One bidder in the court battle over SNC-Lavalin Group Inc.’s stake up for sale in Ontario’s Highway 407 toll road says the increasingly active role of pension funds in infrastructure projects has put them in direct competition with construction and engineering firms.
Cintra Infraestructuras Internacional SL, an infrastructure developer and a subsidiary of Spanish multinational Ferrovial SA, makes the argument in documents filed with the Ontario Superior Court.
Cintra, which owns 43.23 per cent of Highway 407, is locked in a legal fight with the Canada Pension Plan Investment Board (CPPIB), which has a 40-per-cent stake, over the right to purchase SNC’s shares. Both shareholders believe they have a right to match an offer from the Ontario Municipal Employees’ Retirement System (OMERS), which struck a deal last August to buy a 10.01-per-cent stake from SNC for $3-billion in cash and as much as $250-million in future payments over 10 years.
Selling that portion of its position would allow SNC-Lavalin to pay down debt and improve its balance sheet, although it would also mean giving up a sizable chunk of an asset with huge growth potential – one that pays out steady dividends. After the sale, the engineering firm would still own 6.76 per cent of Highway 407.
SNC-Lavalin quashed the contract it had struck with OMERS after the CPPIB exercised its right to match the offer, the engineering firm said in a statement in May. The move cost SNC an $80-million break fee.
However, Cintra argues it also has a right to match the offer and is seeking to buy slightly more than half – 51.95 per cent – of SNC’s 10.01-per-cent stake up for sale.
SNC argues that Cintra signed an agreement in 2002 that waives its matching rights in the event that SNC sells shares to a buyer who "does not have competing interests with Cintra, Grupo Ferrovial, or any of their subsidiaries, in relation to construction, operations, asset management of, and investment in, road or airport infrastructure projects other than solely as a financial investor such as a pension or superannuation fund.”
The crux of the matter is whether or not OMERS is a competitor to Cintra. The Spanish firm notes that OMERS has “significant interests” in the London City Airport, the Chicago Skyway toll road, the Confederation Bridge toll road and the Detroit River Tunnel, and the pension fund competes with Cintra in bids for private road and airport infrastructure projects. OMERS declined to comment on the matter.
Back in 2002, when the waiver between Cintra and SNC was signed, Canadian pension funds were predominantly passive investors in infrastructure projects, the Spanish firm argues in court documents. Since then, however, larger pension funds have taken increasingly active roles as investors and asset managers in the infrastructure space, assembling their own teams of infrastructure experts and creating new business units.
“While these new business units do not typically do the ‘day-to-day’ operational management of toll roads or airports, they do control or significantly influence the strategic direction or management of those operating companies," Cintra argues in its factum. “Today, large Canadian pension funds have emerged as some of the worlds most successful and prolific active investors and managers in airport and road infrastructure investments – in direct competition with the interests of Cintra.”
Meanwhile, SNC-Lavalin and the CPPIB argue in a joint statement that OMERS is merely a financial investor in infrastructure projects and does not engage in building or operating them.
“It is uncontested that all of OMERS’ investments are made with a view to obtaining returns in order to fund pension benefits,” their joint factum reads.
Cintra’s lawyer and a spokesperson for the CPPIB declined to comment on the matter, while lawyers representing SNC-Lavalin did not immediately respond to a request for comment. A spokesperson for the engineering firm said only that the matter, which was heard on June 21, is currently awaiting a judge’s ruling.
SNC-Lavalin previously said that regardless of how the judge rules, it will be allowed to sell its stake under the terms and at the price it had previously announced – it’s just a matter of determining who the buyer will be.
The line between financial and active ownership has become blurred as pension funds, alone or as a team with other private funds, have begun to take over multibillion-dollar companies or infrastructure assets and appoint boards of directors, pension consultant Bob Baldwin said.
“I’m in no position to comment on the legal dimensions of the dispute, but it is part of the evolution of these plans that they have become very active, long-term investors, and one part of that story is you can’t express your happiness or unhappiness with a lot of these investments by selling," said Mr. Baldwin, a former pension industry employee and a board member of a number of Canadian pensions.
"You end up with such big stakes you have no choice but to be an active owner. That’s certainly an important dimension of what’s happened to the big Canadian funds in recent decades.”
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