JPMorgan analysts predict GFL will turn down private equity buyout

JPMorgan Chase & Co. analysts have advised institutional investor clients to short GFL Environmental Inc. shares and buy shares of U.S. rival Casella Waste Systems Inc., according to The Globe and Mail. The recommendation is a long-short position, a hedge fund strategy designed to generate returns regardless of overall market direction. The trade reflects JPMorgan's view that GFL, Canada's largest waste company, is unlikely to complete a deal with private equity suitors, while Casella may either improve its results under activist pressure or be acquired at a premium.

GFL's board launched a strategic review in July after receiving what founder and chief executive Patrick Dovigi described as "unsolicited preliminary expressions of interest from multiple parties to take the company private." The interest followed a sharp decline in GFL's share price after the company launched a friendly $5.4 billion takeover of Calgary-based Secure Waste Infrastructure Corp. At least two private equity fund managers have approached GFL with take-private offers valuing the company at more than US$20 billion. Media reports cited in the article put the potential offer from a PE consortium at US$50 to US$55 per share. Since the review was announced, GFL's share price has risen 18 per cent, and on the most recent Friday it closed at US$45.56 on the New York Stock Exchange. GFL was scheduled to report quarterly results on the Wednesday following the article, which could include an update on negotiations.

JPMorgan's analysts said the current share price suggests investors doubt a PE consortium will pay the reported offer range. They set a GFL target of US$42, below recent trading between US$43 and US$45. The analysts said that if the take-private deal falls through, GFL would likely decline more than Casella because of its higher leverage. Conversely, a GFL acquisition could pave the way for a leveraged buyout of Casella.

Casella, with a market capitalization of US$6.2 billion, is a smaller player in a sector dominated by acquisitive rivals. Its shares rose 11 per cent last week after activist fund manager Jana Partners LLC launched a campaign at a New York conference, with a Jana executive calling for improvements to profitability, return on invested capital, and alignment between executive pay and shareholder returns. Before the Jana announcement, Casella shares traded between US$86 and US$88 on the Nasdaq. JPMorgan has a US$99 target price on the stock and said Casella could command US$120 per share in a takeover, representing a potential 30 per cent premium to the current share price.