Two Western Canadian waste and energy-services companies that have wrestled with unmanageable debt loads are merging in a reverse takeover, providing the larger company, Tervita Corp., with a long-sought public listing.
Calgary-based Tervita, which handles energy-industry waste as well as industrial contracts, such as the cleanup in High River, Alta., after the 2013 flood, is combining with Newalta Corp., which focuses on servicing heavy-oil clients, in an all-stock deal.
The deal caps a long journey for Tervita. The company, previously called CCS Income Trust, was taken private in 2007 in a $3.5-billion debt-fuelled buyout. Five years later, in 2012, investment bankers started talking about the likelihood of an initial public offering for the revamped company, a deal that was rumoured to be as large as $1-billion.
The deal chatter was a corporate highlight at the Calgary Stampede that summer. But within months, the prospects for such an offering dimmed. That fall, Tervita issued debt and Standard & Poor's rated the notes "CCC+," citing "high debt leverage due to management's aggressive financial policy."
Over the next four years, the debt proved to be problematic, killing any IPO hopes. In 2016, almost a decade after its buyout, Tervita finally had to restructure by swapping its debt for equity.
Newalta's fortunes have largely tracked the energy market since oil prices started to crash in September, 2014, because many of its contracts are tied to heavy-oil producers. That September, the company reached a peak postfinancial crisis value of around $2-billion. Within six months, it was worth one-tenth of that, largely owing to debt woes.
Before merging with Tervita, Newalta's net debt amounted to nine times its earnings before interest, taxes, depreciation and amortization. After joining forces, the two companies' combined net debt ratio will be 3.6 times – largely owing to Tervita's restructuring. Before that transaction, its equivalent net debt ratio had hit 10 times.
In return for sharing its balance sheet, Tervita gets its long-sought public listing, as well as some cost synergies.
After combining, Solus Alternative Asset Management LP, a Tervita equity holder, will control 40 per cent of the company. The merged company's next largest shareholder will have a 17-per-cent stake. Existing Newalta shareholders will hold 11 per cent of the shares.
John Cooper, who joined Tervita in July, 2017, after the restructuring, will lead the combined companies. Together, they made $201-million in EBITDA in 2017. Because they operate in similar sectors, they expect substantial cost savings and after factoring these in, they predicted they would have made $243-million in EBITDA together in 2017.
"A combined company with up to $50-million in potential synergies is better positioned to withstand a prolonged downturn in drilling activity in Western Canada," GMP Securities analyst Anoop Prihar, who covers Newalta, wrote in a research note.
On a conference call, Mr. Cooper made it clear that streamlining costs will be the priority early on, and added that there are promising organic options between the two businesses.
However, he acknowledged that it is tough to completely rule out any future mergers or acquisitions. "We are not going to avoid M&A or consolidation," Mr. Cooper said, because "consolidation has to occur in the North American energy industrial services business."
Consolidation is a common theme across waste management. GFL Environmental Inc., which is owned by private equity backers, is on an acquisition spree as it seeks scale. Much like Tervita a few years ago, GFL is now seeking an IPO and the offering could be worth $1-billion.
However, GFL was recently warned about its debt load. Rating agency Moody's Investors Service changed its outlook on GFL's debt to negative from stable after the company issued US$400-million worth of new notes last week.
The company's net debt burden now amounts to 6.4 times its EBITDA, and it isn't expected to fall for some time because it wants to keep consolidating the industry.
Tim Kiladze