AtkinsRéalis Group Inc to sell stake in Toronto’s highway 407 toll road

Canadian engineering giant AtkinsRéalis Group Inc. is aiming to sell its stake in Toronto’s Highway 407 ETR toll road within three years as it pushes on with a strategic revamp it says has re-energized the business.

The Montreal-based company, previously known as SNC-Lavalin, intends to unload its 6.76 per cent position by the end of 2027, chief executive Ian Edwards told analysts and investors gathered Thursday in Toronto. The stake is worth an estimated $1.7-billion.

“We’ve transformed this company. We’ve simplified it,” Mr. Edwards said. “But we’re not taking a view that the job is done. And as we further optimize to expand our margins, we will take any measures we need to to get there… We are moving towards divesting the 407.”

Mr. Edwards, a civil engineer now in his fifth year as CEO, is trying to re-establish the corporation as a go-to partner for governments and other customers as it claws its way back from years of crisis. He has reshaped the company by selling oil and gas assets, and pivoting toward a new business model centred on engineering consulting work and nuclear energy technology, while riskier fixed-price construction contracts that have sucked cash for years are wound down.

The engineering firm said last year it is exploring its options for selling assets it doesn’t consider central to its business, including Linxon, a joint venture with Hitachi Energy that specializes in electrical AC substation projects. It also signalled a desire to sell the Highway 407 stake. Now the company has put a specific timeline on that divestiture.

Owning a stake in the 108-km toll road, which stretches from Burlington to Pickering, has been super valuable for AtkinsRéalis over the years. Proceeds from its dividend payouts has provided a reliable stream of cash to counter the cost of wrapping up construction projects and boosted the company’s credit profile.

But the importance of the stake is diminishing over time as the engineering firm generates more stable profits and consistent positive free cash flows, according to AtkinsRéalis chief financial officer Jeff Bell. He says there’s an opportunity to redeploy the proceeds for other uses, including bulking up engineering capability through acquisitions or returning money to shareholders.

“Selling down the 407 by 2027 means material M&A” and the company’s focus on the United States will likely lead to a deal there, National Bank analyst Maxim Sytchev said in a research note on Thursday. But he warned the company has to be careful that it doesn’t buy into a hot geography at peak multiple momentum, and repeat what happened with the purchase of Kentz before the oil market cratered.

Despite work-from-home trends, traffic volumes on the 407 have largely recovered following the Covid-19 pandemic, even with a pricing increase. Trips during the first quarter of this year climbed by 6 per cent compared to the same period last year while vehicle kilometres travelled increased by 7 per cent, according to results released in April.

“We think all the foundational pieces that you would need as a potential buyer of that asset exist today,” Mr. Bell said. “So we’ll be getting after that and we’ll see how long it takes.”

The Ontario government leased highway 407 to a conglomerate of private companies in 1999, which operate it under a 99-year concession agreement that now has 74 years remaining. The owners are Canada Pension Plan Investment Board with a 50.01 per cent stake, Cintra Global, a subsidiary of Spanish multinational Ferrovial SA, with 43.23 per cent, and AtkinsRéalis.

The sale timeline came Thursday as AtkinsRéalis also unveiled new financial targets for 2025 to 2027. The company is aiming to grow revenue in its engineering services business by at least 8 per cent for the three-year period and deliver at least $1.8-billion in annual revenue in its nuclear business by 2027.

AtkinsRéalis has grown its headcount over the last two years by 8,000 people net of attrition and now employs 38,000 workers. Its backlog is $15.6-billion.