SNC-Lavalin Group Inc.’s planned sale of a minority stake in Ontario’s Highway 407 has hit a snag as the toll road’s current shareholders fight for the right to buy the engineering firm’s 10-per-cent share.
The dispute is now headed to court with an expedited hearing scheduled for June 21 and a ruling expected shortly after, SNC-Lavalin said in a statement Friday.
Regardless of how a judge rules, the company said all the Highway 407 shareholders have agreed that SNC be allowed to sell the stake on the same terms as the original sales agreement it announced in early April and for the same proceeds. It only remains to be determined which shareholder will get SNC’s stake.
“Cash is going to come in the door regardless” of the delay, said Maxim Sytchev, an analyst at National Bank of Canada, adding in a note that the company will not need to amend any credit agreements while the dispute plays out. “As an SNC shareholder, you don’t care if the cash is coming from [one buyer or another].”
The delay is an unexpected stumble for SNC-Lavalin chief executive Neil Bruce, who is trying to halt a falling share price for the company as it struggles with criminal charges on bribery and fraud and increasingly uncertain prospects for key pieces of its business. The company had previously said it expected the 407 sale to be finalized in early June.
In mid-afternoon Friday SNC shares were trading at $26.76 on the Toronto Stock Exchange, unchanged from Thursday’s close. They’ve fallen more than 56 per cent from a 52-week high of $61.54 in June, 2018.
SNC announced on April 5 that it struck a deal to sell a 10-per-cent stake in Highway 407 to the Ontario Municipal Employees Retirement System (OMERS) for $3-billion in cash and as much as $250-million in future payments over 10 years. The sale would allow the company to pay down debt and improve its balance sheet, although it would give up a big piece of an asset that pays out steady dividends and has tremendous growth potential.
Highway 407’s two other shareholders, Canada Pension Plan Investment Board (CPPIB) and Cintra Global, a subsidiary of Spanish multinational Ferrovial SA, both believe they have rights to match the OMERS offer and they are now locked in a two-way battle for the SNC stake, SNC-Lavalin said in its statement Friday. The fight hinges on whether OMERS is considered a true competitor to Cintra.
(Selling that 10-per-cent position would leave SNC with a 6.8-per-cent stake in Highway 407. Currently, the ownership structure is CPPIB with 40 per cent, Cintra with 43.2 per cent and SNC with 16.8 per cent.)
CPPIB was first to exercise its right to match the OMERS offer and SNC subsequently ended the sales contract with OMERS, SNC said in a statement. SNC will pay OMERS a previously disclosed break fee of $80-million.
According to the sequence of events as laid out by SNC in its statement Friday, Cintra then stepped in with the intention of exercising its matching rights as an existing 407 shareholder and said it wanted to buy 51.95 per cent of SNC’s 10-per-cent stake.
SNC then challenged Cintra’s move, saying that under an agreement signed in 2002, the Spanish firm “unequivocally waived” its matching rights in the event SNC sells shares in the 407 to a buyer that does not have competing interests “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 fund or superannuation fund.”
Cintra, an infrastructure developer and manager, claims that OMERS, one of Canada’s largest defined benefit pension plans with $97-billion in net assets at last count, is a competitor, SNC said. Therefore, Cintra believes the 2002 waiver agreement doesn’t apply and so it has the right to buy SNC’s 407 shares that are for sale, SNC said. Cintra intends to seek a ruling in the Ontario Superior Court, SNC added.
“Cintra believes that the 407 ETR is a valuable asset and that the price on offer from SNC-Lavalin is attractive,” Cintra told The Globe and Mail in an e-mailed statement. The company said it believes it has validly exercised its matching rights under the shareholders agreement and that contrary to the position taken by SNC and CPPIB, its shareholder rights have not been waived.
CPPIB spokesman Michel Leduc declined to comment on this latest development. A spokesman for OMERS also declined to comment.
SNC-Lavalin said it remains confident in its position that Cintra’s claims and arguments are without merit and that Cintra “does not have the right to disrupt or participate in either the original sale transaction between SNC-Lavalin and OMERS, or in the sale transaction between SNC-Lavalin and CPPIB.”
SNC said it will be allowed to sell the shares “as soon as practicable” after the court ruling. The only question is whether it will sell the entire 10-per-cent stake to CPPIB or split the stake roughly half-and-half between CPPIB and Cintra.
“This process does not jeopardize the proposed transaction,” Desjardins Securities analyst Benoit Poirier said in a research note. He said that depending on the timing of the court ruling, SNC might receive proceeds from the sale in the third quarter instead of the second quarter.
With files from Tim Kiladze and David Milstead
Nicolas Van Praet