CPP Investments and OMERS Infrastructure Sell Skyway to Atlas Arteria

Chris Bourke and Amy Bainbridge of Bloomberg News report Australian firm defies top investor and buys Chicago Skyway stake from Canada pensions:

Atlas Arteria Ltd. agreed to buy a $2 billion stake in the Chicago Skyway toll road despite strong opposition from the Australian company’s biggest shareholder.

Canada Pension Plan Investment Board and OMERS Infrastructure sold their respective one-third stakes in the 12.5 kilometer (7.8 mile) road linking downtown Chicago to its south-eastern suburbs. The deal forms a venture with Ontario Teachers’ Pension Plan, which will retain a one-third interest, according to a statement Tuesday.

Chicago touted the sale as a win for the city, which will generate a tax payment “in the tens of millions of dollars,” Mayor Lori Lightfoot’s office said in a statement on Tuesday. “It proves that sophisticated global investors who can buy assets anywhere view Chicago as a great place to invest.” 

An equity raising will help fund the deal, for which details will be provided “in due course,” according to Atlas Arteria. 

The acquisition was announced despite a strongly-worded statement Monday from Atlas Arteria’s biggest shareholder IFM Investors, following confirmation of the talks. It said the deal could be potentially “dilutive to distributions” and that those concerns were shared by other major shareholders.

“We are disappointed with the decision by Atlas Arteria to proceed with the acquisition of Chicago Skyway,” an IFM spokesperson said via text message. “As a major shareholder, we are considering our options.”

IFM said that it could seek “an accelerated board transition by way of an EGM, to protect its interests as a shareholder of the company” if the deal went ahead.

The acquisition is subject to regulatory approvals including consent of the City of Chicago.

Bloomberg also reports that the $2.1 billion equity raise to fund this toll road deal comes at a time when Atlas Arteria has been maneuvering to fend off a takeover offer from Australian pension manager IFM Investors.

Reuters confirmed that there is strong opposition to this deal:

"It is clear that the company does not have the support of its major shareholders, IFM GIF (Global Infrastructure Fund) included, in relation to the pursuit of a large equity-funded acquisition, if that acquisition would be dilutive or otherwise destroy shareholder value," IFM Investors said in a letter addressed to Atlas Chair Debbie Goodin.
In Chicago, Robert Channick of the Chicago Tribune reports Australian tollway firm agrees to buy majority stake in Chicago Skyway for $2 billion:

Atlas Arteria, an Australian toll road company, has agreed to buy a 67% stake in the Chicago Skyway from two Canadian pension funds for $2 billion.

The deal, announced Tuesday, would give the publicly traded firm majority control of the 7.8-mile elevated toll road connecting the Dan Ryan Expressway to the Indiana Toll Road on Chicago’s South Side, pending approval from regulators and the city.

Canada Pension Plan Investment Board and OMERS Infrastructure, which each bought one-third stakes in the Skyway six years ago, agreed to the sale Monday. Atlas Arteria, which owns toll roads in France, Germany and Virginia, will partner with Ontario Teachers’ Pension Plan, which is retaining its one-third stake.

Built by the city in 1958, the six-lane Chicago Skyway features a steel bridge spanning the Calumet River, and a congestion-easing shortcut to Indiana and points east. The city operated the Skyway until 2005, when it leased operations to a private company under a 99-year agreement, marking the first privatization of an existing toll road in the U.S.

In 2016, the three Canadian pension funds bought Skyway Concession, the toll road’s private operator, for $2.8 billion.

Atlas Arteria, which owns the Dulles Greenway, a 14-mile toll road that connects Washington Dulles International Airport with Leesburg, Virginia, has come under fire from its largest shareholder for plans to buy a second toll road in the U.S.

IFM Investors, an Australian investment firm that owns a 20% stake in Atlas Arteria, has opposed the potential Skyway acquisition since becoming the company’s largest shareholder in June. In a letter sent Monday to Atlas Chair Debbie Goodin, IFM called the Skyway purchase “highly dilutive to distributions” and “value destructive,” urging the company to withdraw from the Chicago toll road acquisition process, and warning of an “accelerated board transition” if it moved forward.

The investment firm issued a statement Tuesday following the announcement that Atlas had agreed to purchase the Skyway over its objections.

“We are disappointed with the decision by Atlas Arteria to proceed with the acquisition of the Chicago Skyway, and as a major shareholder we are considering our options,” an IFM spokesperson said.

The Skyway was a money-loser for decades after it opened to traffic in 1959 and only began generating a profit in the early 1990s, when convenience trumped the cost for a growing number of motorists, and the toll road traffic dramatically increased. The city began exploring a Skyway sale to private operators in 2002 under then-Mayor Richard M. Daley, seeking money to pay off several hundred million dollars in outstanding bonds for the toll road.

In 2004, the city struck a groundbreaking $1.8 billion deal to lease the Skyway to a Spanish-Australian consortium for 99 years. As part of the agreement, the city set limits on graduated increases for the toll, which then cost $2 per trip. Skyway Concession has invested more than $130 million in improvements since taking over the toll road, including adding an electronic payment system.

The current rate for a car is $5.90 per trip, with average daily traffic at about 38,000 vehicles, according to Skyway Concession.

Lastly, Fran Spielman of the Chicago Sun-Times also reports Chicago Skyway sale generates windfall for beleaguered taxpayers, values toll road at $3B:

The Chicago Skyway is changing hands - for the second time in seven years - generating another transaction tax windfall for Chicago taxpayers.

Canadian pension plans that control the Skyway were looking to sell their one-third stakes for a handsome profit that valued the overall roadway at $4 billion, courtesy of drivers forking over tolls that have risen steadily since the city leased it to private operators in 2005.

The deal announced this week delivered, but not quite as much as the Canada Pension Plan Investment Board and OMERS Infrastructure, which invests for an Ontario municipal employees' pension, had hoped.

The combined two-thirds stake was sold to Atlas Arteria Ltd., an Australian toll road company, for $2.014 billion. That price values the entire 7.8-mile toll road at $3 billion, $1 billion short of the price the two investors had envisioned.

The firms and the Ontario Teachers' Pension Plan bought the lease in 2015 for $2.8 billion, $1 billion more than Chicago taxpayers got for the 99-year lease in 2004. The teachers' pension plan plans to keep its one-third stake in the Skyway.

The latest ownership change is expected to generate a roughly $25 million windfall for Chicago taxpayers, enough to cut in half Mayor Lori Lightfoot’s $42.7 million preelection property tax increase.

The mayor's office refused to say how the money would be used, only that the latest sale is a "win for the city, generating a tax payment in the tens of millions of dollars."

Former Mayor Richard M. Daley directed the original sale of the 99-year lease in what came to be known around City Hall as the Great Chicago sell-off.

The Skyway deal allowed operators to regularly increase tolls. The rate for cars on the 7.8-mile shortcut from Chicago to Indiana is now $5.90, while rates are much higher for vehicles with more than two axles. Drivers of cars paid $2 in 2004.

Dana Levenson, the former chief financial officer who engineered 2004 Skyway transaction, argued the latest sale shows how good a deal it really was.

"What are the implications for the value of the Skyway when it comes back to the city in 2104? Based on the equity value of $3 billion, it's gonna be north of $15 billion in value," Levenson said.

"If you do an inflation-adjusted calculation, that sale was superb."

Levenson pointed to what he called the "multiple of earnings" being paid on the most recent sale. It's "30 times earnings," compared to "an unheard of 50 times earnings" when Chicago unloaded the Skyway.

"That tells me that the Skyway was sold [by the city] for a very good price," he said.

Levenson said he has "no regrets whatsoever," pointing to the "tremendous" financial benefits to the city "that continue to be tremendous today."

"We paid off over $800 million in direct Skyway debt and city debt that we haven't had to pay interest on over the past 17 years. We took $500 million and we put it into a long-term reserve fund which, in and of itself, is making a return. That has actually been beneficial to Chicago's bond ratings," he said.

The Skyway generated $114.3 million in toll revenue in 2021, up from $84.9 million in 2020 during the height of the pandemic, according to the latest audit conducted for the city by accounting giant Deloitte & Touche.

Results of the latest audits were provided to the Chicago Sun-Times by attorney Clint Krislov. As director of IIT Chicago-Kent's Center for Open Government, Krislov has reviewed dozens of transactions to date and provides an annual analysis of each year's results.

Krislov strongly disagreed with Levenson's assessment.

"The idea that we'll get it back in 2104 is like saying that the [native Americans] are gonna get Manhattan back in the year 2500," Krislov said.

"The public-private partnerships have profited and continue to profit ... at the expense of the city. This shows that everybody who buys it profits from having bought it and then, sells it to a third-party who pays more for it. It was a bad deal then. It's a bad deal now."

Downtown Ald. Brendan Reilly (42nd) agreed the city "has a poor track record" on public asset sales.

"The political 'short term gain' realized by a large asset sale gives administrations more budgetary breathing room. But in exchange for that short-term gain, taxpayers typically lose badly over the course of these deals," Reilly wrote in an email to the Sun-Times.

"These assets appreciate in value, some faster than others. Chicago seems to make a habit of undervaluing its infrastructure."

Atlas Arteria's largest shareholder has opposed the purchase of a two-thirds stake in the Skyway. IFM Investors has said it is "considering our options" as a "major shareholder."

As you can read, the sale of Chicago Skyway to Atlas Arteria is generating diverging views in Chicago and Australia, with some supporting the sale and others not.

For their part, CPP Investments and OMERS Infrastructure are steering clear of all this controversy and put out a press release announcing the sale of their stakes in Skyway Concession Company to Atlas Arteria: 

Canada Pension Plan Investment Board (CPP Investments) and OMERS Infrastructure today announced they have agreed to terms with Atlas Arteria to sell each of their respective 33.33% indirect stakes in Skyway Concession Company LLC (“SCC”). SCC manages, operates and maintains the Chicago Skyway toll road under a 99-year concession agreement. CPP Investments and OMERS initially acquired their stakes in 2016. The acquisition represents an equity value of US$2.013 billion for the 66.67% majority interest.

Chicago Skyway is a 7.8-mile (12.5 kilometer) toll road that forms a critical link between downtown Chicago and its south-eastern suburbs. As an essential part of the Chicago road network, it delivers reliability and time savings for its users in one of the busiest corridors in the United States.

Scott Lawrence, Managing Director, Head of Infrastructure, CPP Investments, said:
“We would like to commend SCC’s management team and its partners and stakeholders who have enhanced Skyway, and positioned it to play a key role in keeping the flow of people and goods moving efficiently in the Chicago area. We are proud that our successful investment in SCC has delivered value to CPP’s contributors and beneficiaries.”

Gisele Everett, Senior Managing Director and Head of Americas, OMERS Infrastructure, said: “We have maintained OMERS stake in SCC for over five years, during which time the company has proved to be a strong and resilient asset that plays a key role in keeping Chicago connected and mobile. We would like to thank all the stakeholders we have worked with, and wish Skyway’s staff, management and new investors well as the company enters its next phase.”

The transaction is subject to customary conditions and regulatory approvals and is expected to complete in Q4 2022.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments) is a professional investment management organization that manages the Fund in the best interest of the 21 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. As per June 30, 2022, the Fund totalled C$523 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedInFacebook or Twitter.

About OMERS Infrastructure

OMERS Infrastructure manages investments globally in infrastructure on behalf of OMERS, a defined benefit pension plan for municipal employees in the Province of Ontario, Canada, and third-party investors through its Strategic Partnership Program. OMERS Infrastructure currently has approximately C$32 billion in assets under management and over 30 investments, principally in North America, Europe and Asia-Pacific and across sectors including energy, digital services, transportation and government-regulated services. OMERS Infrastructure has employees in Toronto, New York, the U.K., Continental Europe (including Amsterdam, NL), Asia and Australia. More information: www.omersinfrastructure.com.

OTPP confirmed to me they are keeping their one-third stake in Skyway and look forward to working with Atlas Arteria.

Let me share some quick thoughts on this sale.

First, when CPP Investments, OTPP and OMERS acquired Skyway back in 2016 for $2.8 billion, it made a lot of sense because it was a mature and significant toll road which was critical to the Chicago region.

Toll roads generate stable income and provide inflation-protected returns over the life of the concession to match long-dated liabilities of pension plans.

Skyway has been a solid asset for these large Canadian pension investment managers but CPP Investments and OMERS Infrastructure have been exploring a sale in recent months and were reportedly looking to sell the asset at more than $4 billion including debt.

CPP Investments told me they decided to sell and value the asset at $4.4 billion including debt (the articles above do not incorporate debt in their figures).

Why did they sell their stake? Because they want to realize on their investment and focus their attention on other assets. It's that simple.

OTPP is maintaining its stake in Skyway and will work with Atlas Arteria and Skyway Concession to keep creating value in this asset.

All three Canadian pension investment managers have made stable yields on this asset over the last six years and that includes the pandemic when toll revenues declined:

The Skyway generated $114.3 million in toll revenue in 2021, up from $84.9 million in 2020 during the height of the pandemic, according to the latest audit conducted for the city by accounting giant Deloitte & Touche.

Moreover, Skyway Concession has invested more than $130 million in improvements since taking over the toll road, including adding an electronic payment system.

The current rate for a car is $5.90 per trip, with average daily traffic at about 38,000 vehicles, according to Skyway Concession.

Toll rates are set by the Skyway Concession Company and must abide by the Skyway Concession and Lease Agreement.

Under the agreement, tolls were allowed to be hiked to $2.50 by 2008, $3 until 2011, $3.50 until 2013, $4 until 2015, $4.50 until 2017, and $5 in 2017. Since 2017, tolls are rising annually, equal to the greater of 2% (floor), the increase in CPI, or the increase in nominal GDP per capita.

As far as Chicago politics on the Skyway sale, I don't agree with critics of public-private partnerships and think it's a grave mistake to think that this model isn't in the best interest of taxpayers.

There are many infrastructure projects in the US and all over the world that benefit from such public-private partnerships and Canada's large pension investment managers are great long-term partners to have on such partnerships.

Lastly, on IFM Investors' strong objections to this sale, I understand why it's not happy with the equity raise to fund the acquisition and is defending its interests but it must take some solace knowing OTPP is maintaining a significant minority stake in Skyway and will work with Atlas Arteria to create more value in this asset.

Chicago Skyway has 81 years of remaining concession life, so it is in their interest to work together and the Skyway Concession Company to add more value to this asset.

All this to say despite all the media attention on IFM Investors opposing the sale of Skyway to Atlas Arteria, I'm pretty confident this transaction will happen in the fourth quarter. 

What was suppose to be a straightforward sale of an asset has been blown up to something which is beyond CPP Investments and OMERS Infrastructure's control.  

Below, a great clip which tells the story of the Chicago Skyway Toll bridge and how the city of Chicago endured years of complications before it turned the liability into a valuable asset.

I also embedded some US and Australian media coverage of this sale.  

Update: Atlas Alteria has released a long and detailed presentation on why it is acquiring a majority interest in Chicago's Skyway. You can view it here

Take the time to read this, it demonstrates why they are committed to acquiring this asset and owning it alongside OTPP.