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SNC-Lavalin Group Inc. on Friday announced a fresh spate of problems in its plan to sell a coveted 10-per cent stake in the 407 toll road, including a bill for tens of millions of dollars and litigation.
The Montreal-based engineering and construction firm said it terminated its agreement from April to sell a 10.01 per cent stake in the road to the Ontario Municipal Employees Retirement System for $3.25 billion. That will trigger payment of an $81.25 million break fee to OMERS — 2.5 per cent of the purchase price.
Instead, SNC-Lavalin said the Canada Pension Plan Investment Board, as a 40 per cent owner of the 407, had exercised its right to match the offer. But a subsidiary of Spanish infrastructure company Ferrovial SA known as Cintra, which controls 43.2 per cent of the road, said it also has a right to match the offer and filed a lawsuit in Ontario Superior Court seeking recognition of this right — which SNC-Lavalin disputes.
That two funds would step up to match the purchase offer underscores the contention by some investors and analysts that SNC-Lavalin did not obtain a high premium for the toll road, which has provided a reliable and growing stream of cash.
SNC has said the latest dispute arose after CPPIB exercised its right of first refusal, but Cintra also said it intended to exercise its right of first refusal to acquire up to 51.95 per cent of the 10.01 per cent stake .
However, SNC said that Cintra waived its “right of first refusal” in April 2002.
“Cintra claims that OMERS, one of Canada’s largest defined benefit pension plans, is a competitor of Cintra and does not fall within the waiver’s clear exception for financial investors such as pension funds,” SNC said.
A spokesperson for Cintra said he would not comment because of the pending litigation, but issued a statement that the 407 was a valuable asset and that “the price on offer from SNC Lavalin is attractive.”
The company, which is operating at the edge of its loan covenants, has said it will use proceeds from the sale to pay down debt and insisted that regardless of the litigation, the sale would close by late June.
Neil Bruce, chief executive of SNC-Lavalin, declined to comment.
SNC said that all parties have agreed to an expedited process with a hearing scheduled for June 21, and a ruling expected shortly thereafter. Once a decision is released, SNC will complete the sale and that Cintra and CPPIB have an agreement to adjust their ownership interest to comply with the court’s decision. SNC would still own 6.7 per cent of the road.
Benoit Poirer, an analyst with Desjardins, noted that depending on the timing of the court ruling, the funds may not be received until after the second quarter.
In an interview with Bloomberg News earlier this week, Mark Machin, president of the CPPIB declined to comment on the price of the 407 sale; but he said there are few opportunities to invest in infrastructure projects in Canada as everything “is priced to perfection.”
The 407 sale may prove to be an exception.
For SNC-Lavalin, the complication to the sale is adding more strain on a company whose stock has declined 42 per cent since January, and by 20 per cent since the start of May to $27 per share as of Friday afternoon.
“Unless somehow they can turnaround the stock and convince or show some solid results, I think management’s ability to remain in place is very questionable,” said Michael Willemse, an analyst with Taylor Asset Management and investor, adding his firm owns less than two per cent of the company.
But SNC-Lavalin’s largest shareholders, including Caisse du Depot et Placement du Quebec, have not publicly voiced such concerns.
Some analysts have said the company’s shares now have dropped so low that there’s bound to be upside.
“Stepping away now when shares are still at 2009 levels does not make much sense to us,” Maxim Sytchev, an analyst National Bank Financial wrote on Friday. The bank has a target price of $47 for the company.
The SNC stock closed virtually flat on the Toronto Stock Exchange at $26.74 per share, close to its 52-week low of $26.01.
Copyright Postmedia Network Inc., 2019