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Apr 8, 2019

SNC's 10-fold gain on 407 shows value of toll roads

SNC-Lavalin had to sell 407 stake despite it being a valuable asset: Money manager


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Toll-roads are good businesses.

That’s the key takeaway from the sale Friday by SNC-Lavalin Group Inc (SNC.TO). of a portion of its stake in 407 International Inc., the 108-kilometer (67-mile) highway that snakes its way across the north end of Toronto and nearby cities.

The Montreal-based engineering firm sold a 10 percent stake in the 407 to the OMERS pension fund for $3 billion in cash, valuing the toll-road operator at about $30 billion. That’s roughly 10 times more, which is known as a 10-bagger, than the $3.1 billion that SNC and its partners paid the Ontario government for the concession to expand and operate the world’s first electronic toll-road in 1999.

“This is a truly unique and exceptional asset that we believe has been undervalued by the market for many years,” SNC Chief Executive Officer Neil Bruce said in a statement announcing the sale. “Through this transaction, we are able to benefit from crystallizing some of this value, while retaining an interest in a successful Canadian infrastructure asset that we are proud to have helped build.”

SNC, whose stock has been battered by problems in Chile and charges that it paid bribes to win contracts in Libya years ago, will keep 7 per cent of the 407 road after the sale.

Other winners from the surge in value of the toll-road include the Canada Pension Plan Investment Board, which runs money for the country’s national pension plan. The fund holds a 40 per cent stake in 407. The largest shareholder is a unit of Spanish builder Ferrovial SA, run by billionaire chairman Rafael del Pino y Calvo-Sotelo. Madrid-based Ferrovial controls 43 per cent. The 407’s other partners have a right to top the price of the OMERS purchase.

Banco Santander sees it as positive news for Ferrovial as the price of the transaction implies a valuation that is 13 percent higher than Spain’s largest bank estimates in Ferrovial’s books, according to a note sent to investors Friday.

The 407 allows drivers to avoid sections of Highway 401, one of North America’s busiest highways. A 20-kilometer trip during morning rush hour from 7 am to 9:30 a.m. costs about $10.50 with a transponder, an electronic device that measures the trip, and $14.75 without.