SNC-Lavalin Group Inc. is considering selling some of its stake in the Highway 407 ETR, marking a significant shift in the management team’s strategy with the investment.
A year ago, SNC said it had no plans to put its stake in the toll road on the market. “If someone wanted to acquire part of our stake at a future value, absolutely we’d listen to that,” chief executive officer Neil Bruce told The Globe and Mail in September, 2017. “But at the moment, we just see it as an immature asset that’s going to go up in value.”
On Wednesday, however, SNC revealed that it has engaged two financial advisers, CIBC World Markets and RBC Dominion Securities, to advise on a potential sale of part of its investment. SNC is considering lowering its stake to 10 per cent from 16.76 per cent.
If this portion of the stake is sold, it could deliver $2.2-billion to SNC, according to National Bank Financial analyst Maxim Sytchev. However, he cautioned that infrastructure assets are expensive at the moment. While this is the opportune time for SNC to sell, buyers may not be interested in paying top dollar.
“To be clear, we believe that the 407 is currently undervalued. We believe that its value is in excess of the current analyst consensus; this is the only way to truly demonstrate the value," Mr. Bruce said on a conference call, adding that he hopes the sale will boost the company’s total market value.
SNC is only selling part of its ownership of the highway to maintain a “strategic advantage” with the investment, Mr. Bruce said. The company believes that a potential sale or other transaction could “augment the valuation” of its capital investments, he added.
The news of a potential transaction was announced as part of SNC’s quarterly earnings on Thursday.
SNC’s exploration of a sale follows the company’s $3.6-billion acquisition of British engineering firm WS Atkins in 2017.
After the purchase, debt rating agency Standard & Poor’s affirmed SNC’s rating at BBB and gave the company a stable outlook – however, this outlook “places considerable emphasis on the company’s willingness (and ability) to monetize its large investment in the Highway 407,” according to SNC’s regulatory filings earlier this year.
Highway 407 ETR is a 108 kilometre-long toll highway that runs across the northern border of Greater Toronto Area. It has a 99-year concession agreement that expires in 2098. In fiscal 2017, the highway’s dividends to SNC contributed $142-million of the company’s earnings before interest and taxes.
SNC has held its stake in the toll highway since 1999. Cintra Global is the largest owner of the road, with 43 per cent, while Canada Pension Plan Investment Board owns 40 per cent.
Tim Kiladze
Salmaan Farooqui