SNC-Lavalin Group Inc. has told investors it is considering breaking up the company by spinning out some businesses before its criminal case ever gets to trial, a move that could include carving out British unit WS Atkins.
Executives with the Montreal-based engineering giant, which has been charged with bribery and fraud in a case that has created political turmoil for the federal government, told institutional investors at a private luncheon last Friday that its so-called “Plan B” is about generating more value for all stakeholders and that certain businesses could be spun out, according to two people who participated in the meeting.
“[They said,] ‘We want to find a way to surface value, to separate the businesses,’” said David Taylor of Toronto-based Taylor Asset Management who took part in the meeting hosted by TD Securities. Mr. Taylor said SNC should give WS Atkins its own management and board of directors.
At the meeting, SNC made specific mention of WS Atkins, which was purchased for $3.6-billion in 2017, telling investors it believes the business is worth more now than two years ago, Mr. Taylor said.
SNC-Lavalin chief executive Neil Bruce is trying to stop the freefall in the company’s share price, which has plunged 46 per cent since the firm announced in October that it would not be invited by federal prosecutors to negotiate a settlement.
A loss of about $356-million on a project for Chilean miner Codelco and the decision to sell a bigger stake than originally planned in Highway 407, a toll road in the Greater Toronto Area, have added to investor concerns.
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Some investors have grown so frustrated with SNC’s operational performance of late that they are abandoning the stock. The drop in the company’s share price has, in turn, masked the true value of some of its assets.
Early Tuesday afternoon, shares of SNC traded at $27.57, giving it a total market capitalization of $4.8-billion – less than the value of its share of the 407 toll road.
SNC struck a deal last month to sell a 10-per-cent stake in the 407 to the Ontario Municipal Employees’ Retirement System for $3-billion in cash. The deal implied a value of roughly $5-billion for SNC’s entire 16.77-per-cent stake in the highway, or about $27 a share after tax, according to calculations by AltaCorp Capital analyst Chris Murray.
Adding the company’s 14 other infrastructure concession investments, such as the Okanagan Lake floating bridge in B.C., which Mr. Murray says together have a book value of about $2.10 a share, he calculates SNC’s hard assets are worth $29.10 a share. That means that at SNC’s current share price, investors are giving the company’s core engineering and construction business a value of less than zero. Spinning out some of those assets as separate companies could change that.
Under pressure, Mr. Bruce is stepping up cost-cutting to deliver on financial guidance for the year after disappointing first-quarter results released last week. The company told investors it plans to cut 800 to 1,000 jobs in this latest effort, Mr. Taylor said.
There is much skepticism among shareholders that Mr. Bruce can make the targets because the company would have to turn a large profit in the second half of the year. Management is forecasting adjusted earnings before interest, taxes, depreciation and amortization in its main engineering and construction business of $900-million to $950-million for 2019.
“[SNC-Lavalin] still can’t get it together,” Raymond James analyst Frederic Bastien said in a note published May 3. “With the company facing execution and macro headwinds as well as political and legal controversy back home, we simply can’t picture how its fortunes change overnight.”
For many investors, the company’s worsening situation has highlighted the urgency for a more drastic restructuring to protect its total value. Based on management’s comments Friday, it could come sooner rather than later.
SNC said any spin out is not solely predicated on the outcome of the court proceedings, according to another fund manager who took part in Friday’s meeting and was granted anonymity because they are not authorized to speak to the media.
A Court of Quebec judge is expected to rule May 29 on whether there is enough evidence against the company to proceed to trial. The hurdle for going to trial is considered low in Canada.
This is not the first time SNC has made the case for a Plan B.
“We’ve got employees. We’ve got shareholders. We’ve got a duty and responsibility to these people,” Mr. Bruce told The Globe and Mail in an interview this spring. “We can’t just sort of sit there and say, ‘Oh well, let’s see what happens and if worst comes to worst we’ll deal with it then.’ I mean, that’s stupid.”
But the share price is adding extra pressure.
Addressing questions about the TD Securities meeting, company spokesperson Daniela Pizzuto wrote in an e-mail that SNC continues to explore all available alternatives to increase value for its stakeholders. “No decisions have yet been reached and it would be premature to comment further at this time,” she said.
Last December, the board of directors launched a special committee and hired external legal and financial advisers to help develop options for the company after it failed to secure a negotiated settlement that would suspend legal proceedings against it in exchange for a fine and independent third-party oversight. The precise reasons why federal prosecutors declined to offer SNC such a settlement, called a deferred prosecution agreement (DPA), remain unknown to the public.
Justice Minister and Attorney-General David Lametti has said he could still order prosecutors to settle. But some observers have said they believe the government does not have a strong public mandate for such a move and could wait to see the outcome of October’s federal election.
In communications with prosecutors about a DPA last fall, SNC warned it could break up and move its corporate headquarters to the United States if it was not invited to negotiate a deal and was found guilty. Under one scenario, SNC said it would move its Montreal headquarters and corporate offices in Ontario and Quebec to the United States and cut its domestic work force to 3,500 from 8,717 before eventually winding up its Canadian operations, according to a copy of the presentation obtained by The Canadian Press.
Nicolas Van Praet
Tim Kiladze