Good morning, everyone. Thank you for joining us to walk through a little bit on the GFL and Waste Management Advanced Disposal divested asset package. Before I get started, I'll turn it over to Luke quickly to go through the forward-looking statements caution. Then we'll jump into it here.
Thank you, Patrick. Good morning, everyone, and thank you for joining. Before we get started, please note we have filed a press release which includes important information. The press release is available on our website. We've prepared a presentation to accompany this call, and that's also available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements.
These forward-looking statements speak only as of today's date, and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-GAAP measures. A reconciliation of these non-GAAP measures can be found in our filings with the Canadian and U.S. security regulators. With that, I will now turn the call back over to Patrick.
Thanks, Luke. I won't flip the deck. I mean, everybody has it. It's a pretty short deck. I think we'll keep this more interactive and high level. As most of you know, on the IPO roadshow, these assets were out in the market, and people were trying to understand if we were potentially a bidder. I think as we worked through that process post-IPO, as we said during the IPO roadshow, there was a couple of chunkier type acquisitions, this being one of them, that we thought could come available to GFL, and fast forward to today, delivering on one of those two opportunities on the chunkier side. When we look at this today, this is an asset that, again, without the Advanced Disposal and Waste Management merger, these types of assets would never have come available.
We're acquiring 36 transfer stations, 18 landfills, and almost 300 collection vehicles and approximately 900 employees through 10 states in the U.S. I break them down into three different regions. The Midwest region, which the majority of what we're acquiring in that market is in Michigan, Wisconsin, and Illinois, and there's a small piece in Minnesota. You have the East region, which is largely focused really around Pennsylvania and Indiana. Then you have the South region, which is generally focused around Georgia, Alabama, and Florida. Then you have a little piece up in Maryland that'll be part of the East region. Talk a little bit about the Midwest region and clearly why that is the largest piece of what we're acquiring. Obviously, the Michigan portion of that business that we will be acquiring is a complete tuck-in to our existing business in Michigan.
As most of you know, we've had a focus on growing our Great Lakes Region, operating our business on the Canadian side from Windsor, Ontario, all the way up to Sault Ste. Marie, Ontario, and Sault Ste. Marie, Michigan. Recently we've acquired a business in the Upper Peninsula, American Waste, and with our large build-out of the original acquisition that we did in 2016, have a huge presence in Southeast Michigan. Acquiring these assets in Southeast Michigan and getting our hands on a landfill in that specific market makes a lot of strategic sense for us. If you look at Wisconsin, which is almost 60% to 65% of the overall EBITDA that's coming out of the divested assets, that is a very good sort of secondary market. It's a market where you need to be vertically integrated to compete successfully.
Between Waste Management and Advanced Disposal, we had a significant amount of market share in that market, which led to this opportunity, and I call that a once in a lifetime opportunity to acquire those assets in that region. As well as Illinois, getting our hands on some transfer stations and landfill assets in Illinois will give us the ability to compete successfully on our, what will soon to be a new hauling business in the Illinois market as well as Minnesota. When we move to the East region, today we have operations in Pennsylvania, Virginia, and Maryland. Those will put us into some markets that we're already in, but we'll also expand our footprint in both Maryland, as well as Pennsylvania.
Giving us some new landfill assets to be able to go build hauling businesses around, and as well as moving us into the Fort Wayne, Indiana market where we believe there's a large opportunity there. What's being contemplated now is acquiring a large landfill in that market. Then you look at the South region, largely a tuck-in to our existing footprint in the South. We have a large presence in the Georgia market, as well as Alabama, touching on a couple of the smaller Florida markets.
Again, it's always been a focus of ours to start moving into Florida, and I think with this acquisition, that'll allow us to do that. From our perspective, to acquire, similar to what we did with Matrec back in 2015, carving that business out from a public company called TransForce, as well as carving out the Eastern Canadian assets from Waste Management back in 2014. This is a very similar type program. I think the quality of assets we're getting are second to none. I think when you look at some of the opportunities that this will allow us to do in the future, which we'll talk a little bit about, but I want to talk a little bit about the integration plan first. I think, the majority of what we're getting is stuff that is coming off of the ADS platform.
ADS operates on the same operating platform as us, being an operating platform called TRUX. Given our experience with TRUX and the integration team we have, we believe we're very well-positioned to integrate these assets very easily. Our integration team has been up to speed with Waste Management's IT team as well as ADS' team, and we have a very good, well-defined plan. Between our Detroit, Michigan hub and between our Raleigh, North Carolina hub, the bulk of the back office functions are going to go into those two hubs, and we're very well-positioned to do that, and the delay in timing actually helps us a bit because it gives us a little bit more time from a planning perspective. When you look at the valuation, lots of people are focused on the valuation. Valuation, obviously, out of the gate is a key metric.
Some will say we're acquiring these for 8x. Some will say we're acquiring these for 9x. What I can tell you is, let's focus on today, but let's also focus on what these set of assets do for us over the next 12, 24, 36 months, and what the opportunity is. If you look at what we're acquiring, we're largely acquiring landfill assets as well as basically 350 front-end collection routes, which is arguably the most profitable line of business any one of us have in our overall revenue mix. On the backs of these front-end collection routes, we now have the ability to go and expand our municipal collection operations and expand our roll-off collection operations in each one of these markets. We can do that all organically on the backs of these existing facilities.
If you look at the collection of assets, obviously, Wisconsin, very high-margin market. Again, the overall blended margins coming into us are, we believe are going to be accretive. It just sets us up very well. These assets, if you look historically what we paid for assets of similar nature, I mean, Matrec was one that we did, again, almost five years ago, paid 9.5x-10x for that. If you look at the headline number for Waste Industries when we acquired that business, it was roughly 11x. Acquiring these in the 8x-9x range, we feel it's a very favorable purchase price multiple. Not only is it a favorable purchase price multiple, we think it leads us to an exciting opportunity over the next 12, 24 to 36 months.
Obviously, the part of the deal as what we heard, our model was a little bit different in Canada and some markets in the U.S., where we were more disposal-light. As part of this transaction, I think we've absolved that fear with everybody as people were concerned that our landfill percentage of our overall business was lower than some of our competitors. Again, solidifying the disposal arrangements that we've had with Waste Management, both into our facilities as well as theirs. When you look at how this works, and we'll get into a little later on future M&A. If you think about Waste Industries and what that has done, this is a puzzle we're building.
We continue adding pieces to the puzzle. If we would've never acquired Waste Industries in 2018, this acquisition today wouldn't be possible because just having the ability to tuck these assets into a lot of our existing platform and having the back office support to be able to support these markets has really positioned us very favorably. With that, I'll turn it over to Luke to talk a little bit about the financing, and then we'll get into Q&A and spend the bulk of our time on Q&A.
Thanks, Patrick. If you look at page six of the presentation, there is some outlining on financing considerations. As you are all well aware, early in Q2, we tapped the market on an opportunistic financing, brought on a $500 million bond, which brought us north of CAD 1 billion of liquidity that we have been sitting on, truthfully, in anticipation of the closing of this transaction. We are well-positioned to fund the transaction with the liquidity we have today. We still have basically all that cash, and we could draw on the revolver. We continue to always be looking at opportunistic financing opportunities. That is something that we will continue to evaluate as such opportunities present themselves.
When you think about if you were to finance it 100% today, just with cash on hand from a leverage perspective, before considering this acquisition, if you looked at the model, if you looked at the analyst consensus, I mean, the business was expected to end the year with leverage in the low fours area. Funding the acquisition 100% debt finance would increase that leverage by about half a turn. You'd end up ending the year the high end of mid fours. As we told everyone from the IPO out the gate, our philosophy around leverage was that we think naturally the growth prospects of the business are going to see a natural de-levering year-over-year, even with our growth goals. We would, on a temporary basis, bring leverage up to that level of mid to the high end of mid fours to effect the right transaction.
For all the reasons Patrick just said, we think this is the right transaction. We are doing exactly what we said we would do in that regard. If you look at what that means going forward, the regular way M&A program and the organic growth of the business, you'd still see, even if executing at the levels of M&A that we previously discussed, the business still naturally de-levers about half a turn a year. You still would continue on that de-leveraging profile to getting to that low mid threes that we've spoken about. I think this just delays that process by the half a year or a year, absent any other sort of financing considerations. I think it's important that some people were asking yesterday about what does this mean for our broader M&A.
I do think it's important to emphasize that there's no limitations from a leverage perspective to continuing our normal course tuck-in program. For the most part, those businesses end up in very short order being accretive to the overall profile and certainly don't move it in any material way.
On that theme, we've had a lot of reverse inquiry over the last month about investors asking to put equity in and take equity as part of some form of private placement. What I will say on M&A, leverage is clearly the governing factor in what we need to determine about how much equity needs to go in the business. What I will say is we're not contemplating doing any equity offerings today. We feel more than comfortable with this leverage profile. If some of the other opportunities that we had in our pipeline that we discussed as part of the IPO come, we have multiple equity solutions available to us that will get that leverage profile into the low fours as part of our commitment to each one of the investors that participated and continue to participate.
By no way are we going to continue if there's something, again, a little bit chunkier that comes along. No way are we going to take leverage up into the five to six range. That's what we committed to you, and that's what we'll continue to do. Again, lots of opportunities in various sorts of structures around the equity with very large investors that have been with us previously and continue to be with us. That opportunity exists, but I don't think you'll see us coming, doing a broader syndicated equity deal today or anytime soon. I know that question came up a lot over yesterday, but I just want to make sure that we hit on that today.
Just to round out the conversation, all these conversations about leverage, highly predicated on what sort of underlying EBITDA number you're using. If you think about this asset package, as Patrick articulated, primarily comprised of landfills and front-end hauling businesses and the majority of which in a great market in the Midwest. On the face of it, this package was a low 30s margin EBITDA business. Now, being a carve-out, we've taken a look at it, and we've underwritten ours on a true standalone basis. What would this look like if you carved it out and had to burden it with all its standalone costs? And we also included a certain level of conservatism in the numbers in consideration of the current dynamic, specifically COVID-related impacts to the historical numbers.
All of that, bringing the business down, we're thinking out the gate at something with a high 20s, call it 27%-28% margin profile. We think that is a conservative number. There, as Patrick said, for all the go forward, there's opportunities above and beyond that. There's a very near-term synergy opportunity in terms of just thinking about how much we burden the standalone business, but actually being able to leverage our existing infrastructure in the back office from Raleigh to Michigan. As well as just a more operational synergy going forward as we use this new footprint and network of assets, particularly on disposal side, where we now have our own disposal assets in certain of these markets that are going to lead to internalization opportunities, route consolidation, facility consolidation, and the like.
Do want to just add the color that all this leverage discussion is predicated on one EBITDA number that we think there's some pretty meaningful upside to. The last point I would just say, to echo one of the things that Patrick said on integration, it's near and dear to my heart. Our team has been deep in the weeds in relation to that. I tip my hat to the Waste Management ADS folks who have been very prepared and very helpful in ensuring that collectively we get to a place where there's a smooth transition. As Patrick said, the fact that the majority of the assets are on our current operating system, I can't express how efficient that is for us from an integration perspective.
Again, with the delay of potentially a month or so, adding the extra time to allow us to be prepared, this is going to be a very efficient integration from our perspective. Particularly if you think, although it's a big asset package, the majority of the businesses in the east region and the south region truly are tuck-ins to existing networks and infrastructure that we have. It's really effectively setting up this new Midwest region, but again, will all be administered through an existing back office. We just wanted to really articulate how well advanced we are in that plan and how both the vendor and us are marching towards an efficient transaction in that regard.
Yeah, our belief is it's a great transaction for us, clearly, and it's a great transaction for Waste Management and Advanced Disposal. Just given the relationship we've had with Waste Management over the years and the ability to work collaboratively with them multiple times over the last sort of 13, 14 years, the teams know each other. They've worked well together in the past in various asset sales, and it's the same team working on those. We feel extremely comfortable and very confident. From the highest levels down at Waste Management to the people that are actually doing the work, I think there's just complete agreement. We're really excited. I think with that, we'll turn it over to the operator for questions, and that should bring up some interesting sort of dialogue.
Thank you. Ladies and gentlemen, at this time, the floor is open for questions. If you would like to ask a question, you may do so by pressing star one now. If you are connected via speaker phone, please make sure that your mute function is disabled so your signal can reach our equipment. Again, press star one to ask a question now. Our first question comes from Tyler Brown with Raymond James.
Hey, good morning, guys.
Good morning, Tyler.
Hey, congrats on the deal. Patrick, just real quick, I think the deal is slated to add, I think you said, 18 landfills to the fleet. That's great. I agree it helps with some of the post-collection concerns. Are any of those landfills particularly short-lived? I know ADS has had some landfill issues in the past.
Yes.
Is there any landfill protection as a part of the deal?
Yeah. There's three, I would say, non-strategic assets that are sort of dwindling down, sort of two to five years of life left. Those are not core to the transaction from a value perspective. I would say they were kept open as a going concern, but there was no real value attributed to them. Actually, negative value when you factor in ARO and closure liability. It's really a host of 15 core group of landfills that have a long life expectancy left in front of them.
Yeah, Tyler, just to articulate that even more, if you think about our underlying EBITDA number and the revenue number, those are basically in at zeros. The ARO liability, as Patrick said, all factored into our valuation partner. We went in with our eyes wide open, such that was part of the package that had to be taken, but we just factored that into the math.
Okay, great. Maybe just to level set it, obviously these assets are landfill-centric. How should we think about the CapEx burden on these assets, maybe as a percentage of sales? I'm assuming they're a little bit higher than your base business.
Yeah, that's right, Tyler. I think when you look at the package today being so landfill-heavy, despite the GFL blended numbers today being sort of 9%, we're viewing this as sort of high 11%, 12% CapEx burden. Now, as we execute on our plan to build out a broader, more comprehensive collection network on the back of these assets and the landfill concentration as a piece of the overall mix reduces, I think you'll see that sort of come down. Out the gate, we're viewing this effectively as sort of, call it a 12% CapEx burden.
Okay, perfect. My last one here, just in a broad stroke, how is the deal structured, and how does it affect your cash tax paying status off into the future?
The deal will be a combination of assets and shares, primarily an asset-based acquisition. Effectively, when you put it all together, if you look at the current runway that we had of being a non-cash taxpayer, you're going to add about a year, a year and a half of that non-cash payer status. The incremental tax shield coming out of that will basically give us another 18 months, all other things being created equal.
Okay, great. Well, thanks, and congratulations.
Thank you, Tyler.
Thanks, Tyler.
Thank you. Our next question comes from Adam Wyden with ADW Capital.
Hey, Patrick. Can you guys hear me?
Yeah, we can hear you. How you doing, Adam?
I'm here in Bloomfield Hills. I just had my GFL truck come and pick up my garbage. Happy customer here. Just wanted to say congratulations on the deal. It's a great feeling to partner with a management team that has significant skin in the game and obviously a huge track record of creating enormous value for shareholders, albeit in the private markets. Patrick, obviously you built this business from scratch. 13 years ago, you had one truck. Now you're the fourth largest waste management company with nearly CAD 1.3 billion of EBITDA. You've compounded capital for you and your investors at an extraordinary rate and have shown that you are obviously the most capable exec in the space today.
When I look at the closest public market comparables, Waste Connections and Casella, they trade at 18x-20x EBITDA respectively, or less than 3% free cash flow yields. GFL today is a capital-light share gainer with a better mix growth and management team. Yet today, you trade at only 10x EBITDA. Obviously on a free cash flow basis, if we trade it at the same valuation, this would be a CAD 60-plus stock today. How do you think about narrowing the valuation gap, especially if you want to continue doing large transactions? In my mind, you should be trading at a premium to Casella and Waste Connections because this business is a toll road, route-based business. I guess my question is, the sell side's completely out to lunch.
I don't know if they're recovering from COVID. How do you plan on narrowing the valuation gap and getting the credit for the value creation that you've done and the value creation in the future? Go out there.
Well, anyway, thank you for the compliments. Appreciate it. Listen, I think it's really simple, right? As a new public company, I think at the end of the day, it takes some time to build trust with the public equity investors. I think from my perspective, listen, I'm 40 years old. I have hundreds of millions of equity in this company. I can't control the stock price, but what I can control is how we operate the business and how we deploy capital to create shareholder value. I think if we do those two things properly, I'm going to make a lot of money for myself, and I'm going to make a lot of money for each and every one of the shareholders that are on this call.
I think, as we've been through sort of one quarter, obviously bumpy quarter with COVID and everything else, I think as we continue delivering on our plan on the Q1, we delivered Q1, now we have Q2 through Q3. I think similar to other Canadian champions, when you look at it, you look at the likes of sort of Waste Connections, you look at the likes of like a Boyd Group, you look at the likes of a Couche-Tard, these are all great Canadian champions that have delivered superior results for their shareholders over the years. That took time. I think as we continue to build trust and as we continue delivering on our plan, and as we continue increasing our free cash flow margins, I think what you'll see from us, we'll get sort of margin expansion. Margin expansion as well as multiple expansion.
That's how I'm thinking about it. This is a long game for me. This is not a sort of quarter-to-quarter match. I think this is a substantial amount of my net worth in this. Over the next 10 to 15 years, I will continue doing what I've done for investors over the previous 10 to 15 years. All of them have made a lot of money with us and this management team, and this management team knows how to deliver, and I think will continue to deliver. That's really what we're focused on. You and the rest of the investor base will have to determine what the appropriate price is for the stock. We do believe that we will get multiple expansion as we continue delivering and executing on our plan.
Just following up on that. Look, obviously, I think Canadian investors, I don't know if it's a different landscape. Obviously you have a huge business in the U.S. now, and obviously I think as we've spoken about, being a route-based business, you can run with significant leverage. When we look at American champions like Charter, these companies run with six turns of leverage. I'd argue that you need your garbage truck before you need your cable bill. I guess my question is, do you think that there's an opportunity as you grow your U.S.-based business to engage U.S. investors that perhaps can better understand the quality of this business? In our mind, this is like owning a highway or a toll road or a bond. With rates at zero, it totally makes sense to us that these things trade at 2% free cash flow yields.
Yeah. Listen. I think people have always asked us over the last little while is, like a lot of investors are always focused on what happens in a recession, right? I think what all investors are going to see is they're going to see from all of the waste companies, not just us, that these are very resilient businesses. When you have extreme downturns like we've had, that I don't think anyone's seen in forever, certainly not as long as I've been in business or maybe probably even others. I think when you look at it from that perspective and people get to actually see Q2, they also get to see that these businesses actually have the ability to grow through acquisition in a highly fragmented market. I think that's a recipe for success.
Everyone will get to sort of view what the downside case is, and I think everybody can agree on this call that Q2 will be the downside case for the most. You still have the upside of the continued organic growth, the continued diversification of service offerings, as well as sort of the growth by M&A. Listen, I think I love the business. That's why I'm still here. If I didn't love the business, I would've sold to private equity or sold to a strategic, and we would've moved on. I think we're in the company of few that have done this. If you look over the years, you had sort of the Laidlaw days, which is outside of the groups. You had the Huizenga days, and you had Ron Mittelstaedt that founded sort of Waste Connections. There's been very few that have done it.
I think we, to a certain small extent, are in that group today and the underdogs. I think over time, we're the underdog today, but we'll continue proving that our model is solid and sustainable, and we'll continue growing like everybody else. I think we're very well positioned with where we are with our size and our scale. We're not a huge company. We're not a small company, but we have all the resources of larger companies, which I think has put us in a very good footing to continue driving the growth of this business forward, similar to what we communicated when we actually did the IPO. You got to put your money where your mouth is, and you got to deliver on what we said we're going to do, and that's what our plan is. That hasn't changed.
Well, Patrick, this will be the last for me. I can just tell you that in terms of leverage and all the rest, I think this is an incredibly robust and stable and resilient business, and I think given where rates are, I think you probably couldn't be in a more safe asset class. I think the fact that you're a large shareholder and you're aligned with equity value appreciation, and I think as you spoke about, a lot of these sell side guys, specifically Canadians, are talking about, "Oh, there's a capital raise," this and that. Well, come on, four times leverage for a business like this? You ran it with six or seven in the last downturn.
I think you appreciate the public markets like less leverage, but at the same time, your equity is incredibly precious, and you're a large shareholder, and I look forward to being a shareholder for a long time. I personally appreciate the alignment and the fact that you know that your equity is undervalued.
Okay, great. Thanks, Adam.
Thank you, Patrick.
Thank you. Our next question comes from Mark Neville with the Scotiabank.
Hey, good morning, guys.
Hey, Mark.
You mentioned CAD 60 million, CAD 65 million-CAD 70 million in EBITDA roughly coming from Wisconsin. Can you maybe just give us a bit more sort of color on the lay of the land of that market, sort of where you'll fit in after, sort of what your mix of business in that market looks like, and maybe how quickly you think you can sort of roll out or grow the roll-off and the municipal business in that market?
Yeah. I think we'll be very well-positioned with the commercial front load business, which is the most profitable. I think we will start pursuing municipal bids as well as continuing to build up the roll-off business in that market. I think, again, Rome wasn't built in a day. Again, like I said, we can focus on what the acquisitions and the multiple and EBITDA we're going to get out of this. Like in anything we're doing, as we continue to build the puzzle and the pieces of the puzzle, this is just one of the pieces of the puzzle and gives us another opportunity to grow organically at an outsized pace. I think over the next 12, 24, 36 months, we're going to build a very good market presence, particularly in that market.
You've talked about sort of this being a low 30s margin business, but underwriting it sort of at 27%. Just sort of curious, when you think of identification in the East and the South, sort of the opportunities for synergies and I guess alternatively, with it being a commercial heavy business, just your thoughts around or what you sort of baked in for, what kind of impact COVID could have sort of maybe more than just one quarter or medium term on that market. Yeah?
You're specifically talking about the east region?
Well, yeah, I guess-
In general?
Both for the synergies and then just general about sort of it being a more commercial heavy business. I guess it's a two-part question: the more commercial heavy sort of holistically.
Yeah. Again, like all of our businesses, different regions have different perspectives on shutdowns, et cetera. I think we have the benefit of seeing our business perform really through Q2 as we're almost at the end of Q2 here. I think, as originally predicted in late March, no one was really sure how bad it was going to get. I think obviously April sort of being the worst and then a recovery in May, and then businesses continue to perform better in June. Those businesses have trended exactly the same way. From that perspective, I think it's very well positioned trending exactly the same way that the rest of our businesses is. I think they are fortunate from that perspective that today, not many of those business units are in states that have been in sort of full shutdown, lockdown, like certain markets in the extreme northeast.
Obviously that could change. I mean, I'm not certain that any of the political, the governments in both Canada and the U.S., what they're going to do and how they're going to do it. I think we're through the worst of it, and I think we have a pretty good handle on what the trough is, and I think we've taken the sort of underpromise and overdeliver approach by modeling it the way we have. We could have clearly modeled this higher if we wanted to communicate to everyone, but I think taking the underpromise and overdeliver approach was the right thing to do around the presentation of these numbers.
Okay. I guess in that 27% you spoke to, there is something built in for whatever commercial impact that is.
Yeah.
Okay.
For sure.
Maybe just one last question, excuse me, just on leverage and M&A. I understand the 4.5, not an issue there. You talked about equity solutions, if something were to come along chunky. Maybe just curious from internally, from an integration perspective, if something were to come along soon or quickly, would this hold you back from doing anything? The tuck-in you spoke to, you can do that, something of size, I mean, if something comes along next three, six months, do you think this would be preventative?
No. I think from our perspective, it's always where, how, and when. I think we have a team that knows how to do this. I mean, it's really the preparation for the integration that is where all the work is, and I think over the last call it month and a half, two months here, there's been a lot of preparation. There's going to be a lot of preparation for the actual flipping of the switch and whenever that may be, sort of mid-August, end of August, is what the hope is for all of us. We will be very well prepared with a very definitive plan. All the people are in place. I mean, Wisconsin is generally, again, 65% plug and play. Those systems will come right in. I mean, we have the individuals that we want to keep sort of plugged into all the various networks.
From an integration standpoint, it'll be flipping the switch on the day we close, but all of the planning and pre-planning has been sort of done over the previous sort of three months. In really the last six weeks, and it'll continue over the next four to six weeks in order to get this done.
Mark, was your question about whether the pro forma leverage profile precludes us from being able to interact with something larger should that come available?
No. The question was the one that Patrick answered. It's just sort of internal capabilities. I sort of understand the leverage when you talk about equity solutions.
Yeah.
No, it was more Patrick's question, but that's fine.
Yeah. Touching on Luke, at the end of the day, there's a lot of money in the world today. There's been a lot of money since I started, and I always say there's lots of money for good deals. Again, if we can deliver the return profile we want on a specific acquisition, again, historically we're focused on leverage at 6 to 6.5. Today, we need to make the numbers work and the IRRs work using leverage sort of around 4. There's lots of good equity out there. There's lots of investors that want to support it. From our perspective, that will not be an impediment to growth because of leverage sort of in the mid-4.
We will raise the amount of appropriate equity that we need to maintain our commitment to the shareholder base, which is maintain leverage in the low fours. You're not going to see us take leverage up materially to take on a larger acquisition. If it makes sense, it'll make sense for my equity, and it'll make sense for your equity, and it'll be another piece to the puzzle that fits in, and it'll be another sort of geographic expansion that gives us the ability to continue growing the business in the future.
Mark, just back to the original question that Patrick answered. From an integration perspective, I do just want everyone to appreciate the sort of nuance of having, not only are we preparing to integrate them on our side, but we also have, again, these great teams at ADS and WM that are equally preparing to divest of the stuff. Effectively, almost sort of doubles up the horsepower that I have in a preparation perspective in terms of the sort of IT considerations, because it's in their best interest for me to be able to run right away because then they don't need to support post-closing.
We feel really fortunate that we have the folks at the ADS side and WM side, again, who have been fantastic, helping us get ready to be able to take this on block and all of that focus over the next six weeks, I think is going to, I don't want to say be plug and play, but lead to a very efficient sort of integration process when you think about otherwise if you were just buying a business like this.
Right. Okay. That's understood. Thank you guys. Congratulations.
Thanks, Mark.
Thank you. Our next question comes from Walter Spracklin with RBC Capital Markets.
Yeah. Good morning. Hi, everyone. How are you doing?
Welcome, Walter.
Good. How are you doing?
A lot of the questions I had yesterday were coming in around what the basis was for the revenue and EBITDA that you were acquiring. Obviously, with COVID-19 happening, there were a lot of shifts in revenue. Perhaps you could walk us through how you came up with a kind of run rate, normalized revenue in EBITDA. Did you start with 2019 and adjusted? Or just a little bit along your thought process on how you valued these assets.
Yeah. Walter, if you think about what the asset package actually represents, in many instances, it is a portion of a previous business that existed largely for ADS. There's a little bit of WM in there as well. Really, if you think about a hauling company that we're buying, in most instances, what we're getting is a fraction or a portion of the prior hauling company that existed. If you think about a landfill that they used to use and they would bring all their internal tons, et cetera, what we're by and large getting now is the landfill, but X all of the previously internal volume, under the thesis that WM ADS post-close will now take that to one of their existing landfills.
You started with 2019 P&L as actual, but then there was a significant level of rigor in trying to carve that up to see what we would actually be sort of leaving with. In doing that, in addition to being considerate about, well, that volume is not going to any longer be there because WM is retaining that. We also use certain discounts in certain markets to reflect, well, maybe, that was a peaky year, and in light of COVID, we should be having something different. That's how the revenue buildup was. However, what I would put forth is the majority of our cushion, per se, is at the margin level. Again, as I've said, the thesis and the process was what does this business contribute on a standalone basis?
Again, when you think about that construct of taking full hauling yards, and then I'm going to take 10 routes of what was a 40-route hauling yard, how do you now burden that location with all the appropriate overhead costs, all the insurance costs, all the admin costs. It was through that process that I think we've actually built in the incremental conservatism, although at the margin level, effectively providing you sort of, from our perspective, the cushion and what will ultimately be a tailwind, overcoming any sort of COVID related dynamic.
Then layer on synergies on top of it, like in the south market and through Michigan. Real opportunities, real internalization opportunities. I think, again, the further cushion that we're now modeling here, that's all sort of upside in 12, 24, 36 months. I think, very conservative approach to the actual way we're going about this.
Again, Walter, just another sort of consideration is where you look at where the majority of the hauling revenue is coming from. By and large, this is in sort of very secondary type markets as opposed to in the dense urban centers. I just highlight that because our experience, and I think consistent with the industry as a whole, is the impact in the secondary markets have been a little bit more muted than some of those more urban areas.
Makes sense. Turning now to the synergies. How do these synergies, if at all, differ from the type of synergies you would capture in a typical acquisition? Given COVID-19 and some of the government focus on restarting the economy and ensuring jobs and that kind of thing, is there any risk in the current environment that you see to achieving those synergies that might not have been a risk factor in past deals?
Yeah. I break the synergies up into sort of three buckets. The first one is tied back to this manner in which we burdened the business. Again, viewing it as a standalone business. Now when I actually integrate it, I'm going to add synergies to that standalone business on the basis that I'm going to get insurance savings, I'm going to get administrative savings, et cetera, as I sort of tuck it in. I view that as very normal and consistent with past deals, and I see minimal risk to the achievement of those. The next bucket is what I call the sort of operational synergies from now utilizing this incremental asset base that I didn't have before to improve my preexisting business. You think about now if I have a landfill in Michigan where I can now internalize volume that I previously couldn't.
I have an incremental landfill in Georgia that now allows me for better route optimization because I have an expanded footprint. Synergies of that nature, again, I think those are consistent with past deals where we have geographic overlap, and I don't foresee the current sort of backdrop as being a risk to the realization of those. The other incremental level of synergies is what really is sort of a revenue synergy, and going back to how I described the methodology of how we carved up the business. The idea is that any volumes that were internal volumes before are no longer going to be there, and a very sort of negative view as to how much special waste volumes would continue to the extent there was intercompany-related special waste volumes in historical numbers.
I think in actuality, post-close, there'll probably be opportunities for volume at the landfills in excess of what we've included in that underwritten number. That is the component that I think is subject to the current backdrop. Obviously, if things remain muted and more depressed economic activity, you'll see less of that. However, if infrastructure spending and other tools of the like to restart the economy start happening en masse, I think that could represent a meaningful tailwind to what we've positioned today.
Great color. Appreciate the time.
Thanks, Walter.
Thank you. Our next question comes from Michael Hoffman with Stifel.
Patrick, Luke. Can you help us a little bit? You got a step-up from Waste Management, I know it's early days. You still got a lot of work to do on this, could you parse a little bit of the CAD 835 and how we ought to allocate it to PPE, goodwill, and intangibles so we think about our integration of this into our models?
Mike, it's early days. We've been running I know there's a meaningful dollar there, but I'm going to humbly request you give me till the next time we talk to lay that all out for you, as we're deep in the weeds on that at the moment. There's a meaningful component of, think about all the landfills we're getting here. There's a meaningful component that's going to go to PPE, but it's early days, Mike. I'd prefer to get back to you with a sharper number.
Okay. Fair enough, but I think one of the points I was trying to get to is there's more likely to be PPE, therefore deductible, less goodwill, not deductible. All that works in your favor from all this returns analysis.
I'm looking, like our preliminary on which part of the thesis was that I'm effectively going to get another year's worth of tax shield coming out of this. Ultimately, I think that's a conservative number, that 12-18 months, when you look at how many of the dollars are going to come into deductible classes. Yeah, 100%. The fact that a big component of these dollars are going to go into deductible classes is going to provide meaningful incremental shield for us. Where I was saying, I probably at a minimum in your model, wherever you had me becoming a cash taxpayer, push that out a year at a minimum, I think is a safe assumption.
Okay. This is a little bit of a tangent. When does the lock-up expire from the IPO?
It was six months from March 5th. September 2nd? September 2nd.
September 2nd. Okay. This is maybe the benefit of having been in this business a long time. This is as much a statement as a question. Bill Dietrich built an amazing business in the Superior Services company that is Wisconsin for ADSW. I mean, it's just an exceptional business. It was a public company at one time, Billy buys it. It was very well-run. You're getting, if I'm not misunderstanding, everything but the residential collection and the roll-off, including all the employees. You're getting a standalone company.
Correct.
Is that right?
Plug and play.
Yeah. An exceptional asset. If nothing else, if that's all you got and you paid this, that's just a phenomenal addition, like once in a lifetime chance to buy something like that.
Yeah, we agree.
Okay.
We concur. That's Yeah. Like I said, like in any acquisition, Michael, you have gold, silver, bronze, and you got a couple pieces of lead, right? What do you do with a couple pieces of lead? How do you make the bronze silver and the silver gold? The bulk of what we're getting is gold. There's some silver and bronze, and then there's a couple pieces of lead. We've got to figure out what to do with the lead. That's You got to take the good with the bad. I don't think any one of us ever done an acquisition where we haven't bought something with a little bit of lead. That's just the way it goes.
Right. Then listening to the Q&A, clearly there's this hand-wringing about how can you do future deals and all the leverage. To be honest, there's nothing really super big to buy out there at this point. There's going to be a lot of little stuff, and there really aren't that many big chunks left that are really likely to change the scale. This is going to be a lot of filling in around the gaps and maybe chunky bits of CAD 10 million or CAD 20 million of revenues, but there's not a lot of CAD 100 million, CAD 150 million, CAD 200 million revenue chunks to buy.
No. Like you said at the time of the IPO, there's one other asset out there that's been floating around that people, I think, know what it is on this call, and I think that'll transact sometime. Outside of that, no. It's going to be the normal steady Eddie, run-of-the-mill acquisition program acquiring 25 to 30 deals throughout the network. Now we've got some incremental space that we can continue growing on the back of a good core group of assets because historically, we've gone in collection only first, built the collection business, and then bought post collection. This, I think, is much easier buying post collection and front end, which I think for all intents and purposes are the two most highly profitable businesses within all of our revenue mixes. Now bolting on sort of the lower margin services onto those existing footprints.
I think, again, well-positioned with the assets we're getting to execute the future growth program.
Okay. Luke, you and Patrick participated in a fireside chat with us a couple weeks ago, and one of the questions in that session was, what's the way to think about a target EBITDA cash conversion? You want to talk about it as a percent of revenue. We're kind of 10% today. It goes to 14% and call it 24 months. How does this transaction speed that up or confirm you'll get there?
Mike, really, despite the higher EBITDA margin, if you think about financing this all with debt today, that's sort of basically a wash. What I think on the face of this pro forma, it doesn't change the trajectory in the percentage-wise, just from the incremental leverage. On an unlevered basis, this is accretive, obviously. What it does, I think where we see the real opportunity is as we realize the synergies and now with this great incremental platform to continue to execute on our growth strategy, it just provides opportunity for incremental dollars of growth. I don't think it meaningfully changes the ultimate getting to the 14%, as you and I were previously speaking at your fireside chat. I think the opportunity set of how we get there with the broader U.S. platform is just that much greater.
Last question from me. How did May close, particularly in the solid waste business?
Without giving any forward-looking statements, the business, it had two less days than May of 2019, but for all intents and purposes, everything is trending the right way, and I will make the statement that it's not as bad as what people had anticipated the impacts from COVID would be. I think similar to what you've heard from the other strategics out there is that everything is trending in the right direction. I think when people see the Q2 results from the industry itself, I think they're going to appreciate why they're invested in this sector.
Thank you.
Thanks, Michael.
Thank you. Our next question comes from Kevin Chiang with CIBC.
Thanks for taking my question, and congratulations on the deal here, Patrick and Luke. Maybe just two for me. Maybe I'm going to ask an M&A question. More broadly speaking, you talked about opportunities within solid waste, but just wondering how the asset package you've acquired maybe provides opportunities for your liquid waste or infrastructure business. Is that something that you see as being also additive to revenue synergies over time, or is that something that has not been contemplated?
We haven't modeled anything on the synergy side for that. I think if you can see, again, we have a very large liquid waste presence just outside Chicago in Mokena, Illinois. Again, expanding into Minnesota and expanding into Wisconsin was a big focus of that. That'll be all additive. We haven't modeled a dollar for that. Yes, we see a big opportunity there to continue expanding that, but that's really the only market we've looked at today versus sort of the Pennsylvania market as well as in the stuff in the South.
Okay. Just the last one from me. When you look at your capital structure, you have a couple of high yield notes out that I think are due in about a handful of years. Just wondering how you think about refinancing those to further lower your effective interest rate and improve free cash flow. Is that a priority for you, Luke, or is that lower down the totem pole?
No, that's a very high priority. Those are from the days of past, and we'd love to get rid of them. Today, unfortunately, they're not callable, and the payback to do so today just doesn't work. If you look, the first one you can take out in May of 2021. You could refi that. I don't know what you want to use as your assumption, but if you use a sort of four to five number, it's materially accretive to the free cash flow profile. The other one you can take out in June of 2022. When you roll that forward, today, if you think about improving the overall blended cost of debt, even 100 basis points, which I think is a very conservative ambition, that's all pure free cash flow. That is a meaningful contributor. That's definitely part of the plan.
Again, there was thoughts at the IPO just to bite the bullet and do it, but it's real dollars and the payback just doesn't work, so we'll be patient.
Yeah. In simple terms, there's CAD 1 billion of those high-yield notes that are out. Average cost of capital for those is about 7.5%.
If you take 300 basis points off of that, refi those mid fours. We think we could probably do it tighter, just take 300 basis points on CAD 1 billion. That's an extra CAD 30 million a year of free cash flow that's just going to hit the bottom line for doing nothing other than refinancing that debt.
Okay. The timeline we were thinking about kind of 2021, 2022, to take out those two. That feels a good timeline to think of when we're modeling this out.
Yeah. The first one, you take them out 2021, and then you take the second ones out 2022. That's correct.
Perfect. That's it for me. Congratulations again, guys.
Thanks, Kevin.
Thank you. Our next question comes from Rupert Merer with the National Bank.
Good morning, gentlemen. Congratulations.
Good morning, Rupert. Thank you.
A follow-up. You mentioned there may be a couple pieces of lead in the portfolio. Can you give us a sense of how much of the portfolio is lead, maybe as a percentage of the revenue? What are the options to either sell those down or maybe look at asset swaps in the future?
Yeah. When I talk about the lead, that's really the three landfill assets that we're going to sort of wind down over the next two to five years. The truth is, we put no earnings on and we're dilutive to it. That's really what I was referring to.
Okay. You'd be comfortable operating in all the regions where you've acquired assets?
Yes.
Great. Secondly, looking at the organic growth with the acquired assets, can you give us a little more color on the excess capacity that you have in the infrastructure that you're acquiring? How capital efficient is the organic growth in those areas, maybe in Wisconsin with municipal and roll-off markets? How would that compare to CapEx efficiency in, say, other opportunities you have at GFL?
Yeah, Rupert. I think it's a good point and one that needs to be articulated because in many instances, as I was saying before, what I've now acquired is, say, what was previously a fully functioning hauling company in a great market that had a commercial fleet, a roll-off fleet, and a residential fleet operating out of the facility. And now I'm getting that facility with just a portion of the previous commercial hauling business. Leveraging that infrastructure to start growing, one, a broader commercial hauling business, because, say, I only got a portion of the overall routes that used to be there, but then immediately starting to offer the roll-off residential, the full suite of collection services. I think as Patrick articulated, normally we've bought a hauling company that's relatively mature in its market.
It offered the services that it offered, and we tried to build from there. Here, we're really just starting in many instances with the foundation of what could be a fully comprehensive service offering. We think the opportunity for outsized organic growth in many of these as we ramp up this foundation to a full-fledged business represents a very material sort of growth opportunity and part of the reason that we're excited beyond just the headline numbers of the deal itself.
Can we anticipate increased guidance for organic growth CapEx in the future?
You heard from Tyler’s first question how we’re thinking about that. We’re putting a full 12% on this. I think that is reflective of the fact that there will be a heavier spend as we’re building that out. Again, once that more normalizes and you have a full comprehensive hauling business in each of these markets, you’ll probably see that come down. I think thinking pro forma of the new business running at a 12% intensity is the right way to think about capturing those dollars for that ramp up.
Right. I'll leave it there. Thank you very much.F
Thank you, Rupert.
Thank you. Our last question comes from Brian Maguire with Goldman Sachs.
Hey, good morning, and congratulations on the deal.
Thanks, Brian.
Just a two-part question on valuation. I think most people on the call would agree you're getting these at a pretty attractive multiple, certainly versus what you paid for some of the other strategic platform deals in the past. It's kind of a two-part question. I was wondering if you could comment on the specific process that happened here. Obviously, it was a very well-known asset that was for sale and an auction of sorts. If you could comment on just the dynamics of others you were bidding on. Was the COVID impact kind of keeping people away? Was the asset quality and the markets they were in just not really suitable for some folks? Just sort of the other part of the two-part question is just in general, how are you seeing assets for transactions these days?
Have we seen multiples start to come down some as a result of the recession and concerns around what future growth in the industry could be?
Yeah. This process specifically, there was a lot of stopping and starting. I'm sure there were other players that were around it. I think what we had going for us was, number one, we had a long relationship with Waste Management. We've worked extremely well together over the years. We've had growing disposal agreements with Waste Management over the years that have always formed part of previous acquisitions that we've done with them. And I think what we brought to the table was certainty for them that we actually had the ability to take down the lion's share of the asset package without any divestiture risk, which gave them certainty on their bigger transaction. I'm not speaking for them. I said that's what I think.
Versus trying to negotiate with multiple parties and I think given what the DOJ has, the approach they've taken here is that the divestiture package and the purchase agreement needs to be agreed to with the party previous to them closing their transaction. I think just dealing with one party made it much simpler, particularly with a party that know each other very well, and have worked well together in the past. I think that's what gave us a leg up, and I think maybe Waste Management, they for sure probably could've got more money if they sold some of the parts individually, but I think this was a good consolation prize and got them the certainty that they needed to do what really was the golden goose for them, which was the bigger deal. I think, we got it for a very fair value.
Obviously it's less than we've historically paid for vertically integrated businesses like this. From a valuation perspective, we're seeing an asset acquisition. Gold is always gold. Sizable, vertically integrated businesses and sizable market position, disposal municipal markets in Canada. We haven't seen a real retreat in valuations yet. I think when you're looking at those, the comps are always the public companies, and I think that the public companies have held in there pretty well over the downturn. I think from a multiple contraction perspective, we're not seeing much of that. The phone is ringing with people that maybe don't want to live through the COVID pandemic for a lot of time. People ask about multiples, but it's always a multiple of what, right?
When you look at that, is there an adjusted number from an EBITDA perspective and a free cash flow perspective that you can now pay, or historically you're paying more with a multiple that's comparable.
This last one from me, just back to the three landfills you'll be winding down. Just so I understand, they're generating some revenue and a little bit amount of earnings today. You're not anticipating that to continue, so it didn't factor into the value you're paying for the assets. You will see a little bit today, and then you will have to pay some capping and closing fees, so there'll be some cash outflow for that? Is that coming from WM or somebody else to indemnify you down the road?
We got Waste Management sort of took on all pre-closing environmental liabilities. We will have some closure costs to those, but very minimal, which was sort of factored into the bid. From a revenue perspective, again, we're modeling very little for those, and truthfully, they were largely open just as a going concern anyways. They weren't taking a significant amount of volume. I don't think you'll see a meaningful impact from any of those.
Yeah. Brian, the sites in question are on the much smaller end of landfills, as Patrick said. Over the last few years, they've been taking de minimis volume just to keep the permit open. These aren't massive site closures. Yeah, there will be regular course closure costs, but again, that was all sort of just factored into the overall model.
Okay. Yeah. Just to think of the negative value, something tens of millions of CAD, but nothing more than that in the kind of closing and capping in the two-to-three year timeframe.
Yeah. That's right, Brian.
Okay. Thanks very much.
Thanks, guys. Thank you very much, and we'll look forward to speaking to you after. We're always available anytime. If not, we'll speak to you after Q2 results.
Thank you. Ladies and gentlemen, that concludes the GFL Environmental Incorporated investor call. You may disconnect your phone lines, and thank you for joining us today.