SNC has been down the 407 toll highway before

Here’s an idea: Let me know when a deal actually gets done and not when a seller says, yet again, that it intends to monetize part of its stake in an asset, in this case a huge money-generating toll road that runs east-to-west across the top of Toronto.

This week SNC-Lavalin Group Inc. announced its plan to sell part of its stake in Ontario’s Highway 407, but longtime followers of the company will know we’ve seen this movie before. No matter what the process is or how the transaction is structured, it always ends the same way. No buyer emerges and SNC maintains its 16.76-per-cent stake in what is a very profitable asset.

According to some analysts, a similar fate may occur this time round. This week SNC-Lavalin hired CIBC Capital Markets and RBC Capital Markets to assist with a potential sale of a portion (6.76 per cent) in Highway 407 ETR “to further create shareholder value.” That potential divestiture could be in the form of a “direct sale or another type of transaction.”

SNC was one of the original investors in the toll highway when it was sold by the Ontario government to the private sector in 1999, part of a plan to balance the province’s books before an election.

One analyst, who requested anonymity, called the monetization development “a surprise. We don’t really fully understand why the company decided to do it. It could be posturing, (a case of ) clearing up the valuation without actually selling it.”

The analyst suggested the company’s “frustration” with its share price could be a compelling reason for the proposed divestiture.

“They mention it a lot and (I think) are sick of being undervalued in the market,” noted the analyst, who argues that a better approach would be to “focus on putting up a strong quarter and not worry too much about the share price.”

The reality is that the company is in the penalty box for some past transgressions. In its recently released second-quarter financials, for instance, it paid $88 million to settle two class-action lawsuits.

The other reality is that Highway 407 is privately owned and hence difficult to value.

But it’s a gift that keeps on giving. In the second quarter of 2018, revenues, earnings before interest, taxes, depreciation and amortization (EBITDA), and dividends were all up by around nine per cent from a year earlier. And it’s been that way for almost two decades since the government sold the highway for a mere $3.107 billion – about double the construction cost.

Indeed, the said analyst is confused about the need to sell a well-performing asset. “It has a high return on invested capital. If they take that capital (from the monetization) they would have a difficult time allocating to a place that generated higher returns. To me it doesn’t make good sense from the perspective of running its business to sell it.”

But SNC Lavalin — which originally had a 26.92-percent stake in the toll road — wants to press ahead. It has made two similar public statements previously. Indeed, because of a part sale in 2002, SNC has already got its original investment back.

In 2010, it formed a new public company, TransAxio Highway Corp., to sell 10 per cent of the highway. But the stake wasn’t coming from SNC’s own interest. Instead major shareholder Madridbased Cintra SA (which was under some pressure to reduce debt levels) was set to be the seller. And SNC-Lavalin, which enjoyed rights of first refusal, opted to buy the stake, invite the public in as shareholders, and take a margin on the way through. But the plan, on which CIBC World Markets was the lead underwriter, didn’t work out.

Five years later, SNCLavalin was at it again. “We are continuing to move forward in a deliberate manner on the sale of Highway 407 and have hired financial advisers to assist with the process,” it said when releasing its first-quarter financials in 2015. Back then, BMO Capital Markets and HSBC Securities were given that assignment.

Maybe the third time around, SNC will find a buyer who is prepared to pay up what the seller wants.