New Chicago Skyway owners need long investing view

November 16, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s lucky that the Chicago Skyway’s new owners take a long-term investing view. Sellers Ferrovial and Macquarie paid $1.8 billion for the concession a decade ago – $1 billion more than the next-highest bid. Now three Canadian pension funds are buying the eight-mile stretch of toll road for $2.8 billion. Ferrovial and Macquarie are barely recouping their investment, and the buyers may face a similarly unrewarding journey.

The right to operate the Windy City’s artery for the next 89 years is costing the purchasers around 35 times an estimate of this year’s EBITDA. The nearby Indiana Toll Road went for 31 times EBITDA in March and a network of Australian highways fetched 27 times EBITDA last year, but that’s still a high price. A substantial toll increase set for 2017 probably helped persuade the Canadians to pay up.

Even so, for the sellers it’s a relief more than a triumph. Ferrovial and Macquarie put around $880 million of equity into the deal when they bought the Skyway in 2005, according to the Federal Highway Administration. A refinancing less than a year later allowed them to extract $370 million. It looks, though, as if they are going to see little if any profit on their 10-year investment.

Ferrovial said it would pocket around $269 million in selling its 55 percent stake. That suggests a $490 million valuation for all the equity. Combine that with the earlier distribution, and the sellers will altogether have reclaimed roughly what they originally put in.

Based on the headline all-inclusive price, the implication is that debt has mounted to north of $2.3 billion, partly thanks to currency-swap contracts which are now out of the money and therefore represent a liability. Covering that while sparing the sellers a big loss may have been a factor in where the price ended up.

The Ontario Teachers’ Pension Plan, the Canada Pension Plan Investment Board and the Ontario Municipal Employees Retirement System are each writing a $512 million check, so the debt-to-equity ratio of the concession will fall to less than one-to-one. That offers increased operational flexibility. But buying the Skyway at a sky-high price may mean the new owners, like the old, will need more than one decade to turn a profit.

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