SNC-Lavalin Group Inc., the Montreal design-build giant caught in a Canadian political uproar over the firm's pending ethics legal case that has reached up to Prime Minister Justin Trudeau, appears to be finished attempting to hammer out a settlement with the federal government over corruption charges.
It now is “concentrating 100%” on preparing for a pivotal trial, CEO Neil Bruce said in announcing tough fourth-quarter results on Feb. 22.
Striking a defiant tone in an earnings call with analysts, Bruce said “our employees are being used as a puck in a political hockey game, and frankly they don’t deserve it, and we’ve had enough."
SNC-Lavalin pushed for a negotiated settlement of bribe charges involving long-since departed top executives, noting a major revamp of its management and a broadened and stricter global ethics program in the wake of the ethics lapses, revealed in 2011. It also has paid fines related to the alleged bribes and sued former employees to recover misused company money.
In its latest legal action, SNC-Lavalin on March 1 sued former CEO Pierre Duhaime in a Quebec court, a company spokesman confirmed on March 5, claiming he “facilitated” an embezzlement scheme of company funds linked to bid-rigging a contract to build a $1-billion Montreal hospital.
Duhaime, terminated in 2012 under a separation agreement the Montreal Gazette said was worth “millions,” pleaded guilty in February to one criminal count of breach of trust in that case and is under a 20-month house arrest sentence.
But government prosecutors rejected last fall—for reasons not publicly disclosed—use of a deferred prosecution agreement to settle the corporate charges that had become a legal tool for the first time in Canada several months before.
SNC Lavalin filed a legal challenge to that decision, which prosecutors are trying to have dismissed.
The corporation and two units were initially charged in 2015 with bribing Libyan officials for over a decade ending in 2011, and has also been embroiled in the bribe scandals in Montreal and Bengladesh.
Bruce joined the firm in 2013 and became CEO two years later.
Click here for Neil Bruce video comments on the agreement and Q4 corporate results in an internal corporate interview.
Political Firestorm
Leaks to Canadian media about the government response to settlement talks—including alleged pressure on prosecutors to grant the deferred prosecution agreement—now have become a Trudeau political imbroglio and a media obsession that have incluided cabinet resignations seven months before national elections in Canada.
Not clear is whether the still escalating controversy will end SNC-Lavalin's chances to avoid added business impact of a criminal trial.
A conviction could result in a 10-year ban on work for the Canadian government although the firm's role on current major infrastructure, nuclear and other projects would not be affected, and it could bid work during the trial proceedings, which could last for months.
The firm emerged on top in a contract award recommendation just announced to build one line of Ottawa's estimated $3.5-billion light rail extension.
Ottawa officials recommended award to its unit TransitNEXT, to extend the north-south Trillium line with a link to the Ottawa Macdonald-Cartier International Airport. A second bidding group, a joint venture of Kiewit Corp. and French construction-concessions firm Vinci SA, is set to win the extension of the east-west Confederation line.
SNC Lavalin already is part of the consortium building the Confederation line.
The extension picks, which evoked some debate among Ottawa officials, are set for a March 6 city council vote. The two leaders, if selected, would design, build, finance and maintain the projects.
Meanwhile, still swirling on the political front are reports that new Canada Attorney General David Lametti may reconsider a settlement with SNC-Lavalin and that government officials are weighing public-works rule changes that would allow agencies more flexibility to award a contract to a convicted firm.
The uncertainties come as SNC-Lavalin seeks to put its financial house in order following a tough year-end earnings report, prompted by "overhang" from the political uproar and looming legal issues, said Bruce, as well as other market gyrations.
The global firm reported a $1.2-billion loss for the fourth quarter of 2018, with revenue falling to $1.9 billion from $2.5 billion during the same period in 2017. The company reported a Q4 loss of $6.93 per share, compared to earnings of 23 cents per share in the same period of 2017.
Market Impacts
About one-third of SNC-Lavalin's loss came from a non-cash after-tax goodwill impairment charge related to slower growth in the oil and gas sector and delays in work at the Codelco mining project in Chile.
Factors also include “unpredictable commodity prices and uncertain client investment plans,” Bruce said, as well as what he termed "difficult inter-governmental relations between Canada and Saudi Arabia" over a reported government challenge to the Muslim nation's alleged human rights abuses, that have begun to affect SNC-Lavalin bidding success there.
“2018 was a disappointing year," he added, pointing to under performance in its mining & metals and oil & gas segment, and management changes.
SNC-Lavalin also cut dividends paid to investors by two-thirds to $7.61, the first cut in 27 years.
Despite the rough quarter, SNC is estimating earnings from its core engineering and construction operations between $683 million and $723 million for 2019.
SNC-Lavalin had a backlog of $11.34 billion at the end of December, with $1.67 billion in bookings in the fourth quarter, the company said.
'Fundamental' Change
Michael Sabia, CEO of giant Canadian pension fund Caisse de Depot et Placement du Quebec, SNC-Lavalin's largest shareholder with a just boosted 20% stake, told media that he supports management's position and the firm's long-term potential, noting that it "has changed itself in fundamental ways.”
But a law firm shareholder has filed a class action suit contending the company did not disclose soon enough last year prosecutors' rejection of a proposed settlement, Canadian Press reported Feb. 26.
At least one sector analyst, Derek Spronck, vice president of global research at Toronto-based RBC Dominion Securities, appears upbeat, advising investors in a Feb. 22 research note to “keep calm and carry on.”
SNC Lavalin has not shared details of planned strategic responses to boost its bottom line, but analysts and media reports speculate that options include relocating its base to the UK, where it already has thousands of employees from its 2017 purchase of WS Atkins and new enlarged space it showed off last month.
They note such a change would not stop trial proceedings and could impact the firm's Caisse funding deal that requires it to remain in Montreal. The pension fund also gave a $1-billion+ boost to rail firm Bombardier in 2015 to prevent foreign acquisition, says The Financial Post.
Observers speculate as well on a company breakup, with problem units sold and better performing businesses staying in Canada, the publication says.
Also being watched is how—or if— SNC-Lavalin will monetize its valuable 16% stake in the 407 toll road around Toronto that could be worth billions, to shore up cash flow if it becomes necessary. Analysts disagree, however, on whether selling the asset is a good idea and SNC Lavalin has said previously it will wait for the right offer.
“There remain lots of challenges ahead for SNC, but none of which we would view as insurmountable and more than reflected in the current share price,” analyst Spronck said, placing an "outperform" rating on the company's stock.