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1 FINANCE 711 C01. MERGERS, RESTRUCTURING, AND CORPORATE CONTROL (Fall 2021) 2021 Sarkar, S. Not to be reprinted without permission. Table of Contents Page Chapter 1. Capital Budgeting Recap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Chapter 2. Capital Structure Recap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Chapter 3. Bondholder-Stockholder Conflicts (Agency Problems) . . . . . . . . . . . . . . . 26 Chapter 4. Asymmetric Information and Signaling . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Chapter 5. Valuation for Mergers & Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Chapter 6. Mergers & Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Chapter 7. Leveraged Buyouts (LBO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Chapter 8. Corporate Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Chapter 9. Financial Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Chapter 10. Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Answers to Chapter Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Case Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 2 FINANCE 711 C01. MERGERS, RESTRUCTURING, AND CORPORATE CONTROL (Fall 2021) Chapter 1. CAPITAL BUDGETING RECAP Capital budgeting refers to the real investment decisions of the firm – from new products or projects to simple replacement decisions. Real investments are important because they are the primary means by which shareholder value is created by the corporation. Capital budgeting rules tell us how to choose investment projects. A good investment rule should have certain properties: it should (i) maximize firm value, (ii) balance subjective assessment and consistency (i.e., not be too mechanical or too malleable), and (iii) work for all kinds of investments. Capital budgeting is crucial in M&A analysis and in restructuring decisions such as LBOs, Leveraged Recapitalizations and Divestitures. Important Measures in Capital Budgeting A number of methods are used when making capital budgeting or investment decisions: Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), Payback period, Accounting Rate of Return, Economic Value Added (EVA) and Equivalent Annuity (EA). These are discussed in detail below. 1. Net Present Value, NPV = , where tCF = cash flow in period t, and k = discount rate. The decision rule is: For Investing: invest in a project if NPV > 0. For Ranking: rank projects according to NPV. Note the following regarding the NPV approach: a) Intermediate cash flows are assumed to be reinvested at the discount rate; b) NPV is the most appropriate measure of a project’s attractiveness; there is a direct link between NPV and stock price, and positive/negative NPV results in a higher/lower stock price; c) NPV is an additive measure, i.e., NPV1+2 = NPV1 + NPV2; no other investment rule has this property; this means firm value can be expressed as the sum of PV of projects in place and NPVs of future projects (growth opportunities); thus, if the firm shuts down a negative-NPV project, the stock price should rise; and d) Technical advantage of the NPV method: we can take into account changing discount rates (yield curve effects), which is not possible with the IRR. 3 Practical issues when using the NPV method – How to adjust for risk There are two ways of adjusting for risk: (i) Risk-adjusted discount rate, and (ii) Certainty-equivalent cash flows (see below for examples); if done correctly, both give same results. – Which cash flows to discount Incremental cash flows only (those affected by the decision); sunk costs should be excluded. – How to handle inflation Must be consistent – nominal (real) cash flows should be discounted at nominal (real) rates. Risk measure There are two measures of financial risk – Total Risk (σ) and Systematic Risk (β). They are related by the equation: 22M22 or Total risk = Systematic risk + Unique risk Diversified (undiversified) investors are concerned with systematic (total) risk. Unique or idiosyncratic risk is diversifiable, so there is no reward for bearing it; as a result, required return or expected return or cost of capital depends solely on systematic risk or beta (as specified by the CAPM). Risk adjustment Risk can be incorporated in two ways: (i) Use a Risk Adjusted Discount Rate (RADR) when discounting the cash flows, (ii) Use Certainty Equivalent Cash Flows but discount at the risk-free rate. RADR: The discount rate is adjusted to match the risk of the cash flows being valued. Thus, Ri = Rf + βi(Rm–Rf), from the CAPM, where i is the systematic risk of the project. In this method, the denominator (discount rate) is adjusted for risk. Keep in mind that all reported betas are equity betas, hence betas must be unlevered and then re- levered to take into account difference in leverage ratios. Also, since most firms use some debt financing, we must take into account the valuation effects of leverage in the discount rate. Certainty Equivalent Cash Flows: Instead of increasing the discount rate (the denominator) to account for higher risk, the cash flow (the numerator) is adjusted downward for risk; and the risk-free rate is used for the discount rate. This method is useful when systematic risk is difficult to estimate, or when the manager wants to incorporate his/her own risk aversion. The certainty equivalent cash flow is the certain (risk-free) amount that would be equivalent (i.e., would make the manager indifferent) to the risky cash flow. Suppose, for example, the manager feels that a risky cash flow next year with an expected value of $200 is equivalent to a riskless cash flow of $180. Then the certainty equivalent cash flow is $180, and . 4 2. Profitability Index, PI = This measure is conceptually similar to the NPV, but it is normalized by the investment cost. The decision rule is: For Investing: invest in the project if PI > 1, For Ranking: rank projects according to PI. The PI is a way to approximate the “bang for the buck” from the project. It is useful for ranking projects, particularly under capital rationing (when firms cannot choose all good projects because there will not be enough capital, as is often the case is real life). In theory, there should be no capital constraints in efficient markets; if it is a good project, the firm can always raise funds in capital markets. In practice, however, capital constraints exist because of various reasons, e.g., lack of management credibility and uncertainty of prospects of the new project, underpricing of new securities (particularly equity) setting limits on how much can be raised in financial markets, flotation costs and other costs of external financing, and budgetary (management) control. Example of PI Project A Project B Investment 1 10 NPV 1 5 NPV is higher for project B, but PI is higher for project A (2) than for project B (1.5). If there are no capital constraints, we should pick project B (higher NPV), but if the firm is capital-constrained, it is better to pick project A (because of the higher PI). 3. Internal Rate of Return, IRR: this is the discount rate that gives a zero NPV, i.e., . It is generally identified numerically. Decision Rule: For Investing: invest if IRR > cost of capital or discount rate, For Ranking: ranking: by IRR (higher IRR denotes more attractive project) There are some potential problems with IRR: (i) Multiple IRRs: when cash flow changes sign more than once (e.g., if a large cash injection is needed late in the project, as in shipping or mining), we get multiple IRRs. (ii) Mutually exclusive projects: for mutually exclusive projects, one project might have higher NPV over a range of discount rates, but the other project might have higher NPV for discount rates outside this range. (iii) Term structure effects. 5 Points worth noting about the IRR: a) IRR is a rough proxy for “average return over life of project;” b) Intermediate cash flows are assumed to be reinvested at the IRR; c) We do not need a discount rate to compute the IRR; d) For well-behaved projects, IRR gives exactly the same results as NPV; e) Unlike the NPV, IRR is not additive, i.e., IRRA+B ≠ IRRA+ IRRB; f) In spite of its drawbacks, IRR is more popular with managers than NPV. 4. Payback Period: the number of years required to recoup the investment. Note that this is a non-DCF method. The decision rule is to invest in the project if the payback period is shorter than some critical value, e.g., 3 years. Projects are ranked by payback period (shorter payback period is better). This measure has a few drawbacks: (i) it ignores the time value of money, (ii) it ignores cash flows after the payback period, (iii) it is based on an arbitrary standard, e.g., why 3 years (iv) it does not necessarily lead to firm value maximization, (v) it does not work with certain types of projects, e.g., shipping, mining (when there might be negative cash flows after t = 0), (vi) it biases the decision towards the short term, i.e., leads to rejection of good long-term projects and acceptance of worse projects with early cash flows. The payback period is popular with managers (although used mostly as a coarse screen) because of its simplicity; also, managerial risk aversion can be incorporated in the decision-making process, since later cash flows are discounted harder. This method is widely used by small and/or unsophisticated firms, and for small projects, e.g., replacement of standard equipment such as pumps. Discounted Payback Period Under the discounted payback period method, the project will be accepted if the sum of the discounted cash inflows equals the initial investment before a specified cutoff period. This is of course very similar to the Payback Period rule except that the time value of money is incorporated. However, it might actually worsen the bias against long- term projects. 6 5. Accounting Rate of Return (AROR): average return on book investment. This is also a non-DCF method. This measure is based on accounting numbers, hence it is unreliable. Moreover, it ignores the (opportunity) cost of capital, hence it tends to over-value projects. 6. Economic Value Added (EVA): Variation of AROR. EVA is defined as: EVA = Profit – Value of Capital Used (i.e., cost of capital is included in costs) Since EVA incorporates the cost of capital, it is superior to AROR. It is similar to the NPV for the year, and Project NPV . Since EVA ≈ NPV for the year, it is used widely for evaluating managerial performance and for rewarding (and incentivizing) managers. 7. Equivalent Annuity (EA): this method used to evaluate projects of different durations, for which NPV is not a fair comparison. Firms often have to choose among projects with different lives, in which case NPV is not a good comparison because the longer-term projects are likely to have higher NPVs. In this situation, the correct approach is to annualize the NPVs, or to convert all the project cash flows to equivalent annuities, under the assumption that projects can be replicated: thus, EA = NPV/PVIFA. Example. You have to choose between a 5-year project and a 10-year project, using a discount rate of 12%. The former requires an initial investment of $1,000 and returns $400 per year for 5 years. The latter requires an initial investment of $1,500 and returns $350 per year for 10 years. Which is the more attractive project With a discount rate of 12%, NPV = 441.91 (for first project) and 477.58 (for second project). Convert to EA by annualizing the NPV (divide by the present value interest factor for annuity or PVIFA): EAV(1) = 441.91/3.6048 = 122.59, EAV(2) = 477.58/5.6502 = 84.52. Therefore, the first project is better. 7 The Real Option Approach to Investment Decisions As discussed earlier in this chapter, the generally accepted decision rule (in textbooks) is as follows: an investment project should be accepted if its IRR exceeds the cost of capital or if its NPV is positive. In practice, however, it is observed that managers seem to have much more stringent requirements. The “hurdle rates” that are used for new projects are much larger than the cost of capital (typically three times). A study by Lawrence Summers found that companies used hurdle rates as high as 30%, with a mean of 17% and a median of 15%. The cost of capital during this period was much smaller. In other words, managers’ required returns are higher than the theory recommends, that is, managers delay investment until conditions are significantly better than prescribed by the theory. This does not necessarily mean that managers are irrational or excessively risk averse. The explanation lies in the fact that most investment projects share three characteristics: (i) The investments are partially or completely irreversible. This is caused by sunk costs (e.g., firm-specific investments such as marketing or advertising expenses), informational asymmetries between buyers and sellers (the “lemons” problem), government regulations or institutional arrangements (e.g., high costs of hiring or firing employees), etc. (ii) The future benefits from the investment are uncertain. This is essentially business risk or industry risk, and results from uncertainty or randomness in business conditions, revenues and costs. (iii) Managers have significant leeway over the timing of the project. If the manager can time the decision, then it is no longer an Accept/Reject decision; the options then become Accept/Reject/Defer. When conditions improve sufficiently, it will be optimal to invest; until then, the firm is better off if it just waits and defers the decision. Because of the manager’s ability to time the project, there is an “option” aspect to the investment decision. We can think of the firm as holding an American Call Option – the option to invest in the project (with an exercise price equal to the investment cost). The decision to invest is equivalent to exercising the option; thus, the decision is not whether to invest, but when to invest, as in the case of an American call option. As a result, this branch of the investment literature is called the “real option” approach to investment. When the investment decision is viewed as a real option, the firm (at investment) receives the value of the project and pays the investment cost; in addition, it gives up the option to invest. This results in the investment being delayed relative to the NPV or IRR policy, hence it makes the investment policy more stringent. Thus, the observed “hurdle rates” mentioned above are significantly higher than the cost of capital or WACC (as recommended by the IRR rule). What is the “option premium” (i.e., what does it cost the company to acquire the real option) Very often, the premium is zero, because the company gets the option for free by virtue of being in the business, e.g., the option to expand is free because the company is already in the business. What is the “option exercise price” (i.e., what does it cost the company to exercise the option) For expansion it is the investment required to expand, for new investments it is the investment cost. 8 A Simple Example A firm has an investment project that is completely irreversible (i.e., no part of the initial investment can be recovered). There is an initial investment requirement of $1600; once the project is (instantaneously) implemented, it will produce 1 unit of the output per year, and the operating cost is zero. The current output price is $200 per unit, but the price will change next year to either $300 or $100 (with equa

l probabilities); and will remain unchanged thereafter (that is, uncertainty is resolved after 1 period). The appropriate discount rate is 10%. Should the firm make the investment The project’s NPV if accepted today (using expected future price of $200 per unit) is: 400 1.0 2001600NPV0 . According to the traditional decision rule, the project should be accepted right away, since the NPV is positive. However, let us see how the firm will fare if it decides to postpone its decision. If it waits, and the price falls to $100 next year, it will clearly reject the project, since NPV = –1600+100/0.1 = –600. On the other hand, if the price rises to $300 per unit, it will invest since NPV = –1600+300/0.1 = 1400. Then the expected NPV (today) of postponing the decision is 36.636 1.1 )01400(5.0NPVP . This is substantially larger than the NPV of accepting it right away ($400). Then the optimal decision rule is: (i) at time t = 0, postpone the decision; (ii) at t = 1, invest if price has risen (to 300) and reject if price has fallen (to 100). The project value with no timing flexibility is 400, and project value with timing flexibility is 636.36. Thus, the value of the manager’s flexibility (to time the investment) is the difference = 636.36 – 400 = $236.36. If the uncertainty extends to multiple periods, the optimal investment policy will of course be more complicated, and the value of the timing ability will also be larger. Real Option vs Financial Option There are some strong similarities between Real and Financial Options; therefore, the well-developed theory of financial options can be utilized to analyze investment decisions as real options. Call Option on Stock Real Option on Project Stock price ENPV of project cash flows Exercise price Investment cost (cost of the project) Time to expiration Time until investment opportunity vanishes (competition, etc) Stock price volatility Volatility of project value or project cash flows Risk-free interest rate Risk-free interest rate 9 Some General Remarks on Real Options The real option approach is superior to the traditional methods such as DCF, which cannot incorporate the flexibility inherent in a project. Real option analysis is particularly valuable whenever flexibility has a significant role. From survey information, the important real options seem to be the timing option (option to defer) and the option to abandon; less important are options to expand, to switch inputs, to shut down temporarily, etc. When is real option analysis useful Some examples: 1. Contingent investment decisions, e.g., when decisions are contingent on the state of nature. 2. High level of uncertainty. 3. When future growth opportunities are a large component of current value. 4. When flexibility is valuable. 5. When the manager has the ability to make changes after project acceptance. In practice, real options have not been completely ignored. Very often, real options have been handled by using coarse “rules of thumb,” e.g., set the required return at approximately double the cost of capital. However, it is a good idea to have a solid understanding of real options (since rules of thumb are typically opaque and arbitrary), particularly when large investments are being contemplated. Since real options are options on non-financial (real) assets, such as land, technology, patents, machinery, etc., they tend to be more long-lived and more complex and illiquid than financial assets (and very often non-traded too); hence it is much more difficult to value real options than standard financial options. Nevertheless, we need to be familiar with real options analysis, in capital budgeting as well as mergers and acquisitions because real options are ubiquitous – any kind of managerial flexibility is an implicit real option; and managerial flexibility cannot be valued by the traditional DCF methods. Also, real options account for a significant fraction of the equity value of growth companies (resulting in high market-to-book ratios for such companies), hence cannot be ignored in valuation analysis. The value of a real option comes from two elements – (i) capacity of a firm to learn from new information, and (ii) ability to modify behavior based on that learning; for instance, to temporarily shut down a copper mine when copper price falls. An NPV calculation only uses information that is known at the time of the appraisal, whereas the real option approach incorporates the ability to make mid-course changes or adjustments as more information becomes available, i.e., it incorporates managerial flexibility. Clearly, the real option approach is a superior method of valuing uncertain projects. However, for all its advantages, the real option approach has not yet become very popular with managers. In some cases, it gives excessively ambitious managers a license to overinvest in risky projects and gamble with shareholders’ money. Another potential problem is that, when applying the real option approach, it is necessary to make simplifying assumptions; we must ensure that these assumptions are not unrealistic. 10 Types of real options Entry option: option to enter a business or a segment of a business, resulting from R&D work, new product development, oil drilling rights, other resources, etc. These are call options on the underlying business. Exit option: the ability to shut down operations permanently and exit the industry. This is valuable because without this option, shareholders would be forced to keep alive the firm even if it suffers huge losses and its prospects are bad. These are put options. These include option to divest assets or subsidiaries, and option to default or declare bankruptcy. Timing option: the right to delay an investment; probably the most common real option. This is especially important for new or expansion projects. The delay might provide additional information about the market (price history, pilot project, etc). Growth option (expansion): option to expand into the same or related product market; sequential investment: when to invest, how large an investment, etc. Replacement option: option to replace existing plant and machinery with new (more efficient) machinery, or existing technology with new and better technology. Switching options: the flexibility to switch from one operating mode to another (on either the input or the output side). An example is a power generating plant that can use either coal or gas; the ability (option) to switch to the cheaper fuel is valuable; and might justify the investment in a more expensive flexible plant than a cheaper coal- based or gas-based plant. Or a hybrid car, where the inputs can be gas or electricity. Or a car manufacturer can switch to a high-margin SUV when gas prices are expected to decline. Real Options and Strategic Decisions Because traditional valuation tools such as NPV ignore the value of flexibility, real options are important in strategic and financial analysis. Consider the example of an oil company, which has the opportunity to acquire a five-year license on a block. When developed, the block is expected to yield 50 million barrels of oil. If the current price of a barrel of oil from this field is $10, and the present value of the development cost is $600 million, then the NPV of the opportunity is: $500 million – $600 million = -$100 million. Based on NPV analysis, the company would obviously pass up the opportunity. Real Option analysis would recognize the importance of uncertainty in this situation. The major source of uncertainty here is the price of oil, and we have historical data on the variability of oil prices. Suppose that its volatility or standard deviation (σ) is 30% per year. Holding the option also obliges the company to incur the annual fixed costs of keeping the reserve active – let us say, $15 million. This represents a dividend-like payout of 3% (that is, 15/500) of the value of the asset. The duration of the option, t, is 5 years and the risk-free interest rate, r, is 5%, leading us to estimate option value at (using the Black-Scholes formula): ROV = (500e-0.03*5)*(0.58) – (600e-0.05*5)*(0.32) = $251 million – $151 million = +$100 million. Thus, the value goes from –100 to +100. Where does this $200 million difference come from Consider a simple financial option, available at $17 for an exercise price of $70 when the stock is trading at $83. A buyer who 11 exercised the option immediately would have a payoff of $13 but would be $4 out of pocket, having paid $17 for the option. The $4 represents the value of the flexibility inherent in not having to decide whether to make the full investment immediately, a flexibility whose value an NPV analysis would recognize as zero. So too in this case: the $200 million in the real option is the equivalent of the $4 in the financial option. Ultimately, then, the option valuation recognizes the value of learning. This is important because strategic decisions are rarely one-time events, particularly in investment-intensive industrial sectors. NPV, which relies on all-or-nothing, “go/no go” decisions and doesn’t properly recognize the value of learning more before a full commitment is made, is for that reason often inadequate. In fact, NPV’s inadequacy can be stated in the precise terms of the real-options model. Of the six variables in that model, NPV analysis recognizes only two: the present value of expected cash flows and the present value of fixed costs. The real option approach offers greater comprehensiveness, capturing NPV plus the value of flexibility – that is, the expected value of the change in NPV over the option’s life. A General Decision Rule for Investment Timing If we cannot use the traditional rules (IRR, NPV, etc), how do we decide when or whether to invest in such situations We will illustrate a general decision rule under this type of uncertainty with another simple example. Suppose the main source of uncertainty is output price P. Then, the general form of the optimal decision rule for investment decisions under uncertainty (when the timing option exists) is as follows: invest when P exceeds some critical value or investment trigger, say P*. Clearly, a higher (lower) P* implies delayed (accelerated) investment. When the option value rises relative to the value of the underlying asset, it is better to delay option exercise, that is, the critical price, the critical price P* will rise. From option theory, we know that the value of the option is an increasing function of uncertainty (price volatility), window for option exercise (or time to expiry of the option), asset value, flexibility, and a decreasing function of exercise price. Thus, the critical investment trigger P* will depend on all these factors; of these, the most important factor in practice is uncertainty (or risk or volatility). A higher volatility results in a higher option value, thus it will give a higher P* (i.e., will delay investment); in other words, volatility has a negative effect on investment. Example In our earlier example, suppose the current output price is P, and the price will either rise to 1.5P or fall to 0.5P next year (with equal probabilities). Then the NPV of accepting the project right away (again using the average or expected output price of $P) is: 1600P10 1.0 P1600NPV0 . If the decision is postponed and the price rises next year, the NPV of accepting the project then will be: 12 –1600+1.5P/0.1 = 15P–1600. If the price falls next year, then the project will be rejected next year (i.e., NPV = 0). Then the expected NPV (today) of postponing the decision is 1.1 )1600P15(5.0NPVP . The project should be accepted today if P0 NPVNPV . Using the expressions for 0NPV and PNPV , this condition simplifies to P > 274.3. Thus, the trigger price is P* = 274.3, and the decision rule is: invest immediately if P > 274.3, otherwise postpone decision. This gives us the general form of decision rule in investment decisions under uncertainty when the timing option exists, i.e., invest if P exceeds some critical trigger P*, else postpone the decision.1 Determinants of Investment Timing (or P*) 1. Volatility or Uncertainty: This is the most important determinant of the trigger price (or time of investment). Volatility is usually measured by the standard deviation of the price process or the earnings process. Recall that when the firm invests it gives up the option to invest; also recall that option value always increases with volatility. Thus, higher volatility means the firm is giving up a more valuable option (to invest) while the project value is the same; as a result, the firm is more reluctant to invest, and the trigger price is higher (investment is delayed) when volatility is higher. Volatility therefore has a negative effect on investment. In the above example, if volatility was higher (that is, the spread 0.5P – 1.5P was wider) the critical price P* would be higher (as you can verify). 2. Discount rate: A higher discount rate will reduce the project value, making the firm more reluctant to invest. Thus, a higher discount rate results in higher trigger price or delayed investment. 3. Investment Cost: A higher investment cost will of course delay investment (or raise the trigger price). 4. Level of competition: (this is not considered in our above examples, but is important in real life). Competition might force the firm to invest earlier than it would otherwise do (resulting in a lower trigger price), thus competition has a positive effect on investment. Public-Private Partnerships and Real Options A Public Private Partnership (PPP or P3) is defined by the Canadian Council for Public-Private-Partnerships as “a cooperative venture between the public and private sectors, built on the expertise of each partner, which best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”2 In recent years, P3 has become the most popular means of delivering infrastructure projects (transportation, healthcare, education, water and sewage treatment, garbage disposal, etc.) around the world, including the federal government and all provinces and territories in Canada. We can expect to see an increase in infrastructure projects in Canada because 1 If there is ongoing uncertainty, then the problem becomes more complicated because the project might not necessarily be rejected
if the price falls, so the NPV will not be 0 but rather the option
value at that point (which will be a function of the price at that
time). This problem can be solved using more advanced methods; for an
introduction, you can read (i) Dixit, A. and R.S. Pindyck (1994) Investment Under Uncertainty, Princeton University Press, Princeton, NJ, or (ii) McDonald, R. and D. Siegel (1986) The Value of Waiting to Invest, Quarterly Journal of Economics 101, 707-727. 2
Allan, J.R. (2000) Public Private Partnerships: A Review of Literature
and Practice, Saskatchewan Institute of Public Policy, Public Policy Paper No. 4. 13 the government has prioritized it as a key growth area (see, for instance, the $53 billion New Building Canada Plan). Some examples of P3 infrastructure projects in Canada: Confederation Bridge, Government of Canada and Strait Crossing Development Inc. Highway 407 ETR, Province of Ontario and 407 International Inc. (consortium of private firms) William Osler Health Centre, Province of Ontario and The Healthcare Infrastructure Company of Canada Moncton Water Treatment Facility, City of Moncton and USFilter Canada Why P3 Most infrastructure projects have the following characteristics: 1. Irreversibility 2. Significant risk (uncertainty) 3. Large investment requirement 4. Long payback period Traditionally, these projects were built, operated and maintained by the public sector. But in recent years, governments have been more interested in partnering with the private sector, which can provide (i) capital (which most governments have trouble raising because of budgetary constraints), and (ii) technical expert