Good morning, everyone, and thank you for joining us to walk through a little bit on the GFL and waste management advanced disposal divestiture asset package. Before I get started, I'll turn it over to Luc quickly to go through the forward looking statements caution and 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. Also, we have prepared a presentation to accompany this call and that's also available on our website. During this call, we will 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. So I won't flip the deck. I mean, everybody has it. It's a pretty short deck. I think we'll keep this sort of more interactive and sort of 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. And I think as we work through that process post IPO, as we said during the IPO load, there was a couple of chunkier type acquisitions, this being one of them that we thought could come available to GFL and sort of fast forward to today, sort of delivering on one of those two opportunities on the chunkier side. So when we look at this today, I mean, this is an asset that, again, without the advanced disposal in waste management margins, these types of assets would never become 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.
And I sort of break them down into 3 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. And then you have the South region, which is generally focused around Georgia, Alabama and Florida. And then you have a little piece sort of up in Maryland that they'll be part of the East region.
So I'll 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.
And recently, we've acquired a business in the Upper Peninsula, American Waste. And with our large build out of the with our Rizzo acquisition that we did in 2016, had a huge presence in Southeast Michigan. So 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.
And 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 sort of East region, I mean, we have today we have operations in Pennsylvania, Virginia and Maryland. So 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.
So 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. And then you look at the South region, largely talking 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. But again, it's always been a focus of ours to start moving into Florida.
And I think with this acquisition, that will allow us to do that. So from our perspective, to acquire similar to what we did with Metrec 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 Trucks. And given our experience with Trucks 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's team.
We have a very good well defined plan. And 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 2 hubs. And we're sort of very well positioned to do that. And we'll be 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 8 times, some will say we're acquiring these for 9 times. 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 collection front end collection routes, which is arguably the most profitable line of business any one of us have in our overall sort of revenue mix. On the back 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.
And we can do that all organically on the back of these existing facilities. If you look at the collection of assets, obviously, Wisconsin, very high margin market. Again, so the overall blended margins coming into us, we believe are going to be accretive. And it just sets us up very well. These assets, if you look historically what we paid for assets of similar nature, I mean, Metrec was one that we did again almost 5 years ago, paid 9.5 to 10 times for that.
If you look at the sort of headline number for weight industries when we acquired that business, it was roughly 11 times. So acquiring these in the 8 to 9 times range, we feel we've been it's a very favorable purchase price multiple. But not only is it a favorable purchase price multiple, we think it leads us to an exciting opportunity over the next sort of 12, 24 to 36 months. Obviously, as a 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.
And as part of this transaction, we basically 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. And I think if you look at that, we've entered into an extension of our existing disposal deals for probably another 5.5 plus years. So again, solidifying the disposal ranges that we've had with Waste Management both into our facilities as well as theirs. When you look at sort of how this works and we'll get into a little bit later in sort of future M and A, I mean, if you think about Waste Industries and what's that have done, I mean, this is a puzzle we're building. We continue adding pieces to the puzzle.
If we would have 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. So with that, I'll turn it over to Luke to talk a little bit about the financing and then we'll get into the Q and A and spend the bulk of our time on Q and A.
Thanks, Patrick. If you look at Page 6 of the presentation, there's some outlining financing considerations. As you're all well aware, in early in Q2, we tapped the market on an opportunistic financing, brought on a US500 $1,000,000 bond, which brought us north of a $1,000,000,000 of liquidity that we've been sitting on truthfully in anticipation of the closing of this transaction. So we're 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.
However, we continue to always be looking at opportunistic financing opportunities. And that is something that we'll 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 look at the analyst consensus,
I mean the business was expected
to end the year with leverage in the sort of low fours area. Funding the acquisition 100% debt finance would increase that leverage by about half a turn. So you'd end up ending the year sort of the high end of mid-4s. Now as we told everyone from the IPO out the gate, our philosophy around leverage so that we think naturally the growth prospects of the business are going to see a natural delevering year over year even with our growth goals, but we would on a temporary basis bring leverage up to that level of sort of mid to the high end of mid-4s to affect the right transaction. For all the reasons Patrick just said, we think this is the right transaction.
And so 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 and A program and the organic growth
of the business, you'd still see even if executing
at the levels of M and A that we previously discussed, the business still naturally delevers about half a turn a year. So you still would continue on that deleveraging profile to getting to that low mid-3s 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 and A. I do think it's important to emphasize that.
There's no limitations from a leverage perspective, continuing our normal course tuck in program. For the most part, those businesses end up in very short order being accretive to overall profile
and certainly don't move
it in any material way.
Yes. And 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 sort of private placement. What I will say on M and A, leverage is clearly the governing factor of 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 sort of with this leverage profile.
And 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 sort of get that leverage profile into the low 4s as part of our commitment to each one of the investor that participated and continue to participate. So this is not by no way are we going to continue if there's something again a little bit chunkier that comes along no way we're going to take leverage up into the 5% to 6% range, that's what we committed to you and that's what we'll continue to do. But again, lots of opportunities in various sorts of structures around the equity with very sort of large investors that have been with us previously and continue to do that so that opportunity exists. But I don't think you'll see us coming doing a broader syndicated equity deal today or sort of anytime soon. So I know that question came up a lot over yesterday, but I just want to make sure that we sort of hit on that today.
And just to round out the conversation, I mean, 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 integrate sort of market in the Midwest. I mean 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 this sort of standalone costs?
And we've also included a certain level of conservatism in the numbers in consideration of the current sort of dynamic, specifically COVID related impacts to the historical numbers. But all of that bringing the business down, we're thinking out the gate at something with a sort of high 20s, call it 27%, 28% margin profile. We think that is a conservative number. And 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.
So do you want to just add the color that all this leverage discussion is predicated on EBITDA number that we think there's some pretty meaningful upside to. The last point I would just say to echo some 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 overestimate, I can't express how efficient that is for us from an integration perspective.
And again, with the potential well, 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 talking to existing networks and infrastructure that we have. So it's really effectively setting up this new Midwest region, but again, we'll all be administered through an existing back office. So 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.
Yes. I mean, our belief is a great transaction for us clearly, and it's a great transaction for Waste Management in Advanced Disposal. And 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 in various asset sales.
And it's the same team working on those. So we feel extremely comfortable and very confident. And from the highest levels down in Waste Management to the people that are actually doing the work, I mean, I think there's just a complete agreement. So we're really excited. So I think with that, we'll turn it over to the operator for questions.
And that should bring in some interesting sort of dialogue.
Thank you. Ladies and gentlemen, at this time, the floor is open for questions. Our first question comes from Tyler Brown with Raymond James.
Hey, good morning guys.
Good morning, Tyler.
Hey, congrats on the deal. But 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. But are any of those landfills particularly short live?
I know ADS has had some landfill issues in the past. So is there any landfill protection as a part of the deal?
Yes. So there's 3, I would say, non strategic assets that are sort of dwindling down sort of 2 to 5 years of life left. Those are not part of 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. So it's really a host of 15 core group of landfills that have a long life expectancy left in front of them.
Yes, Tyler, I would just to articulate that even more. If you think about our underlying EBITDA number and the revenue number, those are basically in at zeros. So and the ARO liability factors that all factored in to our valuation partners. 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. And then 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.
Yes, that's right, Tyler. So I think when you look at the package today being so landfill heavy, despite the GFL blended numbers that are being sort of 9%, we're viewing this as sort of high 11%, 12% CapEx burden. Now as we build out 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. But out the gate, we're viewing this effectively as sort of call it a 12% CapEx burden.
Okay, perfect. And 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?
So the deal will be
a combination of assets and shares, primarily an asset based acquisition. And 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, 1.5 years of that non cash payer status. So 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, Tom. Thank you. Our next question comes from Adam Wyden with KBW Capital.
Hey, Patrick. Can you guys hear me?
Yes, we can hear you. How are you doing, Adam?
I'm here in Bloomfield Hills. I just had my GFL truck come and pick up my garbage. So happy customer here. So just want 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 creating enormous value for shareholders, albeit in the private markets.
So, Patrick, obviously, you built this business from scratch. 13 years ago, you had one truck. Now you're the 4th largest waste management company with nearly $1,300,000,000 of EBITDA. You've compounded capital for you and your investors in extraordinary rate and have shown that you're obviously the most capable exec in the space today.
So when I look at
the closest public market comparables Waste Connections and Casella, they trade at 18 times to 20 times EBITDA respectively or less than 3% for cash flow yields. GFL today is a capital light share gainer with a better mix growth and management team, that today you traded only 10 times EBITDA. And obviously on a free cash flow basis, if we trade it at the same valuation, this would be a $60 plus stock today. How do you think about narrowing the valuation gap, especially if you want to continue doing large transactions? I mean, in my mind, you should be trading at a premium to Cassell and Waste Connections because this business is a toll road route based business.
So, I guess my question is, I mean, the sell side is completely out to lunch. I don't know if they're recovering from COVID, but like 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? A lot there.
Well, anyway, thank you for the compliment. I appreciate it. But listen, I think it's really simple, right? When you're as a public company, 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 100 of 1,000,000 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. And 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. So I think as we've been through sort of 1 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, Q3. I think similar to other Canadian champions, when you look at it, you look at the likes of sort of Waste Connection, 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.
And 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 and margin expansion as well as multiple expansion. And 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. And over the next 10 to 15 years, we'll 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. So that's really what we're focused on. I mean, you and the rest of the investor base will have to determine what the appropriate price is for the stock.
But we do believe that we will get multiple expansion as we continue delivering and executing on our plan.
Yes. Just following up on that. I mean, look, obviously, I think Canadian investors, I don't know if it's a different landscape. I mean, 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 running with 6 turns of leverage. I mean, I'd argue that you need your garbage truck before you need your cable bill. So I mean, I guess my question is, is I mean, 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. I mean, in our mind, this is like owning a highway or a toll road or a bond. And so so with rates at 0, it totally makes sense to us that these things trade at 2% free cash flow yields.
Yes. I mean listen, I think people have always asked us over the last in a while is like a lot of investors are always focused on what happens in a recession, right? And I think what all investors are going to see is they're going to see from all of the weeks coming, not just us, that these are very resilient businesses. And 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, but they also then 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 sort of deal with the downside cases, and I think everybody can agree on this call that Q2 will be the downside case from a host. And then 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 and A. Listen, I think I love the business. That's why I'm still here.
If I didn't love the business, I would have sold to private equity or sold to strategic and I would have we would have moved on. And I think we're in the company of few that have done this. I mean, if you look over the years, you had sort of the late law days, which is part of the cruise. You had the Huizenga days, and you had Ron Mittelstaedt that sounded sort of voice connections. I mean, there's been fairly few that have done it.
I think we, to a certain small extent, are in that group today and the underdogs. But I think over time, we're the underdogs today, but we'll continue proving that our model is solid and sustainable and we'll continue growing like everybody else. So I think we're very well positioned with what 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 on 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 wallet 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. So that hasn't changed.
Well, Patrick, this will be last for me. I can just tell you that in terms of leverage and all the rest, I mean, 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. So I think the fact that you're a large shareholder and you're aligned with equity value appreciation and you recognize, I mean, a lot of 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, 4 times leverage for a business like this.
I mean, you ran it with 6 or 7 in the last downturn. So I think you appreciate the public markets like less level, 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. So 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 Nadel with Scotiabank. Hey, good morning, guys. I think you mentioned 60%, 65% to 70% EBITDA roughly coming from Wisconsin. So can you maybe just give
us a bit more 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 in the missile business in that market?
Yes. I mean, 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 continue to build the roll off business in that market. So I think, yes, again, roll wasn't built in a day. But again, like I said, let's talk we can focus on what the acquisitions and the multiple EBITDA we're going to get out of this.
But 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. And 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 that sort of 27% -ish. Just sort of curious, when you think of a densification 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 did have sort of maybe more than just 1 quarter or medium term on that market? Yes.
Are you specifically talking about E3GEN? Well, yes, I guess for
the synergies and then just general about sort of it being a more commercial heavy business. And so I guess it's a 2 part question, the commercial, more commercial heavy sort of holistically.
Yes. So again, like all of our businesses, different regions have different perspectives on shutdowns, etcetera. I think if we have the benefit of seeing our business perform really through Q2 as well as 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.
And those businesses have trended exactly the same way. So from that perspective, I think it's very well positioned, trending exactly the same way that the rest of our businesses. 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. So but obviously that could change. I mean, I'm not certain that any of the political, the governments on both Canada and U.
S, what they're going to do and how they're going to do it. But 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 under promise and over deliver approach by modeling it the way we have. We could have clearly modeled this higher. We wanted to communicate to everyone, but I think taking the under promise and over deliver approach was the right thing to do around the presentation of these numbers.
Okay. So I guess in that 27% you scope to, there is something built in for
whatever commercial or that might be?
Yes. Okay. For sure.
I guess as well maybe just one last question and sort of just on leverage and M and A, again, I guess sort of understand the 4.5%, not an issue there. You talked about Equity Solutions, if something were to come along chunky. Maybe just curious just from internally from an integration perspective, if something were to come along soon or quickly, is there any will this hold you back from doing anything? Obviously, the tuck in you spoke to, we can do that. But something of size, I mean, if something comes along next 3, 6 months, do you think this would be preventative?
No. I think from our perspective, we're where it's always where, how and what. I think we have a team that knows how to do this. 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, 2 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. So we will be very well prepared with a very definitive plan. All the people are in place. I mean, Wisconsin 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. So from an integration standpoint, it will 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 3 months. And then really the last 6 weeks and will continue over the next 4 to 6 weeks in order to get this done.
Mark, was your question about whether the pro form a leverage profile precludes us from being able to interact with something larger should that come available?
No. So now the question was,
I don't want Patrick answered, it's just sort of internal capabilities. They sort of understand the levers and you talked about these solutions. It was more a Patrick's question.
And then touching on LOOMS, I mean, 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 would say there's lots of money for good deals. And again, if we can deliver the return profile we want on specific acquisition and 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. So from our perspective, that will not be an impediment to growth because of leverage sort of in the mid-4s. We will raise the amount of appropriate equity that we need to maintain our commitment to the shareholder base, which is maintain levels in a little lower. So it's not going to be a you're not going to see us take leverage on materially to take on a larger acquisition.
If it makes sense, it will make sense for my equity. It will make sense for your equity. And it will be another piece of the puzzle that fits in. And it will be another sort of geographic expansion that gives us the ability to continue growing the business in the future.
And 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 and effectively almost sort of doubles up the horsepower that I have in a preparation perspective in terms of the sort of IT considerations. Because I mean, it's in their best interest for me to be able to run right away because then they don't need to support sort of post closing. And so we feel really fortunate that we have the folks at the EDSI and WM site again who have been fantastic, helping us get ready to be able to take this on block and all of that focus with over the next sort of 6 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.
Our next question comes from Walter Spracklin with RBC Capital Markets.
Welcome, Paul. So 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-nineteen happening, there were a lot of shifts in revenue. Did you perhaps you could walk us through how you came up with a kind of run rate normalized revenue and EBITDA? Did you start with 2019 and adjusted or just a little bit along your thought process on how you valued these assets? Yes.
So, 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 ADF. There's a little bit of WM in there as well. And so 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. And if you think about a landfill that they used to use and they would bring all their internal tons, etcetera, what we're more by and large getting now is the landfill that ex all of the previously internal volume under the thesis that WMEDS Post Falls will not take that to one of their existing landfills. So you started with 2019 P and L is 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.
And 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 peak year and in light of COVID, we should be having something different. So that's how the revenue build up was. However, what I would put forth is the majority of our cushion per se is at the margin level. Because again, as I said, we've taken quite a
the thesis
and the process was what does this business contribute on a standalone basis. And so again, when you think about that contract 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? And 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.
And then layer on synergies on top of it, like in the South market and through Michigan. So we have opportunities, we have internalization opportunities. So I think, again, a further cushion that we're all modeling here, that's all sort of upside in 12, 24, 36 months. So I think very sort of very conservative approach to the actual way we're going about this.
And again, Walter, this is another sort of considerations where you look at 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. And 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? And given COVID-nineteen and some of the government focus on restarting the might not have been a might not have been a risk factor in past deals?
Yes. I'd write the synergies up into sort of 3 buckets. The first one is tied back to this manner in which we burden the business. So 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, etcetera, as I sort of tuck it in.
So 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 I didn't have before to improve my pre existing business. So 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. And 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 it 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 the historical numbers. Whereas 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. Now 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 on that, I think that could represent a meaningful tailwind to what we position today.
Great color. Appreciate the time.
Thanks, Walter. Thank you. Our next question comes from Michael Hoffman with Stifel.
Patrick, Luke. Luke, can you help us a
little bit? You've got a
step back in Waste Management. So I know it's early days, still got a lot of work
to do on this. But could you parse a little
bit of the 835 and how we ought to allocate it to PP and E, goodwill and intangibles, so we think about our integration of this into our models?
Hi, Gus. It's early days. We've been running. I mean, there's a meaningful dollar there, but I'm going to humbly request you give me for the next time we talk to lay that all out for you as we're deep in the weeds on that at the moment. And there's a meaningful component of think about all the landfills we're getting in, there's a meaningful component that's going to go to PP and E, 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,
Yes.
Yes. I mean, 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 PackShield coming out of this. Now ultimately, I think that's a conservative number is 12 to 18 months when you look at how many of the dollars are going to come into deductible classes. But yes, 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.
And 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.
So it's just a little bit of
a tangent. When is the lockup expire from the IPO?
It was 6 months from March 5, September 2. September 2.
September 2, okay. And then this is maybe the benefit of having business for a long time. So this is as much a statement as a question. Bill Dietrich built an amazing business in the Superior Waste Company that is what is Wisconsin for ADFW. I mean, it's just an exceptional business.
It was a public company at one time. The only advice it was very, very well run. And 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. Plug and play.
Yes. And an exceptional asset. So if nothing else, if that's all you've got and you paid this, that's just a phenomenal addition, like once in a lifetime chance to buy something like that.
Yes, we agree. So we
can Okay.
We can Yes. But like I said, like in any acquisition, Michael, you got gold, silver, bronze and you got a couple of pieces of lead, right? If we do with a couple of pieces of lead, how do you make the bronze silver and silver gold? We got the bulk of what we're getting is gold. There's some silver and bronze and then a couple of pieces of lead.
We got we got to figure out what to do with the lead, but that's you got to take the good with the bad. I don't think any one of us ever has done an acquisition where we haven't bought something with a little bit of leg. So I mean, that's just the way it goes. Right.
And then listening to the Q and A, clearly there's this hand wringing about how can you do future deals and all the leverage. But 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 be on sale. So this is going to be a lot of filling in around the gaps and maybe chunky big to $10,000,000 or $20,000,000 of revenues, but there's not a lot of 100,000,000 dollars $150,000,000 $200,000,000 revenue chunks to buy.
No. Like I said at the time of the IPO, there's one other asset out there that's been fully around that people I think know what it is on this call. And I think that will transact sometime. But 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 states that we can continue growing on the backs 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 in front end, which I think for all intents and purposes are the 2 most highly profitable businesses within all of our revenue mixes and now bolting on sort of the lower margin services on to those existing footprint. So 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 of 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?
Yes. So Michael, really, despite the higher EBITDA margin, if you think about financing this all with debt today, that's sort of basically awash. So what I think on the basis of this pro form a, it doesn't change the trajectory in the percentage wise just from the incremental leverage. On an unlevered basis, it is accretive, obviously. But 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 So I don't think it meaningfully changes the ultimate getting to the 14%, as you and I were previously speaking in your fireside chat.
But I think the opportunity set of how we get there with the broader sort of U. S. Platform is just that much greater.
Last question for me. How did May close, particularly in the solid waste business?
I mean, without giving any forward looking statements, the business had 2 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. So I think similar to what you've heard from the other strategics out there is that everything is trending in the right direction. But 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 deals here, Patrick and Luke. Maybe just 2 for me.
Maybe I'm
going to ask M and A question more broadly speaking. You talked about opportunities within solid waste, but just wondering how this 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 that, but I think if you can see, again, we have a very large liquid waste presence in just outside Chicago and Mokena, Illinois. So again, expanding into Minnesota and expanding into Wisconsin was a big focus of that. So that will be all additive. We have remodeled other dollar for that. So yes, we see a big opportunity there to continue sustaining 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. And just the last one for me. When you look at your capital structure, you have a couple of high yield notes 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 total?
No, that's a very high priority. It's 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. But if you look, the first one you can take out in June of May of 2021 And you could refi that. I don't know what you want to use as your assumption, but if you use a sort of 4 to 5 number, it's materially accretive to the free cash flow profile.
And then the other one, you can take out in June of 2022. So when you roll that forward, I mean today, if you think about improving the overall blended cost of debt even 100 basis points, which I think is a very conservative ambition. I mean, that's all pure free cash flow that is a meaningful contributor. So that's definitely part of the plan. Again, there was thought that 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.
Yes. But in simple terms, there's $1,000,000,000 of those high yield notes that are out. Average cost of capital for those is up 7.5%. So if you take 300 basis points off of that, refi those mid-4s, now we think we could probably do it tighter, but just take 300 basis points on $1,000,000,000 that's an extra $30,000,000 a year of free cash flow that's just going to hit the bottom line to do nothing other than me finding that debt.
Okay. So the timeline we're thinking about kind of 2021, 2022 to take up those 2 that's a little bit timeline to kind of think of when we're modeling this out?
Yes. The first one, you take them out 2021 and you think the second one is 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.
Hi, good morning gentlemen. Congratulations.
Good morning, Rupert. Thank you.
A follow-up, you mentioned there may be a couple of 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? And what are the landfill assets that we're going to sort of wind down wind down, wind down, and we're going to landfill assets that we're going to sort of wind down over the next 2 to 5 years. The truth is we put no warnings on where deducts to it. So those are that's really what I was reporting to.
Okay. So you'd be comfortable operating in all the regions where you've acquired assets? Yes. Great. And then secondly, looking at the organic growth of 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?
And how capital efficient is the organic growth in those areas, maybe in Wisconsin with municipal and roll off markets? And how would that compare to capital efficiency we may see and other opportunities you have at your home?
Yes. 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. So leveraging that infrastructure to start growing, 1, a broader commercial hauling business because they 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.
So I think as Patrick articulated, normally sort of bought a Holland company 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. So 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?
I think you heard from Tyler's first question, how we're thinking about that. I mean, we're putting a full 12 percent on this and I think that is reflective of the fact that there will be a heavier spend as we're building that out. Now 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. But I think thinking pro form a 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.
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 2 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. And so it's kind of a 2 part question. Just 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.
But 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 kind of not really kind of suitable for some folks? And then just sort of the other part of the 2 part question is just in general, how are you kind of 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?
Yes. So I mean this project specifically, I mean, 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 1, we have a long relationship with Waste Management. We 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. And versus trying to negotiate with multiple parties and that I think given what the DOJ is, the approach they've taken here is that the divestiture package and the purchaser needs to be agreed to with the party previous to them closing the transaction.
I think just dealing with 1 party made it much simpler, particularly with a party that know each other very well and have worked well together in the past. So I think that's what gave us the leg up. And I think maybe Waste Management, for sure, probably could have got more money if they sold all the some of the parts individually. But I think this was a good compilation prize and got them the certainty that they needed to do what really was the golden goose for them, which was the bigger deal. So I think we got it for a very fair value.
Obviously, it's less than we've historically played for vertically integrated businesses like this. From a valuation perspective, we're seeing an asset wisdom. Gold is always gold. Sizable vertically integrated businesses and sizable market position, disposal move to markets in Canada. Those acquisitions continue to be we haven't seen a real retreat in valuations yet.
I mean, I think when you're looking at those, the comps are always the public companies. And I think the public companies have held in there pretty well over the downturn. So I think from a multiple contraction perspective, we're not seeing much of that. But we are getting the phone is ringing with people that maybe don't want to live through the COVID pandemic for a lot of times. So people ask about multiples, but it's always a multiple of what, right?
So 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, historically, we're paying more over the multiple as comparable.
Okay. And just last one for me, just back to the 3 landfills you'll be winding down. Just to understand, I mean, 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 asset. But 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? Or is that coming from WM or somebody else to identify it down the road?
Yes. So we got waste management sort of took on all pre closing environmental liabilities. We will have some closure cost of those, but very minimal, which will sort of fax into the bid. But from a revenue perspective, again, we're modeling very little for those. And truthfully, they were largely open just as a growing concern anyways.
So we weren't taking a steep amount of volume. So I don't think you'll see a meaningful impact from any of those.
Yes, Brian, these 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. But yes, there will be regular course closure costs, but again, that was also to dispatch it into the overall model.
Okay. So just to think about the negative value, something tens of 1,000,000 of dollars, but nothing more than that in the kind of closing and capping in the 2 to 3 year timeframe?
Yes, that's right, Brian.
Okay. Thanks very much. Thanks, Dennis. So thank you very much, and we look forward to speaking to you after well, we're always available anytime. But if not, we'll speak to you after Q2 results.
Thank you. Ladies and gentlemen, that concludes the GFL Environmental Inc. Investor call. You may disconnect your phone lines and thank you for joining us today.