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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All I know is that I am too cheap to ever use the 407. Last year I accidentally got on and it cost me $30.

Then for a while they kept calling me to pay someone else’s bill. I’m not sure how many times I had to call them to tell them they had the wrong number before they reprogrammed their automated calling machine.

Every time I hear about the 407 it reminds me that we were all supposed to pay the tolls until it got paid off, then it was supposed to be free. It wasn’t supposed to be a giant ATM for the pension funds or anyone else. The fact that everything is electronic and the bill just goes to your house probably helps people to dissociate the real cost of using this HWY. If you had to grab 20$ worth of change to go a few exits, you’d probably reconsider.

This reminds me of my 407 story: we don’t live in Toronto. One day when visiting friends, we accidently got onto the 407 – went one exit, got off, and found our way eventually to where we were going.

They sent us an enormous bill – we didn’t have a transponder, so they had to look up our license, etc. This ticked me off, so we overpaid the bill by $.17.

For years later, I would get a bill from them describing our credit. I figure I got our money’s worth in entertainment…

21 times earnings sounds very expensive, however the cash flow produced is tremendous. But at $400M/year and 30% ownership the pay back would be over 20 years. Not a great idea in my opinion.

Sorry, at $400M/year and only a 30% ownership the pay back would be over 20 years. Not a great idea in my opinion.

neat and simple analysis!

21x is a super high multiple for company with a 4-year compound annual growth rate of 8.8% (EBITDA of ~$420mn in 2009 & $300mn in 2005)

Further, capital expenditures could really add up. They’re taking a big risk. The problem, in my mind, is that “infrastructure” is the current fad among institutional managers. The CPPIB has more money floating around than they know where to profitably invest, so you get deals like this. I wouldn’t care, except that it’s MY pension money they’re messing with. Noone should be entrusted with such large sums of money.

Seems like their high tech automated billing isn’t so accurate

Being from NB, the 401 is a nightmare just about any time of the day and I can’t imagine why anyone would force themselves through that torture on a daily basis

I’m happy to pay whatever fee for avoid it so I always take the 407. I’ve never seen a bill

I find this a bit frustrating… The tax payer built the road at a cost of around $1.6billion. Sold it for 3.1Billion (http://www.cbc.ca/news/story/1999/04/14/407_4_13_99.html) for a profit of 1.5billion. Now we are paying 3.2 billion for a PARTIAL stake in the road… So the partial stake will have cost like 1.7billion after everything… We basically will have paid more than it cost to build the road in the first place and own less…

I agree with Rachelle, these roads are not supposed to be for profit.
In BC they’re building toll bridges to the fraser valley (surrey/langley) which will be tolled, and someone will be profiting from it despite tax money and public land having been used.

On a purely financial analysis, there is a premium to be paid for what is essentially a 0 risk GIC. Tolls & usage will only go up so it won’t take that long to pay it off, I’m sure the cost of use will go up faster than inflation. For someone like the CPP this is the perfect type of ATM.

Good research. Frugal, with you being so good at saving money, I’m surprised you take this highway at all. It’s really expensive and I’m too cheap to drive on it.

On another note, I have read on the motorcycle forums that a lot of people cover their plates and flip the bird at the camera.. ;)

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.

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.

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.

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.

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

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.

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!

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.

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.


“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