SNC-Lavalin sells part of its milk cow
How a highway paid $3.1 billion in 1999 can today be worth more than 30 billion? In 20 years, the 407 ETR has become a true money printing machine.
By paying between $3 billion and $3.25 billion for the acquisition of 10.01% of the toll-free 407 ETR (Express Toll Route) on Friday, the OMERS pension fund gave him a value of a little over 30 billion.
However, in May 1999, a group consisting of SNC-Lavalin, Spanish companies Ferrovial and Cintra and the Caisse de depot et placement du Quebec had to pay only $3.1 billion to get their hands on the right to operate the highway for 99 years, until 2098.
The original contract, however, required the obligation to invest significant amounts to extend and increase capacity. While at the time its tracks were 643 km long, the 407 ETR had at the end of 2018 nearly double (1217 km). In total, the highway now stretches 108 kilometers between Pickering, east of Toronto, and Burlington, to the west.
The Caisse, which had placed 300 million there, declared three years later, by reselling its participation, to have realized a gain of 370 million. This was his first investment in an infrastructure.
Revenue up, expenses stable
In 20 years, the use of Highway 407 has continued to grow. The average number of trips per day increased by 75% from approximately 237,000 to 415,000.
The consortium attributes this increase to “overall economic growth and population growth in the vicinity of Highway 407 ETR, increased capacity, increased congestion on other highways and growing acceptance of the toll road concept by the traveling public in the [Toronto area] and surrounding areas “.
This increase has turned into very large profits. In 2018, the highway generated a net profit of 539 million, corresponding to an astronomical net margin of 38.8% on its revenues of 1.39 billion.
The current shareholders, the Spanish company Cintra (43.23%), the Canada Pension Plan Investment Board (40%) and SNC-Lavalin, shared in 2018 the plump $920 million in dividends.
In addition, the trend is more than favorable. Over the last five years, its revenues have increased by 56%, while its operating expenses have remained essentially stable. Its net profit thus more than doubled from 222.2 million to 539 million.
Probably attracted by these numbers, the Ontario government decided in 2009 to retain for itself the ownership of the next section of Highway 407. The latter, located east of the 407 ETR, was opened to traffic. In 2016. It is also toll, but the money collected goes to the province.
Highway 407: Markets were hoping for more
SNC-Lavalin sold Friday for nearly 60% of its main cash cow, its 16.77% interest in the 407 ETR toll road in exchange for up to $3.25 billion, a price which slightly disappointed financial analysts.
The multinational of Quebec had announced several months ago its intention to sell part of its stake in this highway, located in the Toronto area, to clean up its balance sheet by reducing its debt.
In the end, the Ontario OMERS pension fund won the bet, paying $3 billion immediately in exchange for 10.01% of the shares of the company that operates the highway. An additional $250 million could be paid over the next 10 years if certain financial performance criteria are met.
SNC-Lavalin will retain a 6.76% interest. Originally, the company seemed to have the intention of retaining a stake of about 10%. A spokeswoman for the company contacted Friday to clarify the reasons that led to this change of direction did not respond to our call.
After taxes, the transaction grants a value of $27 per share of SNC-Lavalin to the stake of 16.77% she held, calculated Friday several analysts. Prior to the transaction, their estimates were slightly higher, in some cases reaching up to $30 per share.
The difference explains the decline in SNC shares on Friday, on the Toronto Stock Exchange. It ended the day down 1.6% to $33.92.
Analysts’ reaction on Friday was directly related to their prior estimate of the value of the asset.
“We note that the sale involves an attractive transaction multiple (33.5 times the EBITDA of the last 12 months), allows SNC to significantly reduce its indebtedness and provides it with additional capital that can be used for beneficial purposes for shareholders. Such as redemptions, “said Michael Tupholme of TD Securities, whose estimate was $27.19.
“We believe that many investors will be disappointed with the valuation that the transaction entails, and we expect the stock to be under pressure [Friday],” wrote BMO’s Devon Dodge, whose estimate was $30.
Debts and share buyback
After taxes, the transaction is expected to take about $2.61 billion into the coffers of SNC-Lavalin, or up to $2.83 billion if the premium of $$250million was to be paid, according to estimates by Michael Tupholme, TD Securities.
The first allocation of this sum will be the early repayment of $600 million of a loan of $1.5 billion contracted to the Caisse as part of the acquisition of the British firm Atkins in 2017.
The remainder of the money collected will be used to buy other debts and other possibilities. In its press release, SNC’s management mentions in particular the possibility of a share buyback program.