Spain’s largest construction company and Canada’s biggest pension plan are expected to increase their stakes in Ontario’s Highway 407 by matching a $3.25-billion offer for SNC-Lavalin Group Inc.’s holding in the toll road, a move that demonstrates the value of infrastructure to institutional investors.
Montreal-based SNC struck a deal in early April to sell 10 per cent of the 108-kilometre highway to the Ontario Municipal Employees Retirement System (OMERS) pension plan for $3-billion, with an additional $250-million of performance-based payments. SNC plans to use a portion of this cash to pay down debt and will continue to hold a 6.8-per-cent stake in the highway.
The two other shareholders in Highway 407 – Spain’s Ferrovial SA with 43.2 per cent and the Canada Pension Plan Investment Board (CPPIB) with 40 per cent – have the right to match any offer for the SNC stake, an option that expires after 30 days. SNC announced financial results on Thursday and said in a news release that it “has been informed that a Highway 407 ETR shareholder may exercise its right of first refusal.”
Ferrovial, which has a $24-billion market capitalization, and the $368-billion CPPIB have not disclosed their plans, but sources familiar with the negotiations who were not authorized to speak on the record said the two investors are expected to each take a portion of SNC’s stake in Highway 407. The toll road consistently turns in strong financial results, with revenues that rise in step with inflation and predictable maintenance costs.
A spokesperson for CPPIB declined to comment Thursday on the fund’s intentions for its Highway 407 investment and a Ferrovial spokesperson also declined to comment. During a conference call on Thursday, SNC chief executive Neil Bruce said while the identity of the buyer of its stake is still being decided, binding contracts struck with OMERS, Ferrovial and CPPIB ensure the Highway 407 sale will close in June.
Institutional investors such as pension plans are buying infrastructure such as toll roads as an alternative to fixed-income investments. CPPIB has approximately 8 per cent of its assets or $28-billion invested in infrastructure, up from a $15-billion investment in the sector in 2015. OMERS, a $97-billion fund, owns about $18-billion of infrastructure and earned a 10.6 per cent return from the portfolio in 2018, compared with a 1.8 per cent return on its fixed-income investments.
If Toronto-based OMERS loses out on its planned investment in Highway 407, the pension plan will walk away with approximately $80-million for its troubles. On Thursday, SNC said if the sale to OMERS does not go forward, it will pay the fund a “break fee” of 2.5 per cent of the purchase price.
SNC’s decision in April to sell 10 per cent of Highway 407 means the company is parting with a larger portion of its stake in the toll road than the roughly 7 per cent originally planned, underscoring the balance-sheet stress that forced the engineering company to slash its dividend by about 65 per cent earlier this year.
Fund manager Stephen Jarislowsky, a former director of SNC, is pushing the engineering company to hold a shareholder vote on the decision to sell its stake in Highway 407, and said the asset is likely to double in value in the next decade. Mr. Jarislowsky, founder of Montreal-based Jarislowsky Fraser Ltd., said the toll road “is one of the finest investments that I know, as it is quasi government-guaranteed, plus enjoys the full growth of the traffic around Toronto.”
SNC faces charges of bribery and fraud related to business dealings in Libya from 2001 to 2011. Federal prosecutors have so far declined to invite the company to negotiate a settlement on those charges in order to avoid a lengthy trial. That decision set off a political row in Ottawa that has cost Prime Minister Justin Trudeau two cabinet ministers, a top aide as well as a senior bureaucrat.
In 1999, the Ontario government sold Highway 407 for about $3.1-billion. The toll road has been significantly expanded over the past two decades. Based on the value of SNC’s stake, the highway is now worth $32.5-billion.
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