board had started a strategic review, hiring investment bankers and lawyers to screen bids. In a press release, Mr. Dovigi said that “We have recently received unsolicited preliminary expressions of interest from multiple parties to take the company private, as is often the case when there is a valuation disconnect.”

The disconnect Mr. Dovigi highlighted is simple. PE funds are attempting to acquire GFL for what analysts say the company could be worth in less than a year’s time.

In the wake of GFL’s decision to launch a review, hedge funds that speculate on takeovers bought GFL stock on expectations that PE funds would offer somewhere in the range of $70 to $78 per share for the company.

That is a relatively modest 15-to-25-per-cent premium to the current stock price. On Monday, GFL shares closed at $63.03 on the Toronto Stock Exchange.

Analysts predict that with Secure in the fold, it will be a matter of months before GFL’s share price matches what PE funds will offer. There are 17 investment-bank analysts who cover GFL, and 15 predict that its stock will be worth north of $70 in a year’s time. Their price targets range up to $90 per share.

With the Secure deal closed, GFL has relatively low debt, higher profit margins and the ability to generate $900-million-plus of free cash flow each year, according to a report released last week by analyst Sabahat Khan at RBC Capital Markets.

Mr. Dovigi will use GFL’s strong balance sheet and extra cash to keep acquiring small waste-disposal businesses, Mr. Khan predicted. His target price for GFL is US$60 per share, which converts to just over $84 in Canadian funds.

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Private-equity funds are drawn to low-debt companies with growth potential and strong cash flow. Those were features in recent PE fund buyouts of several public companies, including CI Financial Corp. CIXXF, Dentalcorp Holdings Ltd., Boralex Inc. BLX-T and Information Services Corp.

In Mr. Dovigi, PE funds see a proven talent, someone who has made money in the past under the constraints imposed by the extra debt of a leveraged buyout.

Since walking away from a potential career in the National Hockey League – in 1997, the Edmonton Oilers drafted Mr. Dovigi as a goalie – GLF’s founder has scored with backing from a series of PE funds.

Two global asset managers, London-based BC Partners and Apollo Global Management Inc. APO-A-N in New York, currently have investments in GFL and its offspring. In the past, the Ontario Teachers’ Pension Plan and Australia’s Macquarie Group MCQEF made significant gains on their GFL stakes.

PE funds know Mr. Dovigi has one defining characteristic, a skill that seems lost on public investors. GFL’s founder turns garbage into cash. The more trash GFL takes in, the more money it makes.

Mr. Dovigi has shown that he can make predictable profits on household waste. PE funds are sure that he can continue coining cash by processing industrial and chemical waste, however nasty.

If a PE fund does make a bid for GFL, public-market investors will have to decide if they are willing to give Mr. Dovigi credit for knowing how to take out the trash.