Spruce Point Capital Management, LLC, a New York-based investment management firm that focuses on forensic research and short-selling, issued a 107-page report, "Green for Life, Red for Losses" that outlines why shares of GFL Environmental Inc. (GFL) face 100% downside risk.
Spruce Point believes that without access to new capital, GFL’s shares are worthless for institutional investors.
Spruce Point also reported that GFL's leverage is understated by aggressive reporting of revenue and EBITDA, the company's debt is understated by at least C$460M and free cash flow burn is understated by 60%.
GFL responded to the blistering report and said in a news release that the Spruce Point report is 'baseless'. The company called the report misleading and inaccurate. The company said, “The report contains numerous inaccuracies and mischaracterizations, which GFL believes are solely intended to benefit Spruce Point, who has disclosed that it stands to profit significantly in the event that the stock price of GFL declines.”
"We are very disappointed by the baseless report put out today by Spruce Point Capital," said Dino Chiesa, lead independent director of the board of GFL. "Spruce Point has never engaged with the company and the report is without merit. We have the support of our shareholders and the utmost confidence in management, who have held themselves to the highest ethical standards. We continue to believe in the strategy of the business and its focus on creating long-term shareholder value."
Effect on the market
GFL was down 1.4% after hours on Tuesday, August 18 following a swift 8.2% hit during regular trade. Bloomberg estimated that the analysis wiped out $600M in market value.
Michael E. Hoffman from Stifel did not address the report head on, but did reiterate their buy rating of GFL. Here is a summary statement from the note Hoffman emailed on August 18, “We reiterate our Buy rating and C$40 target price on GFL Environmental (GFL, Buy, C$25.20). There is a short thesis hitting the marketplace today. We are not going to address the direct claims but instead focus on issues investors need to believe are being done appropriately. It is very hard to play with revenue recognition in waste, deal accounting allows for reconciliation on a trailing 12-month basis of closing, right of use assets are never designated as capital spending, The Waste Industries Raleigh corporate office is now the Solid Waste HQ and pulled out of the segment reporting and CFFO as of 2Q20 now accounts for FX related to recapitalizing the balance sheet and the IPO all in CFFO.”
Spruce Point’s views appear to clash with analysts, many of whom have been positive about the company's future. The Spruce Point report included a disclaimer informing readers they should assume the firm and its affiliates have a short position in GFL and could benefit from falling share prices.
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