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SNC Girds for Canada Graft Trial as CEO Says `We’ve Had Enough’


Feb 22, 2019, by Frederic Tomesco
(Bloomberg)

SNC-Lavalin Group Inc., the embattled Canadian builder at the heart of a political scandal that has reached into the prime minister’s office, has given up on settling corruption charges and is now focusing on preparation for a trial.

“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,” Chief Executive Officer Neil Bruce told analysts Friday on a conference call. “So we are 100 percent concentrating now on defending ourselves in court.”

SNC is girding for a legal showdown in a case that has embroiled Prime Minister Justin Trudeau amid reports that his office pressured the country’s former attorney general to intervene on the company’s behalf. Bruce is meanwhile grappling with a business crisis that has intensified during the last month with two profit warnings, a writedown in the the company’s energy business and a credit downgrade by S&P Global Ratings.

The legal battle will probably last “a number of years,” but SNC is confident it will get “the right outcome,” Bruce said.

The shares fell 2.9 percent to C$34.76 at the close in Toronto. Through Thursday, SNC had plunged 26 percent since Jan. 25, the last trading day before the company disclosed a “serious problem” with a mining contract in Latin America and took a C$1.24 billion ($945 million) charge on its energy business because of a diplomatic spat between Canada and Saudi Arabia.

The stock drop during that period was the largest by far on a Standard & Poor’s index of Canadian industrial companies, which advanced 3.1 percent.
 

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Bribery Case

The Royal Canadian Mounted Police charged SNC in 2015 with attempted bribery and fraud related to projects in Libya. 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.

Losing at trial could result in a potential 10-year ban on Canadian government contracts. Reports that Trudeau’s office pressed Jody Wilson-Raybould, the attorney general at the time, to end the legal case last year led to this week’s bombshell departure of Trudeau’s top aide. Wilson-Raybould resigned from the cabinet earlier this month.

It’s still possible for SNC to receive a deferred prosecution agreement, Canada’s top bureaucrat said Thursday.

SNC would “of course be a willing participant” if it were invited to negotiate a deal with Canadian prosecutors, Bruce said. But “frankly it doesn’t look like that today,” he said.

Dividend Cut

While the political scandal deepens, the CEO is also pushing to shore up the company’s finances. SNC cut its dividend for the first time in almost 27 years while reaffirming confidence in its top executives.

The quarterly payout will tumble by about two-thirds to 10 cents a share from 28.7 cents with immediate effect, the Montreal-based builder said in a statement. The move will save SNC about C$131 million a year in cash, which will be used to repay debt and provide “additional flexibility.’

“Given the potential cash requirements in the first half of 2019, we view the dividend reduction as a prudent move,” Derek Spronck, an analyst at RBC Capital Markets, said in a note to clients. “There remains lots of challenges ahead for SNC, but none of which we would view as insurmountable and more than reflected in the current share price.”

The SNC board “reiterates its confidence in the executive leadership team to move forward into 2019,” Chairman Kevin Lynch said in the statement.

Highway Transaction

SNC said it was progressing with the potential sale of part of its interest in Highway 407, a toll road near Toronto. The possible deal “could be in the form of a direct sale or another type of transaction,” SNC said.

The company swung to a fourth-quarter adjusted loss of C$1.62 a share from engineering and construction. Analysts had expected a shortfall of C$1.61, according to the average of estimates compiled by Bloomberg.

The profit measure will be C$2 to C$2.20 a share this year, SNC said. That compared with expectations of C$2.08.

SNC had about C$634 million of cash and cash equivalents and about C$2.3 billion of recourse debt as of Dec. 31. It also had C$2.1 billion in unused borrowing capacity under a C$2.6 billion revolving-credit facility.



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