SNC-Lavalin eyes sale of slice of its Ontario toll road stake
The head of SNC-Lavalin Group Inc. says the company is weighing the potential sale of part of Ontario’s 407 highway to demonstrate the real value of the toll road.
In reporting second-quarter results on Thursday, the Montreal-based engineering and construction firm also announced its interest in parting with 6.76 per cent of the Highway 407 ETR, the 108-kilometre toll road that runs across the Greater Toronto Area from Burlington to Pickering.
A sale of that size would reduce SNC’s ownership stake in the highway from around 16.76 per cent to approximately 10 per cent.
Neil Bruce, president and chief executive of SNC, said the reason behind putting a potion of the 407 in play was that the firm wanted to remain a strategic investor in the highway.
“To be clear, we believe that the 407 is currently undervalued,” Bruce added during a conference call on Thursday. “This is the only way to truly demonstrate the value.”
SNC said the potential divestiture could take the form of a direct sale or another type of transaction, noting in a release that it had tapped CIBC Capital Markets and RBC Capital Markets as financial advisers for any deal that would “further create shareholder value.”
“As we continue to make progress on delivering on our strategic objectives and continue to review our capital allocation strategy, we have determined that now is a good time to consider this transaction,” the release said.
“We believe that the value realized through this potential transaction will demonstrate and augment the valuation of our capital investments and will, concurrently, help the market to value SNC-Lavalin’s E&C (engineering and construction) business more accurately.”
Selling a portion of its stake in the highway could translate into big money for SNC. National Bank Financial’s Maxim Sytchev wrote in a note the implied value of the stake could be around $2.2 billion pre-tax.
SNC also said that it received $37.9 million in dividends from its 407 ownership stake for the second quarter alone.
“We welcome this decision, as we believe it will enable SNC to demonstrate the intrinsic value of this asset while maintaining a significant investment in it (10 per cent),” wrote Desjardins Securities’ Benoit Poirier in a note.
SNC said there is no guarantee the process will end with a sale and that the use of any proceeds will be made if and when a deal is done. The company is still in the early stages of a 407 sales process and expects a closing in its fourth quarter, according to Sylvain Girard, SNC’s chief financial officer.
If a transaction takes place, Girard said that the proceeds would go toward repaying a loan, executing on its deleveraging plans in the wake of SNC’s $3.6-billion acquisition of WS Atkins Plc and funding any potential legal settlements.
But after this, Girard added, the company could look at possible share buybacks or mergers and acquisitions.
“These choices will be heavily dependent on where our share price is at the time of a transaction, and if we feel that we are still undervalued,” he said.
The 407 ETR has been in corporate hands since 1999, when the Ontario government, in return for $3.1 billion, leased the toll highway to the private sector for 99 years.
There is also an easterly extension to the 407 under construction, with one section already built and operating. That extension is owned by the province.
But the bulk of the 407 is operated by a subsidiary of Ontariobased 407 International Inc. The Canada Pension Plan Investment Board has a 40-per-cent stake in the 407, and SNC the remainder.