By NICOLAS VAN PRAET
Saturday, April 6, 2019
MONTREAL -- SNC-Lavalin Group Inc. has clinched a deal to sell a minority stake in the Toronto area's Highway 407 toll road for as much as $3.25billion, a cash infusion that could relieve financial pressure on the engineering company as it deals with a cocktail of problems that threaten its future.
The company's stock price fell 1.6 per cent in Toronto Friday to close at $33.92, reflecting the possibility that some investors thought SNCLavalin could fetch more for the asset.
"I'm a bit surprised" by the market reaction, said Chris Murray, an analyst at AltaCorp Capital in Toronto. "There may have been some expectations that there could have been a significantly higher transaction value."
Montreal-based SNC-Lavalin said it agreed to sell 10 per cent of the shares in the profitable highway to the Ontario Municipal Employees Retirement System (OMERS), with $3-billion payable when the deal closes and $250-million payable over 10 years under the condition that certain financial thresholds linked to the highway's performance are met. OMERS, which has assets worth $97-billion, manages the pensions of about half a million municipal employees in Ontario.
SNC is selling a bigger portion of the 407 than the roughly 7 per cent originally planned, underscoring the balance-sheet stress that forced the engineering firm to slash its dividend by about 65 per cent earlier this year. SNCLavalin's stake would be reduced to about 6.8 per cent after the transaction closes from 16.8 per cent. A final agreement is expected to be concluded within two months, SNC said.
The company is being battered by several challenges at once, including trouble with a contract in Chile that wiped out profitability at its mining unit in the fourth quarter and reputational damage from continuing corruption charges.
The sale could bolster SNCLavalin chief executive Neil Bruce's effort to win a higher market value for the company by cementing a price on one of its key assets. But it will also deprive the builder of a steady revenue stream as its share of the highway is stripped down.
"It is a big cheque" coming, SNC treasurer Stéphanie Vaillancourt said in an interview. "Selling 10 per cent was the right thing to do for us to maximize value for shareholders."
Much of SNC-Lavalin's market value has been underpinned by its stake in the 407 toll highway, which stretches from Burlington to Pickering and gives paying motorists a way to bypass the area's more congested arteries. It is a money machine for its owners, generating earnings before interest and taxes to SNC of $154.3-million in 2018, a nearly 9-per-cent increase from the year before.
Spain's Ferrovial SA holds 43.2 per cent of Highway 407, and indirectly owned subsidiaries of the Canada Pension Plan Investment Board (CPPIB) own 40 per cent.
Both shareholders have a right to match the OMERS offer for the next 30 days.
Ferrovial is not expected to exercise that right because doing so would give it control of the 407 asset, triggering accounting provisions under which it would have to apply the highway's debt on its balance sheet, according to a person familiar with Ferrovial.
The person was granted anonymity by The Globe and Mail because he was not authorized by his employer to discuss the matter.
CPPIB is "more likely" than Ferrovial to match the OMERS offer, Ms. Vaillancourt said. CPPIB declined to comment.
Assuming a tax rate of 13 per cent, SNC-Lavalin could net proceeds of $2.8-billion from the sale, Desjardins analyst Benoit Poirier said. He said the deal values SNC-Lavalin's total current stake at about $27 a share, below average analyst estimates of $28.
There were some fair value assessments for the stake that topped $30.
"Bottom line, while the valuation for SNC's stake in Highway 407 is below expectations, we believe the net proceeds should help SNC," Mr. Poirier said in a research note.
The company said it intends to use the money to pay back $600million on a $1-billion loan from its largest investor, the Caisse de dépôt et placement du Québec. It will also carry out previous plans to reduce debt and weigh other options such as buying back shares.
SNC-Lavalin and the Caisse have also renegotiated their credit agreement on the loan, with one main change being a reduction in the interest rate to about 3 per cent from 6 per cent. That should help protect SNC's investment-grade credit rating, Mr. Poirier said.
There are no changes to the key non-financial terms in the Caisse loan agreement, filings show. Under the terms of the original loan pact in 2017, SNC agreed to maintain its headquarters in Quebec for seven years and keep a "significant portion" of its management team, including the CEO, residing in Quebec.
The requirement to maintain the head office in Montreal for seven years still exists, SNC spokesperson Daniela Pizzuto said on Friday. It would continue to exist even if the loan was repaid because it is also tied to a private placement made by the Caisse in 2017, she said.
SNC faces charges of bribery and fraud related to business dealings in Libya from 2001 to 2011. Federal prosecutors have so far declined to invite the company to negotiate a settlement on those charges in order to avoid a lengthy trial. That decision set off a political row in Ottawa that has cost Prime Minister Justin Trudeau two cabinet ministers, a top aide as well as a senior bureaucrat.