Thank you and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning, we will be providing an update on the sale of our Environmental Services business. I am joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.
Thank you, Patrick. Good morning, everyone, and thank you for joining. We have filed a press release which includes important information. This press release is available on our website. We've prepared a presentation to accompany this call that is 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-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call back over to Patrick.
Thank you, Luke. We are very pleased to announce we've entered into a definitive agreement to sell our Environmental Services business at an enterprise value of approximately $8 billion, significantly higher than our initial expectations. From the transaction, we expect to net cash proceeds of $6.2 billion, an amount that is also greater than our initial expectations. These proceeds will allow us to materially improve our capital structure and position GFL with the ultimate financial flexibility for multiple avenues of equity value creation, including through organic growth initiatives, M&A, opportunistic share repurchases, and dividend increases. Additionally, GFL will retain a $1.7 billion equity interest in the ES business, resulting in a tax-efficient sale and providing us with the opportunity to participate in what we expect to be continued value creation from these high-quality assets.
The transaction structure also allows us to continue to grow revenue synergies between Environmental Services and GFL's Solid Waste business. This transaction is the culmination of a robust and intense process over the past five months. On the back of significant inbound interest, we spent the month of August preparing and launched a formal sale process in September. We had conversations with nearly 40 parties, went through diligence with 10 of those, and had deep dives with the final four potential buyers. After a very competitive process, we are very excited to have selected Apollo Funds and BC Partners to partner with on this transaction. We have a long-standing relationship with BC Partners, to whom we have delivered significant returns on their capital.
We also look forward to working with Apollo Funds, a leading alternative asset manager with deep expertise that has a demonstrated track record of value creation for its stakeholders. I will now pass the call over to Luke who will walk us through certain financial benefits of the transaction, and then I'll have some closing remarks before we open it up for Q&A.
Thanks, Patrick. Pro forma for the planned use of proceeds towards debt repayment and share repurchases, net leverage is expected to be approximately three times. Across our revolver, term loan, and 2025 bonds, we have over $2.25 billion of debt that is readily repayable. The amounts outstanding under each of these facilities would be the first debt to be repaid. The remaining $1.25-$1.5 billion of intended debt repayment would be achieved through a tender process targeting some of the higher coupon bonds in our debt stack. Based on conservative assumptions regarding tender participation rates across our various bonds, we estimate the annualized cash interest reduction associated with the $3.75 billion debt repayment to be approximately $200 million.
As part of our capital allocation strategy post the ES sale, we also plan to opportunistically pursue up to approximately $2.25 billion of repurchases of GFL shares with a view to reducing the current overhang as well as reducing our current diluted share count. Adjusted EBITDA margin, pro forma for the exclusion of Environmental Services, will increase, approaching 29%. Reported corporate costs will reduce by $10-$15 million post the transaction, but the corporate segment as a percentage of revenue will temporarily increase on the lower revenue base. We expect to go forward operating leverage on our corporate costs as we grow our top line both organically and through M&A. The expanded adjusted EBITDA margins and lower cash interest costs will be immediately accretive to Adjusted Free Cash Flow margin and conversion.
As we've previously indicated, we expect that as we transition to investment-grade credit quality, our cash interest expense as a percentage of revenue will reduce by over 300 basis points, which represents a 1,000 basis points improvement in free cash flow conversion. We expect the debt reduction from the transaction to reduce cash interest as a percentage of revenue by approximately 100 basis points, reflecting less than one-third of what we see as the longer-term opportunity in this area. Bottom line, when you couple execution on the various self-help levers in our portfolio with reduced cash interest costs going forward, we expect free cash flow conversion to improve at an accelerated rate. As Patrick mentioned, the delevered balance sheet provides GFL the financial position to allow for incremental growth investments, including reigniting our M&A strategies that have been tempered over the past 18 months.
Recall, the power of the financial model is such that the business organically delevers each year through Adjusted EBITDA growth and free cash flow generation, offsetting any potential leverage impact from M&A. So this three-time starting point of Net Leverage will allow us to comfortably remain in the low threes range for Net Leverage on a go-forward basis. As we've previously discussed, we intend on hosting an investor day in New York next month. The official registration details will be announced in the coming weeks. At the investor day, we look forward to presenting further details of the expected financial impacts of the transaction, as well as our refreshed multi-year outlook for the business. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.
Thanks, Luke. This transaction facilitates the acceleration of several of our key financial objectives while preserving the opportunity to participate in expected material value creation through our retained equity in the ES business. As it relates to our call option on the ES business, I want to highlight that this is solely a GFL's option, and it's not an obligation of GFL to execute on. As we begin 2025, our setup has never been better. We have proven that we can execute on our strategic plans, and with the ES transaction set to close in Q1 of 2025, we believe that we have laid the foundation for long-term growth and value creation for all of our shareholders.
Our go-forward strategy is simple and clear: continue to focus on generating industry-leading organic margin expansion, benefit from the ramp in earnings contributions from both EPR and RNG, execute on our robust Solid Waste M&A pipeline while maintaining our low-threes leverage targets and progressing towards an investment-grade credit rating. With that strategy, we believe that we are uniquely positioned for industry-leading financial performance over the near term. On behalf of GFL's management team, I want to thank our investors, our customers, and our communities for your continued loyalty and support. Most importantly, I want to thank each and every one of our employees because we would not be where we are today without their hard work and dedication. I wish you all a happy New Year and look forward to an exciting 2025. I will now turn the call over to the operator to open up the line for Q&A.
Thank you. We'd now like to open the lines to Q&A. If you'd like to ask a question, please press star followed by one on your telephone keypad, and to remove yourself from the line, press star followed by two. Our first question comes from Sabahat Khan of RBC. Sabahat, your line is now open.
Okay, great, and thanks, and good morning, everyone. Could you maybe talk a bit about the structure of the deal, kind of the ownership interest you're maintaining? Seems like there's a tax efficiency element to it, the equity roll-in, and any other important aspects of this structure. And it seems like an interesting structure here that you've set up. Maybe you can just talk about how you arrived at it and some of the puts and takes around tax and that could rule, or just so we understand how you thought about this deal. Thanks.
Sure, so I think from the company's perspective, at least from my perspective, obviously in life, there's no such thing as perfect, but this is about as close to perfect of a deal as I think anyone could sort of architect. I think we went into this back in the summer. The expectation is that we would sell the business for approximately $6.5 billion, potentially, and there would have been, at that time, a $700-$800 million tax bill, netting us about $5.7-$5.8 billion of cash proceeds. I think we got into it. The objective from my perspective was pretty simple. We wanted to sort of manage short-term needs of the business, but we didn't want to forego any long-term shareholder value creation. That's most important to me, being sort of the largest individual shareholder. I wanted to make sure we didn't give any of that up.
So with that sort of in the vein, we basically said, "How do we deal with the balance sheet to expedite IG status and then potentially buy back stock at what we believe to be a very attractive value when we look at what the opportunities are over the next sort of three to five years?" So with that, we went back and sort of looked at it, and we have a lot of smart people here, and a lot of smart people that are smarter than me and truthfully the rest of the team here, and looked at how we could do this efficiently. And as we got into the process, the value of the business ended up being more than probably we could have even imagined when we went into the process.
We looked at how we could continue on owning equity in the business, given what we saw as, again, still significant opportunity with the business. Now when you look at it, I think the tax bill will be somewhere between $20 and $25 million as an estimate, not $600- $700, and we've been able to roll those assets on a very tax-efficient basis into the new entity, which has allowed us to continue owning 44% of the business today. I think for the remaining cohort of GFL, it solved all the short-term needs, as well as for our existing shareholders, we'll continue owning 44% of ES.
And then when you look at the private equity style case that you have here, that ES will continue on it, which is the world we grew up in, the first sort of 14 years of GFL's existence, which is a world we know well. Again, we get to use a private equity style balance sheet leverage profile. And if you think about equity returns in the private equity world, in their base case, it's underwriting to two times their equity in five years, and in their upside and better cases, you're underwriting to three times their equity. So if you put that into context for the $1.7 billion we're rolling, in private equity base case, that's a $3.4 billion equity check in five years, and if we execute on the plan like we think we can, that number grows to somewhere around $5.1 billion.
So again, from my perspective, satisfy the long-term objectives of what we're doing. In addition to that, we have the option to buy back solely to our discretion in the business. So if we get into a position like we think we're going to do with the cash flow generation, etc., at a different leverage profile where we're going to be in three or four years, and we want to continue growing another business segment, we have that option solely to our discretion. So I think it was just a perfect transaction.
One thing I should mention, should have mentioned first. None of this would have been possible without the team both on the ES side and sort of corporately, and I should really thank them from Ed, Brad, John, Kevin, Ahmad, Gian, Jordan, Michael on the ES side and all of their respective teams, as well as on the corporate side. Again, what was pulled off here from the team under Mindy, Luke, Craig, Sean, Nina, Yusuf, Pino, and Julie on sort of the integration side. Everybody worked tirelessly over the last four to five months, and particularly over the Christmas break to get this transaction across the line for all shareholders. I'm extremely proud of the team, extremely proud of the outcome, and I think it's the best of all worlds for all of us as shareholders for the long term.
Great. Thanks for that color. And then just on the option that you have to purchase the ES business that's a commitment around five years, are there any terms, conditions, or anything we should know about, or how are you thinking about that option?
It's literally solely at our option. So we have the ability to trigger that to repurchase. So again, we can explore that three and a half or four years from now, whether that makes sense or not, given what is going to be in front of us over the next three and a half or four years.
Just one last quick one, and I'll pass the line. Just the $2.25 billion mark for opportunistic share purchases, how are you thinking about that? Do you have specific parameters? Should we expect kind of announcements on that front or just kind of a share buyback program? Just maybe you can just lay out the thought process there. Thanks.
Yeah, obviously we'll refile our sort of Normal Course Issuer Bid. Again, so that'll be one avenue. And we will apply to the OSC to be able to buy back stock from certain of the larger shareholders within GFL sort of off of a perspective. So that is coming. We have a plan. We intend to execute on that sort of plan now that the transaction we signed a definitive agreement, so we'll turn to that. But from our perspective, listen, it gives us the ability to buy back stock that we believe to be a very attractive value today, given what we know we have in the pipeline between RNG, EPR, and all the organic margin expansion opportunities, as well as the M&A pipeline.
So we've set this up very well, and it was always part of the plan, and we're going to kick that into sort of motion now. But it'll be a combination of, again, both buying in the market and buying back from certain shareholders over time.
Thanks very much.
Thank you very much. Our next question comes from Kevin Chiang of CIBC Wood Gundy. Kevin, your line is now open.
Hi, thanks for taking my question. Happy New Year, everybody. Maybe if I just look at, again, the option value, if I look at ES, I guess immediately post the transaction, the new call's going to have like about $4 billion-ish of debt, and if my math is correct, you're kind of running at about mid-$400 million of EBITDA. I guess when you think of potentially exercising that option value, is there a way to think about maybe how you foresee ES growing over the next five years, both from an earnings perspective and maybe how that capital structure might change over the next half decade as you think about either exercising the option or maybe pursuing another liquidity event?
Yeah, so it'll be roughly, Kevin, sort of roughly $3 billion of Opco debt. I mean, the rest is sort of just financial engineering up at sort of holdco, but roughly $3 billion of Opco debt. The business, when you sort of look at 2025, it'll be north of $500 million sort of of EBITDA. We're thinking about leverage of that business somewhere between sort of five and a half and six times. That's where we ran the business privately for a long period of time. I think if you looked at a base case model, I think over the next five years, you grow the business to somewhere between $875-$950 million of EBITDA with a combination of sort of M&A and organic growth opportunity. So I think the case we laid out on equity value creation is pretty simple.
I think when you sort of layer that out, and obviously, who knows where multiples go over the next five years, but that's an assumption you have to make. But I think very conservatively that the equity grows to $2x, and potentially, if we hit sort of the plan that we think we will, the equity will grow to $3x. So you have somewhere between a $3.4-$5.1 billion equity check coming over the next five years if you decide sort of not to buy it back. If you decided to buy it back, I mean, if you ran that math, I think you could potentially buy it back net of your roll for probably somewhere between $9 and $10 times four to five years from now. So both options are very compelling, and we've been able to keep the optionality for both of those.
Okay. That's helpful. And maybe just a clarification question. For your three times pro forma leverage number you put out in the press release, it looks like it doesn't include any equity pickup from your proportional ownership of ES. Am I right on that, or are you sort of adding that back when you get to your pro forma update on it?
Fully carved out, no pickup from ES.
Yeah, Kevin, it's Luke here. We'll treat it similar to what we've done with GIP, and we'll just exclude it from the adjusted EBITDA calculation. That's just really the sort of standalone GFL remaining co., really the operational profitability of the Solid Waste business offset by the corporate cost.
Okay. Thank you for the clarification. And maybe just last one here. I'm not sure if this maybe changes how you think about the monetization opportunities for GIP. I mean, obviously, this is a pretty significant transaction, and it gets your leverage to your target range pretty quickly here. Does that have any implications on how you think about your investment in GIP?
I mean, no. I mean, we're going to look to do it at the right time, and we can maximize value. As we said, there was a couple of headwinds in that business with, I would say, increased sort of cost inflation, but that has certainly moderated. 2024 was a great year, which again, we'll provide an update at the investor day on. We have a lot of great opportunities in that business, but I think we'll maximize value when we think the value is there to be sort of maximized. Obviously, with this transaction, that would just give us incrementally more proceeds. But from our perspective, we're just going to do it when the timing's right.
Thank you very much for taking my question.
Thank you very much. As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad, and to remove yourself from the line of questioning, please press star followed by two. Our next question comes from Konark Gupta of Scotiabank. Konark, your line is now open.
Good morning and happy New Year as well. Congrats on the deal. Just wanted to understand the minority interest that you would retain in Environmental Services, $1.7 billion. In terms of attributing that $1.7 billion equity value to GFL for GFL investors, how should we think about that number, $1.7? It seems like 44% represents $1.7, so a lot of tax might be attributed to this number here. Is there anything we should net out from $1.7, perhaps, Luke, to answer this question, to attribute to GFL, or should we take the $1.7 as is? And as Patrick said, that $1.7 could multiply over the years.
Yeah, Konark, it's Luke speaking. I mean, as Patrick alluded to, by virtue of the equity role, we were enabled to defer sort of taxes otherwise sort of payable. And so if you were just looking at that standalone basis, you'd probably have to tax-affect it, and you wanted to think about what it would be worth to GFL sort of today. Now, obviously, as we go forward and we grow the ES business and we grow sort of GFL and ever-changing tax landscapes, what the ultimate tax liability is will only be known at that time. But I think if you wanted to present value it today, you would just tax-affect that number, and that would reflect the value stored that we have today.
Okay. That makes sense. Thanks. And just to follow up on the free cash perspective, so you mentioned about the free cash conversion going up. Your EBITDA is obviously your GFL EBITDA, excluding ES, but your free cash flow, should that have some free cash attribution for 44% equity stake on ES?
No, Konark. Similar to how we've accounted for GIP, right, where we have the sort of non-controlling interest, we just exclude that from the reported results of Adjusted EBITDA and adjusted free cash so that we report on just the underlying profitability or cash flow generation of the sort of GFL Solid Waste business today. We will have different views as to how you want to sort of value the incremental benefit of those two assets that we have off to the side, but we will not incorporate any of their results into our ongoing reporting.
Okay. Makes sense. Perfect. Thank you. I'll turn the line.
Thank you very much. Our next question comes from Patrick T. Brown of Raymond James. Patrick, your line is now open.
Hey. Good morning, guys.
Good morning, Tyler.
Can you hear me?
Hey, Patrick.
Yep. Hey.
Can you hear me?
Good morning.
Hey, can you remind us real quick, how much CapEx was associated with ES, roughly, annually?
They'd spend, Tyler, somewhere in the sort of 8-9% of revenue range, right? So if you think about GFL as a whole, we were benefiting and having a slightly lower capital intensity than maybe some of the pure-play peers by virtue of having 20% of your revenue attract at 8-9% CapEx, and then you had the sort of other 75-80% of your revenue at the normal course, 10.5-11.5% intensity for a Solid Waste business. So when you back out ES on a pro forma basis, I think that's where GFL will now live. It'll probably be in that sort of 11-ish range.
Higher growth CapEx spent one year might push you up 11.5%, but you'll start being in that range commensurate with your sort of peers as you no longer have that 20% of overall revenue tied to that lower capital intensity.
Okay. Now, I think you said specifically that it would be accretive to free cash flow conversion and free cash flow margin, but will the deal be slightly dilutive to total free cash flow dollars?
Yeah, I think that's right, Tyler. Out the gate no, that's right. Out the gate, by virtue of if you just think about a free cash flow walk pre and post, giving up the EBITDA and net of the CapEx and including the interest savings, it's a little decreative to free cash flow dollars out the gate. But when you look at the conversion percentage today, low to mid-30s% and what that starts ramping up to, and in addition to, if you think on a per-share amount, right, post the buyback, that's where we see the opportunity to really ramp and accelerate free cash flow growth on a per-share basis as you go forward.
Okay. I just wanted to make sure I had those mechanics. Okay. Perfect. And then on the equity roll, I'm again kind of curious about the mechanics, but will we see a $1.7 billion asset that just shows up on the balance sheet as a new line? Will it be isolated?
Yeah. So we currently have our carrying interest in sort of GIP and other sort of non-controlling interests. I mean, I think with the size of this, probably there'll be some sort of note breakout. But yeah, you're going to see this asset on the face of the balance sheet. It may be commingled with other investments, but we'll have the note disclosure so you can see how this changes, similar to what you currently see for our investment in GIP.
Okay, and so that fair value will get marked every quarter, or will you mark it every year, or how does that work?
No, it's going to be equity accounting, Tyler, so you're not going to get this sort of fair value. Again, normal course sort of equity method accounting for it.
Okay. And then, Patrick, just to finish here, you mentioned the M&A side maybe reigniting some of that. Can you just talk about the pipeline there? Have you guys been active here in 2024, kind of building a pipeline of deals, and how does that look into 2025? Thank you.
Yeah. Of course, we think, again, with the balance sheet in the position that it's going to be in, we've obviously reignited the engine. Obviously, this transaction sucked up a lot of time, but we have a very robust pipeline for Solid Waste M&A. A lot of great opportunities that fit within our existing footprint that are going to be sort of highly accretive to us as shareholders. So I think you'll see us get back to doing what we've done for a long period of time, and it's going to be an exciting 2025 and beyond.
Yeah. Perfect. All right. Thank you, guys. Congrats.
Thanks, Tyler.
Thank you very much. Our next question comes from Jerry Revich of Goldman Sachs. Jerry, your line is now open.
Yes, hi. Good morning, everyone, and congratulations. Sounds like the team was working straight through the holidays. Well done. Can I ask, in terms of the agreement with BC, is there a buyback agreement embedded in that, Patrick? I would assume that there is a tax attribute opportunity for them as well, potentially, with the deal structure. I'm wondering, are the transaction, as you laid out, the buyback expectations?
Yeah. No formal agreement. Again, we have to go through sort of the regulatory process. No tax advantage for them as well because, I mean, the new investment's coming out of a new fund, so it's actually separate fund, separate LPs, etc. So this was a standalone investment thesis for them, nothing to do with rolling over from some of their older investments out of older funds.
Got it. And then, Luke, in terms of from a shared service agreement, corporate expense, what you said in the prepared remarks, is there an opportunity for the corporate piece for the two entities to actually be more favorable than what you spoke about in the prepared remarks? Because as a significant equity investor, maybe there's a shared service approach here that we weren't contemplating previously when we were talking about an outright sale.
Yeah, that's right, Jerry. So what we'll be contemplating is we'll continue to sort of support the business under a shared services agreement, and we'll be sort of compensated for doing so. I think what we alluded to on the last update, the Q3 call, was that a significant component of the shared services burden for ES is actually already reported within the ES segment. And you take an example like AR collection and the cost of that process. That's actually already embedded in the ES segment. And so as a result, that corporate cost number we report, $250-$260 million, you're not going to see the pro rata reduction that you might have sort of thought. And so when we look at it, there's about $10-$15 million of costs embedded in that corporate number that are really there to support ES.
That is the amount by which the corporate costs will reduce on the basis that we'll be sort of compensated as we continue to provide those services under a shared services agreement, and then to the extent, once we stop providing those services, then those costs would go away, but that's the order of magnitude that we expect to see, so when you think about the corporate cost number today, roughly 3-3.25% of total revenue, pro forma, if you exclude the ES revenue, you're going to see a temporary jump up to about 4% on that line, but as you go forward and you think about sort of normal course organic growth as well as M&A growth, we see meaningful operating leverage at that.
And you're going to see that corporate cost segment gravitate more to a sort of a 2%-3% number over the sort of medium term as we grow the top line and leverage that cost structure.
Got it. And with a second successful quasi-leverage recap here, is that an opportunity for the landfill gas part of the portfolio, potentially? Longer term, obviously, short-term volatility around credit price expectations. But based on your experience on this transaction and the infrastructure transaction, are you thinking about potentially doing something similar with those assets or anything else in the portfolio?
No plans at the moment, but from our perspective, never say never. We'll look at sort of anything that makes sense, but no plans at the moment to do anything with that.
Okay. I'll leave it there. Thank you.
Thanks, Jerry.
Thank you very much. Our next question comes from Chris Murray of ATB Capital Markets. Chris, your line is now open.
Yeah. Thanks, folks. Good morning and happy New Year. So just going back to the 1.7 billion, just to confirm, there's basically an equal or the proportional ownership of the assets in ES. There's no sort of special carve-out or ring-fencing of any of the assets. So the 1.7 billion in your equity and kind of the deltas in the values is more a reflection of, say, your tax position or something like that. It's not a differential in the asset pool?
No. We're going to own our equity position sort of overall business, not on specific assets. We contributed specific assets that had a lower cost base, obviously, but no. We own our equity interest in the overall business.
All right. Good. Just wanted to confirm. And then, Luke or Patrick, I don't know who wants to take this. It's just the process of getting this closed now. So you've talked about a Q1 2025 close. Can you walk through the steps that you might need? I would assume that financing is not an issue, but are there any regulatory hurdles that you have to get through? And with the change in the U.S. administration, any worries about getting those approvals or delays?
No regulatory issues. As part of the transaction, we required committed financing. J.P. Morgan has led the committed financing for the transaction, which is CAD 3 billion of debt that's going into Opco. That's been committed. Obviously, the sponsors have committed their equity. We anticipate a closing around March 1st.
All right. Okay, folks. Thanks. That's all the questions.
Thank you.
Thank you very much. As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad. And to remove yourself out of line of questioning, it will be star followed by two. Our next question comes from Tobey Sommer of Truist Securities. Tobey, your line is now open.
Hey, good morning, guys. This is Jasper Goodlin for Tobey. Maybe following up on an earlier question, I wanted to ask where you think this might put you on a pro forma basis relative to your free cash conversion. Are we closing the gap to call it pure average mid-40% range now on EBITDA or any way to frame what the conversion percentage might be post-close?
Yeah, Jasper, it's Luke speaking. So we'll provide the details of where we expect 2025 to be when we give our guide in a couple of weeks or in February. But if you think at a high level, what we've articulated and what we strongly believe, when you look at our interest expense or percentage of revenue for 2025, I think it's roughly sort of 6.5%, right? All of our peers' cash interest and percentage of revenue is more in a sort of 2.5%-3.5% range, right? And that is where we are going to transition towards, right? So it's going to be a sort of multi-year process, but you're going to see the benefit in both free cash flow margin and conversion as you sort of do that.
So not only do we believe the self-help levers of the Adjusted EBITDA line is going to allow us to grow our margins at a sort of outsized clip, but concurrently, you're going to have this reduction in cash interest intensity. So when you put that all together, the 34%, 35%, whatever it is for the free cash flow conversion on 2024's consensus numbers, that's being burdened by this sort of almost 2x interest intensity that is going to gravitate towards the peer average. And so a bit long-winded, but I think the answer is yes. We see a closing of the gap, and I think we're going to see the pace at which free cash flow improves to be industry-leading by virtue of this deleveraging dynamic.
Got it. Thank you for taking the question.
Thank you very much. Our next question comes from Brian Butler of Stifel. Brian, your line is now open.
Good morning. Thanks for the question. Most of my questions have been answered, but just wanted to circle back on the Opco debt. So $8 billion deal, equity is about 3.9 billion. And then you said debt's about 3 billion. Seems like there's a billion missing somewhere. Maybe I'm just doing the calculation wrong. Can you walk me through that?
No.
How do we get there from the deal value?
Yeah. There's just financial engineering at the Holdco level with a Holdco PIK note that'll sit in the Holdco. But that's treated as equity in the equity bucket for us.
So that additional billion is equity that?
Yes. Equity contribution to Opco, yes.
All right. That was the only follow-up I had. Thank you very much.
Have a good.
Thank you very much. As a further reminder, if you'd like to raise a question, please press star followed by one on your telephone keypad. And to remove yourself, the line of questioning is star followed by two. Our next question comes from James Schumm from TD Cowen. James, your line is now open.
Hey, good morning, and congrats on the deal, guys. Just one clarification for me. Patrick, did I hear you correctly that you have the option to repurchase the remaining stake in four to five years at a 9-10 times EBITDA multiple? Or is that sort of a contractual option? Or how would the valuation work?
So basically, if we wanted to buy back the option on a contractual basis, you basically return just under two times their capital to the existing equity investors. So if you ran the math, if we created an equity value of 3x, we could buy that back at sort of 2x. So if you ran back in the base case and the numbers that I gave you, you'd basically the business would generate somewhere between 900 and 950 million of EBITDA. And if you ran that math about what it would cost to buy it back, you'd basically be buying it back at a 9-10 times multiple net of the roll. I just did the back-of-the-envelope math for you.
Okay. But there's no agreement in place, and you would have to presumably pay a market multiple, right?
No, no, no. There is a preferred we can return just under two times their capital, and we can take the business back. We don't have to pay a preferred multiple.
Got it. Got it. Okay. Great. Thank you for the clarification.
In that scenario where you return two times and you hit your base case plan, you're effectively buying the business back somewhere between eight and or sorry, between nine and 10 times.
Right. Understood. Okay. Thank you.
Thank you very much. Our next question comes from Jamie Somerville of Eight Capital. Jamie, your line is now open.
Hey, good morning, and congrats. Just wondering about potential timing for some of the follow-up steps. I'm guessing the Normal Course Issuer Bid, you can go ahead with that straight away, but maybe the subsequent steps with regards to debt repurchase that isn't simply repaying debt that can be easily repaid, the paperwork on that, you probably wait for closing? And similar on the share buybacks, what's the order of those steps? Yeah.
Yeah. So on the share buyback, obviously, we'll go forward. We don't need to wait for closing for relief. Obviously, on the debt side, the tender offers we're not going to make on the debt until we actually close. So that would happen post March 1. But yeah, we're in a position to start executing all the documentation, etc., now. So you'll see that, obviously, some news flows. You'll make some of those filings, and that'll trickle through. But definitely through Q1, we're going to be moving to get both of those done.
Okay. Perfect. Thank you.
Thank you. Our next question comes from Abraham Landa of Bank of America Merrill Lynch. Abraham, your line is now open.
Good morning. Thank you. And congratulations on the transaction. Just more focusing on the debt repayment piece. I guess maybe how are you thinking about your pathway to investment-grade and potentially how you think about your capital structure, maybe having more like an investment-grade type of capital structure? And then maybe what are some early discussions you're having with the rates given your unsecured bonds or single-B rated currently?
Yeah. It's Luke speaking here. Great question. Obviously, something we've given a lot of thought to around here as we're constantly looking at optimizing the capital structure. I mean, if you look at this transaction, certainly we're expecting this to be a material accelerant of our path. We've been on credit-positive watch with the agencies and certainly our initial discussions with them is that this is highly positive. If you look at the repayments, we articulated focusing on the TLB, the 3.75% 2025s that are actually current, and the revolver, that gives you sort of CAD 2.25 billion all secured that you're sort of paying down. And if you look at the 5 1/ 8s, the 26s, right, those are also callable. So you take those out, and that's roughly putting the vast majority of the debt repayment into that sort of secured bucket, right?
So again, a step in the right direction as you think about what a more sort of IG-like cap structure is going to look like. I think it's important to note that the business and the sustainability and predictability of the free cash flow as we go forward is something that we're going to sort of utilize to our benefit to sort of grow, but also be able to illustrate the credit quality of the business. So I think we continue to work with the agencies and talk to them about our direction. You're not going to see us stop all growth initiatives in order to achieve that IG rating as quickly as possible. But we have a high degree of conviction that with this sort of reset of the balance sheet, the path becomes that much clearer.
Because when you look at a multi-year model, no matter what your assumptions are, when you get out to a couple of years from now, you're having to utilize share buybacks or dividends or other sort of capital return vehicles in a meaningful way in order to just maintain leverage at this sort of 3x. Meaning you've reached this inflection point where the sort of cash generation of the business is going to be such that you'll have to find incremental levers to deploy the capital. So we're feeling really good. The exact timing of the ultimate IG sort of achievement TBD, but certainly there's, as you're aware, meaningful upgrades along the way, and we're going to continue to sort of be transparent in our sort of leverage philosophies and capital allocation priorities such as that we were in 2024, so there's no surprises.
We'll continue sort of marching on balancing both the sort of equity value creation as well as the achievement of that investment grade rating.
A follow-up on kind of the items that you're or the debt that you're looking at tendering for. I think you mentioned in your prepared comments focusing on the higher coupon bonds. Is that an indication that you're targeting the 31s and 32s given their higher coupons? Or I mean, you also discussed kind of the secured, unsecured piece. So maybe are you targeting those bullet bonds, those 28s or 3.5, 28s?
Yeah. Look, I think we're going to be opportunistic, right? All of those are sort of viable candidates. There's various levers you can use or techniques to sort of tender or use other provisions within the indenture to sort of take up our participation and people that want out. Obviously, there's a trade-off between lower friction of tendering versus coupon. So I think you'll see a balance, but the 6.75 and the other six handle bonds obviously seem like sort of good candidates. But we will be sort of opportunistic between where the debt stack is trading, the sort of features within each of the bonds that will dictate what is the most efficient ones to take out.
Thank you very much for your comments, and congratulations again on the transaction.
Thank you.
Thank you.
Thank you very much. Our next question comes from Rupert Merer of National Bank of Canada. Rupert, your line is now open.
Thank you. Congratulations on the deal. Looking at the ES business, if the M&A outlook is strong in that business in the future, do you contemplate putting more equity into the business, so basically increasing your interest in the joint venture under the right conditions?
No, I don't think so. I think, I mean, we could put in a little bit of capital pro rata if there were great opportunities, but I think the model suggests that given the free cash flow generation of that business coupled together with the CapEx profile of that business, I think we have a very good model that the business sustains itself with the capital structure that we put on it. So our model that we've built for that business is achievable really without any new equity.
All right. Great. Thank you. We have no other questions to be asked.
Thank you, Rupert.
Thank you very much. We currently have no further questions, so I'd like to hand back to Patrick Dovigi for any closing remarks.
Thank you, everyone, for jumping on short notice, and we'll be speaking to you shortly with our sort of results for 2024 and our outlook and guidance for 2025, and again, thank you for always your continued support and trust in us and the management team. Thank you very much.
As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.