The Canada Pension Plan Investment Board is revving up to go from zero to 40 per cent ownership of Ontario's busy 407 toll highway before the year is out.
The CPPIB, which invests money on behalf of the Canada Pension Plan, announced Tuesday it plans to pay $894-million to buy a 10 per cent stake in the 407 Express Toll Route from majority owner Cintra Infraestructuras.
That's in addition to the 30 per cent stake it hopes to acquire indirectly through in a $3.2-billion proposed takeover of Australian toll operator Intoll Group, formerly Macquarie Infrastructure Group.
The CPPIB does not currently own any interest in the toll road, but if both deals go ahead as planned, it would hold 40 per cent of the highway and become its second-largest stakeholder after Cintra, one of the world's largest private transport infrastructure companies, a spinoff of Spain's Ferrovial Group.
"The fact that [the highway]is in our backyard is a benefit," André Bourbonnais, senior vice-president of private investments for the fund manager, said in an interview.
"It's certainly an asset that is very strategically located in one of the markets that is affected the most by congestion. It has had very good results in the past years and given its geographical situation," he said.
The deal with Cintra, which owns a majority 53 per cent interest in the highway, is expected to close in December, but is subject to a right of first refusal from the other shareholders - Intoll and Quebec-based SNC-Lavalin Inc., which holds a 17 per cent interest.
Intoll is holding a special meeting next month to vote on the takeover offer from CPPIB. Intoll's board is recommending that shareholders accept the offer.
Mr. Bourbonnais said he is satisfied with the price that CPPIB will pay for the 10 per cent stake from Cintra because he is confident the toll road will provide the board with an ample return in the near term.
"Obviously, it's an attractive asset for us, our infrastructure program is based on holding an asset for a long time where we see predictable cash flows," Mr. Bourbonnais said.
"It's important for us to get scale and when we have an opportunity like we have here to acquire significant interest in an asset that fits our strategy, the decision is easy to make."
And while Mr. Bourbonnais said he is still "digesting" these initial plays, the board would consider bidding on any future offerings made by the other shareholders.
"We'll make the decision at the time depending on the price and economic conditions," he said.
Highway 407 stretches 108 kilometres from the Queen Elizabeth Way near Burlington, Ont., on a northeasterly path that skirts Toronto and reaches Pickering in the east.
The highway has become an important part of the province's system for moving goods and people from its industrial heartland in the Toronto area to the U.S. border near Niagara Falls.
It is one of only a few privately owned highways in Canada and the only one that operates electronically without any collection booths.
CPPIB likes infrastructure assets because they have a predictable cash flow, offer inflation protection and are easy to maintain. The board set up an infrastructure research group to examine potential opportunities in 2005.
Infrastructure currently makes up under 10 per cent of the CPPIB's assets, but it continues to scour the world for opportunities to expand that portfolio.
The CPPIB's conditional offer for Intoll marks the Toronto-based fund manager's second attempt to purchase an Australian toll road operator, following a failed $3.8-billion bid by the fund and its partners to take over Transurban Group in May.
Intoll also owns a 25 per cent stake in Sydney, Australia's Westlink M7 toll highway.
The CPPIB is a professional investment management organization that invests on behalf of 17 million Canadian contributors and beneficiaries of the Canada Pension Plan.
It invests surplus contributions from employees and their employers to the Canada Pension Plan. The CPP isn't expected to draw on the CPPIB's funds for several years.