SNC-Lavalin owns a stake in Highway 407 in Ontario.
Private investors trump public shareholders when it comes to the plum assets going on the market.
Power lines in Alberta, shopping malls in Toronto and even satellites in space are selling at prices that drive home just how much more big institutions with long-term views are willing to pay for assets than public markets.
Expect to see more sales. For governments such as Ontario that are short on cash, the prices that pension funds and their ilk are willing to pay are going to be very tantalizing, luring more assets onto the market. And public companies whose shareholders are not giving them commensurate credit for the infrastructure assets they own are going to meet up with buyers to take advantage of the mismatch.
The $3.2-billion sale of Alberta power distributor AltaLink to Warren Buffett's power group last week was far in excess of what most anyone thought the power distributor would fetch. And late last year, the sale of the Bayview Village mall in Toronto to British Columbia's provincial pension plan manager set a new high-water mark for real estate valuations. On the final frontier, the Ontario Teachers' Pension Plan is said to be getting ready to pay $7-billion (U.S.) to purchase all of Telesat Holdings Inc. to harness the cash flow from its fleet of satellites.
In all these cases, only a big institution thinking in terms of decades can pay up. Mr. Buffett's Berkshire Hathaway is technically public, but it has a lot more in common with pension funds. It does not require funding from public markets, and its time horizon is very long. An initial public offering of AltaLink got a look, but the valuations were not there.
What sticks out in the case of AltaLink is the fact that Berkshire Hathaway outbid Canada's big pension plans, which were circling the auction run by AltaLink seller SNC-Lavalin Group Inc. Canada's largest pension plans have been willing to pay more than almost anyone for prize assets. The AltaLink transaction, if one believes in Mr. Buffett's acumen, is a ratification of what the likes of Canada Pension Plan Investment Board and Teachers have been willing to pay for assets that they deem indispensable and hard-to-replace infrastructure that will provide cash flow for decades to come.
There are many implications from the huge prices. The first is that governments in need of cash will be very tempted to offer up more assets. Ontario's Hydro One power distribution system seems a prime candidate. The governing Liberals are looking at asset sales, and the rival Progressive Conservatives will be looking to do the same should they prevail in the coming provincial election. Toronto politicians in the mayoral race have mused about selling the local city-owned distribution system.
The second is that public markets are likely to remain second fiddle for some time. Just as an IPO of AltaLink could not compete with a private sale, any other infrastructure and real estate assets that come on the market are likely to go into private hands. An IPO of Telesat has been mooted, but a private sale now appears more likely. And when SNC goes ahead with the sale of its stake in the 407 toll highway across the Toronto region, pension funds are sure to be the lead bidders.
It's not clear when public markets can get back in the game. Investors spooked by the possibility that interest rates may be headed up have stopped driving up stocks of companies in the public markets in sectors such as real estate and power transmission.
Real estate investment trusts, for example, have been sidelined by a selloff in their stocks and cannot compete with private buyers. Broadly, valuations in commercial real estate have basically flat-lined for the past year. Meantime, REITs are trading below their highs even after a rally in 2014.
The result is stark. Thus far in 2014, there has been $1.2-billion (Canadian) of mergers and acquisitions by Canadian REITs, a huge drop from the $10.8-billion that was announced in the same period in 2013.
Public investors are just not willing to look 10 or 20 years down the road. They are more than willing to be sellers at these prices, but they are too skeptical to buy. Until that changes, or pension funds are proven wrong in their assumptions about how well these assets will perform, the big institutions will dominate when long-lived assets come on the market.