Spruce Point Capital Management Releases Report and Strong Sell Research Opinion on GFL Environmental Inc. (NYSE/TSX: GFL)
Finds GFL has Obfuscated its Executives' Failures and Highly-Questionable Relationships, Including CEO Patrick Dovigi's Connections to What Observers Have Dubbed "Organized Crime"
Makes the Case that GFL is an Opaque, Unsustainable Roll-Up of Roll-Ups Failing to Grow Free Cash Flow and Failing to Provide an Accurate Depiction of its Leverage
Highlights Aggressive Accounting and Reporting of Revenue, EBITDA, Cash Flow, Adjusted EPS and Capex – Pointing to Financial Control Issues Overlooked During GFL's 2020 IPO led by Underwriters JPMorgan Chase and Goldman Sachs
Underscores Belief that H1 2020 Adjusted Free Cash Flow is 60% Lower Than it Appears on the Surface
Spruce Point – Which has a Proven Record of Exposing Governance and Financial Lapses at Canadian Companies and Industrial Roll-Ups – Estimates 100% Downside Risk to GFL's Shares
NEW YORK, Aug. 18, 2020 /PRNewswire/ -- Spruce Point Capital Management, LLC ("Spruce Point"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a 107-page report entitled "Green for Life, Red for Losses" that outlines why shares of GFL Environmental Inc. (NYSE: GFL and GFLU and TSX: GFL) ("GFL" or the "Company") face 100% downside risk. The full report can be downloaded and viewed at www.sprucepointcap.com.
Based on an extensive forensic analysis and holistic review of GFL's accounting practices, financial controls and reporting, and corporate governance, Spruce Point believes that without access to new capital, the Company's shares are worthless and likely uninvestable for institutional investors. GFL's executives have not only fostered what appears to be an extremely aggressive and opaque business model, but they have either deliberately concealed, or inattentively omitted, past failures and questionable business connections. Our report's textual and visual evidence shows that Chief Executive Officer Patrick Dovigi has obfuscated his connections to what some observers have dubbed "organized crime" figures. We have also discovered that former General Counsel and current Senior Vice President Joy Grahek has failed to disclose her role advising Philip Services Corporation ("Philip Services"), which was a dual-listed roll-up of metal and industrial businesses that collapsed, was pursued by the Ontario Securities Commission, settled $80 million in shareholder claims, and was described as a "house of cards" and "one of the great unprosecuted frauds in Canadian business history."
Spruce Point's assessment of GFL's accounting and financials leads us to believe that the Company's true leverage is understated by an aggressive reporting of revenue and EBITDA. This is evidenced by the Company making financial restatements without explanation and by minimizing its material weaknesses of financial controls. We also believe GFL's depiction of its debt is understated by at least C$460 million. By our estimate, GFL's staggering C$5.6 billion in total debt and its ongoing financial losses make it reliant on new capital to sustain itself – never mind its prospective growth via an increasingly expensive acquisition strategy. Given that a meaningful portion of GFL's stock is pledged as collateral for loans, we contend there is a real risk that the stock may collapse and the Company's auditor may not sign-off on its financials after reviewing the evidence included in our report.
A high-level overview of some of the detailed findings in Spruce Point's 107-page report includes:
- Mr. Dovigi and GFL executives have ties to controversial individuals, including parties that have plead guilty to breaking various laws and been dubbed "organized crime" figures. Spruce Point's report shows that GFL's Securities and Exchange Commission and SEDAR filings were modified to omit Mr. Dovigi's connections to parties that have faced regulatory infractions, legal issues and allegations of securities fraud. Our research also lays out a web of Mr. Dovigi's first-degree and second-degree connections that we believe should be alarming to investors.some text
- GFL currently uses Campus Auto Collision & Heavy Equipment Refinishing ("Campus Auto Collision") for its vehicle and equipment refurbishment. Photographic evidence in Spruce Point's presentation shows that this commercial relationship reconnects Mr. Dovigi with Claudio Villa, who plead guilty to dumping toxic soil in 2015 when he was an owner and Director of Earthworx Industries ("Earthworx"). The soil, which came from GFL, was reported to have been "contaminated with heavy metals, with elevated concentrations of lead, cadmium, copper, and zinc exceeding Environmental Protection Act standards."1 GFL was also charged with violating the Environmental Protection Act, but those charges were dropped and only Earthworx and Mr. Villa faced legal repercussions and fines.
- Mr. Dovigi was previously 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).2 NGTV's Chief Financial Officer was previously the Vice President of Finance and Administration at Simon Marketing, which was the company involved in the mafia-linked McDonald's Monopoly scandal featured by HBO in a documentary.3
- GFL also obscures the role of Paul ("Paolo") Borrelli, a former executive and current employee according to GFL's phone records. Mr. Borrelli is connected through social media to Antonio Borrelli, who was convicted of attempted murder. Antonio is the nephew of Peter Scarcella, who Canadian police have noted "is one of Toronto's top mob figures."
- GFL is a poorly-organized and opaque roll-up of roll-ups that has grown through an unsustainable acquisition strategy. Department of Justice ("DOJ") approvals are now required to further its haphazard U.S. expansion efforts. Spruce Point believes GFL has amassed $6.5 billion of goodwill and intangibles through expensive acquisitions. We find 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. We believe our research illustrates that GFL is simply a financially motivated investment scheme that failed multiple times to go public and has investment parallels to Philip Services, a scandalous roll-up that went bankrupt.some text
- In one case, GFL bought a company that itself acquired 60 companies, making GFL a roll-up of roll-ups.
- In an extreme case, GFL bought Rizzo Environmental before U.S. authorities indicted its CEO for fraud.
- GFL's current U.S. expansion efforts, including purchases of assets from Waste Management/ADS and WCA Waste Corporation, require DOJ approval. We believe this adds increased regulatory risk to investors, yet sell-side analysts give GFL full credit for successful completion as if these cross-border transactions have already been approved.
- GFL employs an aggressive accounting and reporting approach when it comes to revenue, EBITDA, Free Cash Flow, Adjusted EPS and its assets – pointing to financial control issues being minimized.some text
- Spruce Point's report shows that GFL's initial prospectus for its 2020 public offering discussed a material weakness of financial controls, which is a troubling issue for a Company founded more than 12 years ago. The Company ultimately removed the material weakness statement and suggested it was addressed. However, Spruce Point finds evidence that GFL has restated both revenue and EBITDA without any explanation by pulling from "intercompany" revenues.
- Spruce Point also finds accounting anomalies tied to operating cash flow ("OCF") and capital expenditures ("capex"). In total, Spruce Point estimates that cash burn (OCF - capex) is 60% more than depicted by GFL.
- Spruce Point also has concerns that GFL may be misrepresenting capex requirements of its latest planned acquisition of WCA Waste Corp for $1.2 billion. A recent Moody's credit report shows WCA's capex margin is 15% vs. 10.5% depicted by GFL, an $18 million discrepancy.
- GFL's financial targets are unlikely to be achieved and its premium valuation reflects dubious numbers promoted by historically perilous underwriters like Barclays, Goldman Sachs and JPMorgan Chase. Spruce Point believes that GFL is uninvestable to institutions given its numerous financial issues, and questions why underwriters like Barclays, Goldman Sachs and JPMorgan Chase (who have designated "reputational risk" committees) continue to promote this risky stock to investors.some text
- Based on extensive research in our report and conversations with former GFL employees, Spruce Point contends that GFL is unlikely to stem its cash burn and turn a profit any time soon – especially as it continues a torrid acquisition pace.
- Spruce Point finds that sell-side analysts appear to have universally ignored GFL's financial control issues pertaining to unexplained revenue restatements, capex anomalies and understated debt burdens. We question how analysts can take GFL's word that it is growing organically (with little data to verify) and can continue to acquire (yet overpay for acquisitions) while improving margins (despite evidence of wasteful spending and operational mishaps).
- Spruce Point also believes analysts and market data providers have failed to capture the impact of GFL's tangible equity units ("GFLU") in the valuation, and that the ICE index has misclassified the security as a "preferred" instrument.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
