SNC-Lavalin Wins Caisse Support as Trudeau Controversy Deepens
(Bloomberg) -- SNC-Lavalin Group Inc., the Canadian engineering giant embroiled in a controversy that has reached into the prime minister’s office, won a show of support from its largest shareholder.
The Caisse de Depot et Placement du Quebec will be a “rock of support,” for SNC, said Michael Sabia, chief executive officer of the pension fund manager. Sabia said he continues to back management and is confident in SNC’s long-term potential. The stock jumped as much as 5.5 percent.
“This company has changed itself in fundamental ways,” Sabia told reporters in Montreal Thursday. “We are convinced of the company’s potential. It’s important not to lose sight of how much progress has been made.”
Sabia’s backing comes a day before SNC Chief Executive Officer Neil Bruce is scheduled to update investors on next steps for the engineering firm, which has already had two profit warnings this year that sent its stock and bonds tumbling. SNC is also fighting a Canadian prosecutor’s decision to reject a request for an out-of-court settlement over corruption charges dating back more than a decade.
Analysts say an agreement has become more challenging after reports this month that Prime Minister Justin Trudeau’s office pressured the former attorney general to intervene on SNC’s behalf. Failure to win an appeal in its legal case could result in a potential 10-year ban on government contracts. The scandal has led to the resignation of Trudeau’s top aide and prompted former Attorney General Jody Wilson-Raybould to resign from cabinet.
“Right now the company’s brand and name is splattered all over the news on a daily basis,’’ Richard Leblanc, a professor of governance, law and ethics at Toronto’s York University, said in an interview. “Prosecutors are not immune from the press. What SNC should have done is to confine its arguments to the merits of the case.”
While a lengthy legal trial and government ban wouldn’t necessarily spell doom for SNC, it’s frightening away many investors in the short term. The stock had dropped about 25 percent this year before today’s rally, erasing about C$2 billion ($1.5 billion) in market value.
“There’s a number of uncertainties around the company,’’ Chris Murray, an AltaCorp analyst said in a telephone interview. “I don’t think any of them are lethal in the long term.’’
SNC is seeking a judiciary review of the public prosecutor’s decision not to engage in negotiations and has been lobbying the government to overrule the agency. Bruce has made no secret of his bafflement at Canada’s stance, telling analysts in early November the decision made “no sense’’ and that the prosecutor’s officials refused to speak to the company. Bruce and other executives will hold a conference call with analysts at 1:30 p.m. Friday after releasing quarterly results in the morning.
The Royal Canadian Mounted Police charged SNC in 2015 with attempted bribery and fraud related to projects in Libya. The case is still in preliminary hearings, and no date has yet been set for the start of any trial.
The lack of an out-of-court settlement with Canada has probably cost SNC more than C$5 billion in lost revenue and continues to damage its reputation, Bruce said in December. He wasn’t with the company when the Libyan allegations emerged.
SNC has long argued it has overhauled management in recent years, put in place an ethics and compliance program. It has also complained that the ongoing legal issues are a drain on the company and its approximately 50,000 employees. Aside from the appeal of the prosecutor’s decision, SNC could be bailed out by new Justice Minister David Lametti, who said last week he could issue a directive to the prosecution service to settle the charges in exchange for a fine.
A fine would likely cost SNC “hundreds of millions’’ of dollars, possibly as much as C$400 million, said Murray. Still, it would allow the company to turn the page and not have to deal with the overhang of a government ban in Canada as it pursues projects abroad, where it gets almost 70 percent of its revenue.
SNC’s fate is a touchy issue in Quebec, where politicians such as Premier Francois Legault have urged federal prosecutors to strike a deal with the company. Legault’s call takes on particular resonance as Trudeau gears up for an October election that will see him aim to win a majority of seats in the mostly French-speaking province, Canada’s second-biggest by population.
“SNC is one of Quebec’s great global competitors, and people here take great pride in it,’’ Karl Moore, a professor of management strategy at Montreal’s McGill University, said in a telephone interview. “There is also an economic dimension involved. There are a lot of well-paying jobs that come with having a head office such as SNC’s in Montreal.’’
Since its founding 108 years ago as a one-man engineering consulting office started by Arthur Surveyer with a single client, SNC has played an integral part in the construction of modern Quebec. Picked for projects including Quebec’s iconic James Bay dam, the company served as a breeding ground for scores of locally trained engineers, many of whom gained valuable experience abroad as the company won contracts in far-flung countries such as India.
SNC spent years trying to win business in North Africa before a rebellion ousted dictator Moammar Qaddafi in 2011. Libyan projects on SNC’s books at the time of Qaddafi’s ouster included an airport, a prison and a water line network known as the Great Man-Made River, according to the company’s 2010 annual report.
The potential ban is already having an impact. S&P Global Ratings last week cut SNC’s rating to BBB-, the lowest investment grade, on concern over reduced earnings prospects and the potential fallout from the corruption charges.
SNC had about C$736 million of cash and cash equivalents and about C$1.5 billion of net recourse debt as of Sept. 30, according to its most recent quarterly report. The debt figure includes C$500 million in borrowings under a term loan.
SNC can overcome a fine for corruption and bribery -- and even a ban on government work in its home country -- though the builder would need to sell assets to raise cash and appease bond-rating companies, Murray said.
Relief may be on the way. Bruce reiterated last month SNC was weighing the possible sale of about 40 percent of its minority stake in Toronto toll-road operator 407 International. Such a transaction could bring in more than C$2 billion, according to Maxim Sytchev, an analyst at National Bank Financial Inc.
“If the sale of 407 happens, the balance sheet is repaired,’’ Sytchev said in a telephone interview. A fine of about C$300 million “would not be balance-sheet negative. Just turning the page and moving on is very valuable if you are shareholder. It’s a blue-sky scenario.’’
SNC can also count on financial support in its home province, including the Caisse, which owns almost 20 percent of the company. It’s what Murray calls a “sovereign put.’’
“There will be a backstop,’’ Murray said. “I don’t think for a second that what is a viable business with some very valuable underlying assets would be at risk of defaulting on its debt.’’
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