With the talks of the Canada Pension Plan Investment Board (CPPIB) bidding on the company Intoll for $3.2 billion, it got me curious to do more research on the deal. InToll owns 30% of the Toronto toll highway 407 and 25% of a toll highway Westlink M7 in Sydney Australia. The CPPIB interest in the company was based on their share of the ownership of the 407.
As I have family in Toronto, I tend to visit often and have traveled along the 407 quite a number of times, especially to and from Pearson Airport. The 407 is a unique toll highway in that it’s 100% automated by electronic sensors/transponders and video cameras. In other words, there’s no stopping required to pay for access like traditional toll highways. They electronically track your travel at the access/exit points, and send you a bill at the end of the month.
While driving on the 407, often times I think about the amount of revenue the toll highway must generate if they are charging by the kilometer. What are these charges? They charge per kilometer, a monthly transponder fee, and a video fee if the transponder isnt’ detected or not used. These fees can also vary depending on the vehicle class. For light vehicles, peak time travel varies between $0.201 and $0.2135 per km, add on a transponder fee of $2.50 per month, and a toll charge of $0.40 per trip. Doesn’t sound like a lot, but to put it in perspective, over 170,000,000 KM’s were travelled in 2009, with over 900,000 transponders in circulation. All of that with 2010 growing at an even greater pace.
Out of curiosity, I did some searching for revenue numbers and found that they had some presentations on their website. In 2009, they had a little over $500,000,000 in revenues. Sounds impressive, but it surely must be expensive running and maintaining a highway. I mean, they have to pay for salaries, highway maintenance, a portion of police coverage, snow clearing and unreadable vehicles, let alone capital costs. From the presentation, their earnings after expenses, but before interest, taxes and deprecation/amortization (EBITDA) in 2009 was around $400,000,000 (not counting capital costs). Which makes their annual operating expenses around the $100,000,000 mark.
Knowing the earnings, lets look into valuation. I’ve read that the $3.2 B bid was based on 80% highway 407 and 20% Westlink M7 highway, which means CPP is willing to pay $2.56B for 30% ownership of the 407. This brings the total valuation of the highway to $8.53B. For this amount, they would be getting an infrastructure asset that returns a EBITDA of $400M which means CPP is paying approximately 21 times EBITDA (Price/EBITDA).
With expansion and capital projects ongoing, investing in the 407 may be a growth investment that cash flows well, but at 21 times earnings, it is quite the premium. However, there are high valued assets at play here, which means highway 407 most likely comes with a high book value. What do you think? Do you think CPPIB is paying too much for the highway?