Complex deal a roadblock to SNC sale of toll road
If SNC finds a buyer, Spain’s Cintra can snatch it away
TORONTO • SNC-Lavalin Group Inc.’ s plan to sell its 17 per cent stake in an Ontario toll route is subject to an “unbelievably complicated” partnership contract that would allow the Montreal engineering company’s partner the right to take a sufficiently rich bid away from SNC — and sell out its own stake instead.
Global engineering giants including Worley Parsons of Australia and Actividades de Construccion y Servicios S.A. (ACS) have been exploring takeover bids for the beleaguered SNC-Lavalin, as revealed this week by the Financial Post. SNC’s share in the 108-kilometre Highway 407 toll route through Toronto remains the company’s most valuable asset — estimated to be worth more than a quarter of the company’s $7-billion market capitalization.
SNC-Lavalin said recently it is “continuing to move forward in a deliberate manner on the sale of High- way 407 and has hired financial advisers to assist with the process.”
It has retained BMO Capital Markets and HSBC Securities for the sale, which could fetch up to $2 billion, part of the company’s “strategy of monetizing mature assets” — a move that saw it sell its stake in AltaLink to Berkshire Hathaway Inc. in May 2014 for $3.2 billion.
But the sale of Highway 407 — built in the late 1990s and early 2000s by the Ontario government and sold to a private consortium on the eve of a provincial election with very generous operating conditions — is more complicated than selling a power transmission firm.
“It’s a very complex set of rights, but the sale will get done,” said one source familiar with the agreement.
The reason is the workings of the 407 Shareholders Agreement, a 150-plus-page agreement drawn up in 1999 between Spain’s Ferrovial S.A. — now called Cintra Infraestruc- turas — and SNC Lavalin. That agreement has never seen the light of day.
“The 407 shareholders agreement is confidential. It’s unbelievably complicated,” said the source, adding the agreement deals with priority rights, piggyback rights and rights of first refusal for a highway that’s become a global crown jewel of infrastructure investing. The reason for that is its ability to raise tolls: The highway runs across the top of Toronto and generates a steady stream of income, with dividends jumping last year to 94.3 cents per share from 87.8 cents in 2013 and 77.4 cents in 2012. SNC-Lavalin has already recouped its entire original investment through an earlier sale of some of its equity.
Spain’s Cintra currently owns a 43 per cent share in the 407 International Inc. consortium, while the Canada Pension Plan Investment Board holds 40 per cent.
In the agreement, Cintra benefits from what is known as “a priority right of sale,” while SNC Lavalin has “a priority right of purchase.” But those rights exist only until the two owners attain an equal voting interest in 407.
That means if a shareholder, such as SNC-Lavalin, is selling, the Spanish group has a right to sell in priority. “So if SNC finds a buyer willing to pay a big price the Spaniards can step in and say, ‘We’ll take that (offer for ourselves)’ and will substitute themselves,” said the source with knowledge of the agreement. “That what’s making it so hard to entice bidders.”
SNC-Lavalin declined to confirm the structure of the arrangement “as agreements with our partners are subject to confidentiality,” spokesman Louis-Antoine Paquin said in an email.
A sale would be easier if somehow SNC-Lavalin could get Cintra to support a deal ahead of time. “Your first reaction is to go to Madrid and see (Cintra),” noted one source. But Cintra may well decide that waiting for SNC to lure in offers with the option to take it away is, to put it in highway terms, an even more lucrative route.
The 407 shareholders deal is confidential. It’s unbelievably complicated