Larry Tanenbaum had more than an NBA championship to celebrate this spring. The private equity investor and co-owner of the Toronto Raptors just made a significant score with the sale of Ontario’s 23 ONroute service centres, and proved that public-private partnerships can work.
Mr. Tanenbaum’s company, Kilmer Van Nostrand Co. Ltd., and a unit of Italian catering company Autogrill Group sold their joint interest in the Highway 400 and 401 pit stops to a pair of private equity funds, U.K.-based Arjun Infrastructure Partners Ltd. and Toronto-based Fengate Asset Management Ltd.
While Kilmer is private and does not release financial results, Autogrill is a public company and disclosed it received $255-million for its ONroute stake. Kilmer will pocket slightly more on the deal, as the company also sold a 50-per-cent stake in the chain’s gas stations, which it co-owned with Canadian Tire Corp. Ltd.
Kilmer, Autogrill and Canadian Tire won a 50-year lease on the ONroute stations from the Ontario government in 2010, beating out three rival bidders. The three private-sector partners and the government invested approximately $300-million in complete renovations for the 23 sites, which the province previously leased to oil companies. Kilmer and Autogrill likely earned a four- to five-fold return on their investment over nine years.
However, Kilmer vice-chairman Ken Tanenbaum – the eldest son of Larry Tanenbaum, chairman of Maple Leaf Sports and Entertainment Ltd. – said the profit reflects the risks in the investment, which was structured by the Ontario government during the global financial crisis, along with strong interest in infrastructure assets from institutional investors such as Arjun and Fengate.
“The ONroute chain was structured as a revenue risk partnership with the province. If we didn’t sell more burgers and coffee and pump more gas, we weren’t going to make money on this project,” said Ken Tanenbaum, who has been running Kilmer’s infrastructure and real estate business since 2006 after working at LafargeHolcim, the global building materials company.
Revenue risk projects see private-sector companies such as Kilmer and Autogrill form a partnership with a government and co-invest in a project, with the corporate players only making a profit if they can increase sales by attracting more customers. The approach is relatively common in jurisdictions such as Australia and Britain, and is becoming more accepted in Ontario as debt-strapped governments look at new ways to fund infrastructure.
At ONroute, the province persuaded Kilmer, Autogrill and Canadian Tire to pay for soil remediation and bring the sites up to new environmental standards, as many of the gasoline storage tanks were installed in the 1950s and needed to be replaced. Mr. Tanenbaum said the service centres are also run to play a social purpose, for which the companies shoulder extra costs: The stops are open 24 hours a day, all year, and provide a place for travellers to wait out storms and road closings.
The ONroute chain is one of three revenue risk projects Kilmer has completed with the provincial government. The Toronto-based company teamed up with real estate developer Dream Unlimited Corp. to build the athletes’ village for the Pan American Games in 2015, which was subsequently converted into condominiums. Kilmer and Dream also joined forces to build 1,500 units of rental housing, including more than 400 units of affordable units, in downtown Toronto’s West Don Lands. Mr. Tanenbaum said, “If we can’t lease these units, we don’t make money on these projects.”
Kilmer and Autogrill decided to shop their stakes in the ONroute chain when bankers at CIBC World Markets reported strong interest in the business from institutional investors. “ONroute is what’s known as infrastructure-plus, as there’s a long-term concession, with upside potential that comes from improving the services,” Mr. Tanenbaum said.
Incoming ONroute owner Arjun is making its first North American investment, but runs U.K. service station operator Welcome Break. The British chain features hotels at many of its 27 rest stops, along with fish and chip outlets, and serves 85 million customers annually. ONroute currently welcomes approximately 40 million drivers each year, and the average visit is approximately 20 minutes.
This is Kilmer’s second largest infrastructure sale this year. The firm was also part of a consortium that agreed to sell the Billy Bishop Toronto City Airport terminal in January to a group led by New York-based JPMorgan Asset Management. Kilmer and its partners acquired the downtown terminal in 2015 for an estimated $700-million.
Arjun and Fengate looked to investment bank Evercore for advice on the ONroute acquisition, with legal work done by Blake, Cassels & Graydon LLP and British firm White & Case LLP.
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