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?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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mode3sour
11 years ago

“but you can drive for free if your license is from any other province.”

Hah that’s what I’ve suspected and I’ve never got a bill. Sweet

Ed Rempel
11 years ago

Hi FT,

Interesting article.

The valuation is a bit high at 21 times and I agree with Robert – infrastructure is one of the current fads.

My understanding of the 407 is that the highway reverts to the province after 99 years. It is a lease – not ownership by the 407.

The Tories made $3 billion or so by extending the lease from 30 years to 99.

The 407 built the highway at their expense and the province gets it for free after 99 years. So, as a province, we get a free highway eventually. However, it is actually paid for by the users – not the taxpayers.

The fees are high. They originally had lower rates for off-peak, but they are almost the same as peak rates now. I avoid it, except for periods of heavy traffic.

I live near it. Watching them build it was cool. They use some sort of special cement that is much thicker than normal roads. You can hear it when you drive on it. It is supposed to be much lower maintenance.

The high penalties for short use are if you don’t have a transponder and they can’t trace your route. They charge extra for having to read your license and match up your entrance and exit. If they can’t match them, then they assume you went all the way to the end of the highway. You can get this fixed by calling them.

They pay for license information from provinces, which is too expensive except for provinces with high volumes of drivers on the highway. My understanding is that they will nail you for no transponder if you live in Ontario or Quebec, but you can drive for free if your license is from any other province.

Ed

Glenn Cooke
11 years ago

It’s a highway running through Toronto. If ever there was an investment you could bet on growing in value, that’d be it. The 401 isn’t getting any less congested, and the 407 is the only reasonable alternative.

But that reminds me of my 407 story :). A bunch of us normally take the 407 when we head north to go ATV’ing. One of the guys was telling me that the cameras on the highway couldn’t read the license plate on his trailer. They actually snapped a picture of the license plate on his ATV on the trailer – and billed him that way.

Arcaneind
11 years ago

The history of the 407ETR are rather shameful and I agree with the earlier posts that it should never been sold in the first place.

Since then, I do think that the 407 is a much better highway than it used to be, especially west of Toronto. But only drive it in my company vehicle because I detest getting a bill from them!

BankVibe
11 years ago

Very interesting article. Ive never thought of a highway as a sort of ‘investment vehicle’. You are basically investing into highway traffic. The more cars traveling over the highway the more you make. I guess traffic will only increase as time goes by, but still worth it even if it was 21 times earnings.

Tyler
11 years ago

…And I find the valuation of ~$8.5B to be fair. The GTA’s traffic volumes aren’t going to decrease any time soon.

Tyler
11 years ago

Although I don’t agree with the province selling the highway back in the 1990’s, let’s not forget that the current owners of Highway 407 have put substantial investments into the highway since then. When it first opened, the highway didn’t even extend down to Burlington as it does now. They’ve added numerous lanes and the highway is a dream to drive on. At peak hours of the day, it’s more than worth the $5-10 I pay to avoid the hellish 401.

Laura
11 years ago

Wow… the tickets on the 407 sound expensive! I suppose when you’re not paying it straight out of pocket, the bill coming at the end of the month seems much smaller.

Thicken My Wallet
11 years ago

Great research. It may not be an unreasonable valuation considering the Harris government not only sold the highway for under fair market value but basically gave away the sovereignty of the provincial government by allowing a private business the power not to renew driver’s licenses if the bills are not paid on time (this provision has survived a Court challenge). I would pay a premium if someone told me that I was getting an asset with powers of government thrown in too.

Ben
11 years ago

The 407 is a relatively young highway, and the capital expenses would be fairly low currently. As it ages, and inevitably becomes busier, the repair bills will start to escalate. I’m sure someone smarter than me is taking that into account though.