SNC-Lavalin Sells Highway Stake to OMERS for $2.43 Billion
(Bloomberg) -- Embattled Canadian engineering firm SNC-Lavalin Group Inc. agreed to sell a 10 percent stake in a Toronto-area toll highway for as much as C$3.25 billion ($2.43 billion), stepping up efforts to bolster its balance sheet after two profit warnings and an ongoing political controversy battered its shares.
The sale to OMERS Infrastructure pension fund will reduce SNC’s stake in 407 International Inc. to 6.8 percent from 17 percent, the Montreal-based company said in a statement Friday. Shares fell as much as 2.4 percent in Toronto after the sale raised less than some analysts expected.
SNC’s stock has lost almost a third of its value since late January, when the company posted two profit warnings on troubles in Chile and Saudi Arabia, while becoming the center of a political crisis that engulfed Canadian Prime Minister Justin Trudeau.
SNC had long been mulling the sale, though the company unloaded a bigger stake than planned. Chief Executive Officer Neil Bruce had previously said he was contemplating cutting the stake to 10 percent. Under the deal, C$3 billion is payable at closing and C$250 million is payable over 10 years, subject to meeting certain financial thresholds. The deal values the highway -- the world’s first electronic toll-road -- at about C$30 billion.
“This is a truly unique and exceptional asset that we believe has been undervalued by the market for many years,” Bruce said in a statement.
As part of the transaction, which is expected to be completed in two months, SNC said it also renegotiated the terms of a C$1 billion loan with Caisse de depot et placement du Quebec, the province’s pension fund and its largest shareholder. The company may also use some of the proceeds to buy back stock.
The sale did little for the shares, which fell 2 percent to C$33.79 at 10:25 a.m. in Toronto. SNC has dropped by almost half since June. The toll-road sale at C$27 a share was a dollar short of estimates from Canaccord Genuity.
“The market is a bit disappointed that it wasn’t a price for the assets that was better than expectations,’’ Maxim Sytchev, an analyst at National Bank Financial, told BNN Bloomberg Television. “It’s front-page news every day for the past two months - that clearly doesn’t help in terms of the sentiment and the story.’’
While the deal bolsters the company’s liquidity, it’s unlikely to alter its credit rating because it had already been assumed that a significant portion of the proceeds will be used to repay debt, S&P Global said in a Feb. 12 statement, before it cut the firm by one level to its lowest investment grade.
Still, the sale should help protect the rating, which matters when bidding for some projects, Chris Murray, an AltaCorp analyst, said in a telephone interview.
“It’s a good transaction, it appears to be a good valuation for the asset,” he said. “The timing is probably helpful because of the liquidity needs right now.”
SNC has two bonds maturing this year, including C$150 million due in June and a C$350 million bond maturing in July, according to data compiled by Bloomberg.
SNC Lavalin’s C$300 million of 2.689 percent bonds due 2020 are quoted to yield 143 basis points over the government curve, or around 21 basis points less than the spread Thursday, according to Bloomberg Valuation bid prices. The gap rose to as high as 192 basis points on Feb. 13, when it announced its second profit warning in less than two months.
The Cintra Global unit of Ferrovial SA of Spain holds 43.2 percent of highway 407, and indirectly owned subsidiaries of Canada Pension Plan Investment Board own 40 percent. OMERS is the investment arm of the defined benefit pension plan for municipal employees in the province Ontario.
SNC has been at the center of a conflict that has pummeled Prime Minister Trudeau’s government for the past two months.
The country’s former attorney general, Jody Wilson-Raybould, alleged she was pressured by Trudeau, some of his aides and others within government, to help the construction firm avoid a trial over charges of fraud and bribery in Libya. Wilson-Raybould says she was urged to direct prosecutors to issue a deferred prosecution agreement for SNC instead and negotiate a fine. That would allow the company to avoid a ban on receiving federal contracts.
Trudeau ejected Wilson-Raybould and her ally Jane Philpott, another former minister, from the Liberal Party caucus this week in a bid to bring an end to the drama. Liberal lawmakers have increasingly viewed her statements as political friendly fire.
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