SNC-Lavalin Group Inc. (SNC) is poised to unload its stake in a Canadian toll road, a sale that would raise as much as C$3 billion ($2.8 billion) as the company returns to its roots in construction and engineering.
Chief Executive Officer Robert Card has said SNC is taking a harder look at its minority stake in 407 International Inc., the operator of a toll road in the Toronto area.
“I expect them to sell their 407 stake this year,” said Denis Durand, a senior partner at Montreal-based Jarislowsky Fraser Ltd., SNC’s second-largest shareholder with a 10 percent stake. SNC’s strategy of investing in new infrastructure projects at the expense of more mature assets that offer less growth makes a sale of 407 International inevitable, Durand said in a telephone interview.
Card is reshaping Canada’s biggest engineering and construction company after a corruption scandal under the previous CEO. Investors including activist fund West Face Capital Inc. have been advocating for the sale of the company’s infrastructure concession assets, such as 407 International, to boost shareholder value.
SNC agreed to sell its AltaLink power-transmission unit to Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) for C$3.2 billion in May. SNC then bought oil services group Kentz Corp. (KENZ) in June for $1.97 billion. The transactions increased SNC’s resolve to unlock 407 International’s value, analysts and investors said.
Card, who has been CEO since October 2012, said last month that while the company planned to decide on its 407 International stake in the “mid-term -- one to three years,” the AltaLink and Kentz transactions have brought urgency to the process.
“Given the success of these two transactions, that will more likely be closer to the front end than the back end of that timeline,” Card said about 407 International in a June 23 interview.
Lilly Nguyen, a spokeswoman for SNC in Montreal, declined to comment yesterday on what the company plans to do with its 407 stake.
SNC is scheduled to report second-quarter results Aug. 8 before the market opens. Card may discuss plans for the toll-road stake when he hosts a conference call with analysts that day, Durand said.
SNC shares fell 0.8 percent to C$58 at 10:04 a.m. in Toronto.
407 International acquired a 99-year concession in 1999 to operate the 108-kilometer (67-mile) bypass around Toronto, Canada’s biggest city. The company is building an eastern expansion of the highway that will probably open to traffic by the end of 2015.
SNC spent C$175 million in 1999 for an equity stake of about 23 percent in 407 International and sold part of its holding in 2002 for C$178.2 million.
SNC now owns about 17 percent of 407 International, compared with 43 percent for Spain’s Ferrovial SA and 40 percent for Canada Pension Plan Investment Board.
Canada Pension and other pension plans would probably jump at the chance to buy the stake from SNC, said Durand and analysts such as Canaccord Genuity’s Yuri Lynk.
“There are large strategic buyers out there,” Lynk said in a telephone interview from Montreal. “They could sell 407 International tomorrow if they weren’t that price sensitive.”
Andre Bourbonnais, Canada Pension senior vice president of private investment, said the country’s largest pension fund manager has been happy with its investment in 407 International and it fits well with its long-term investment horizon.
“We would be interested in considering the purchase of any additional interest that became available, through the right of first refusal provisions that are available to existing investors or otherwise,” he said in an e-mail.
Lynk puts the pretax value of the toll-road asset at C$15 for each SNC share, or C$2.3 billion. After tax, SNC may receive C$12 a share, or C$1.8 billion, he said.
Maxim Sytchev, an analyst with Dundee Securities, is even more bullish. He estimates the toll road holding is worth C$18.99 an SNC share before tax, translating into a total value of about C$2.9 billion.
Sytchev said he believes 407 International is being undervalued in the same way AltaLink was before it was sold. This time, investors are anchoring the valuation of 407 International to a 2010 transaction in which Canada Pension increased its stake in the toll road that valued it at about $10 a share.
Card will have no problem finding projects on which to redeploy cash if he sells the 407 International stake, said Durand at Jarislowsky Fraser.
SNC leads one of three groups that the Canadian government this month invited to bid on the construction of a new bridge over the St. Lawrence River between Montreal and its South Shore suburbs. The crossing, which will replace the Champlain Bridge, may cost as much as C$5 billion, the government has said.
SNC had C$1.06 billion of cash and cash equivalents as of the end of March -- an amount that will swell once the company closes the sale of AltaLink to Berkshire Hathaway’s energy unit, probably in the fourth quarter. The acquisition of Kentz is scheduled to close about three months earlier.
In the meantime, SNC is “in no rush” to sell the toll-road stake, said Canaccord Genuity’s Lynk. “They will run a complete process and try to surface as much value as possible. There aren’t a lot of assets of that quality available in North America.”
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