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SNC-Lavalin Seen Speeding Asset Sales Amid Deepening Crisis


Feb 13, 2019, by Frederic Tomesco
(Bloomberg)

If a mine dispute were all that SNC-Lavalin Group Inc. had to worry about, Chief Executive Officer Neil Bruce might be looking forward to next week’s earnings report with some equanimity. As it stands, the Canadian engineering giant is being rocked by a political controversy that’s embroiled Prime Minister Justin Trudeau and dredged up corruption allegations that date back almost two decades in Libya. The company has also slashed its profit outlook by more than 40 percent, seen its shares plunge by a third and had its credit rating cut to near junk. And that’s all in the space of about two weeks. The Montreal-based company will need to move quickly to reassure battered investors that it can boost liquidity and emerge from its current travails without further diluting stockholders, analysts said. That likely includes speeding up asset sales — including potentially its prized 407 highway stake in Ontario and its energy unit in Saudi Arabia, they said.“They need to build investor confidence,” Mona Nazir, an analyst at Laurentian Bank Securities, said in a telephone interview on Wednesday. “People have taken note of their pledge not to raise equity. It’s surprising how everything snowballed.”The company’s woes flared up on Jan. 28 after it disclosed trouble at an unidentified mine in Latin America and took a write-down on its energy unit amid a diplomatic spat between Canada and Saudi Arabia. SNC fleshed out those details this week with a second cut to its profit outlook, and said it wouldn’t be bidding on further mine projects.

Political Controversy

On the home front, SNC now finds itself at the center of a political storm after Canada’s ethics watchdog said it would investigate whether Trudeau pressured his former attorney general to help the company settle corruption charges in Libya out of Canadian court. The probe follows a Globe and Mail newspaper report last week that said the prime minister’s office urged the attorney general to strike a deal. Trudeau and current Justice Minister David Lametti denied the report. Then late Tuesday, S&P Global Ratings cut SNC’s rating to BBB-, the lowest investment grade, on concern over reduced earnings prospects and the potential fallout from the corruption charges.“It’s not just the mining. They also mentioned during on Jan. 28 about a slowdown in growth prospects for the Middle East,” Alessio Di Francesco, a Toronto-based analyst at S&P, said in a phone interview.SNC reports fourth-quarter results on Feb. 22 at which time CEO Bruce will speak to financial analysts.

Lost Revenue

“The 22nd is the day when we talk to various stakeholders,” SNC representative Daniela Pizzuto said in an email, declining to comment on the company’s recent troubles. 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. A conviction for corruption would result in a 10-year ban on bidding for Canadian government work, which fueled about 30 percent of the company’s 2017 revenue. Lametti has also said it may still be possible to settle the fraud charges out of court, a development politicians in Quebec have been pushing for given SNC has about 9,000 of its 50,000 employees in Canada.“They need to lay out a plan on how they can skate onside their debt covenants without raising equity,” said Yuri Lynk, an analyst at Canaccord Genuity. “It’s going to be all about liquidity and the balance sheet.”

Asset Sales?

Asset sales may also offer some relief.SNC is weighing offers for part of its 17 percent stake in 407 International, the operator of a toll road north of Toronto. The CEO told analysts last month SNC would only sell if it gets an offer that matches its internal valuation. Lynk estimates that SNC’s entire stake in 407 is worth about C$28 a share, or about C$5 billion after tax. Cutting the stake to 10 percent — an option that Bruce has said SNC was contemplating — would raise about C$2 billion. Selling the Saudi Arabia asset is another possibility that SNC will likely explore, said Nazir. “If nothing in Saudi Arabia changes, then looking to divest the business may be their best option,” she said. The company owns a clutch of infrastructure concession investments — such as bridges — that Lynk estimates are worth C$3 a share and could be used to raise cash in the short-term.“It’s tough to own a stock that’s in the headlines every day,” he said about SNC. “This is more of a political drama now, but the guidance they gave indicates the rest of the business is OK. It’s not a catastrophe.”



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