While the political drama that unfolded in Ottawa this past week has many speculating about the future of Justin Trudeau’s Liberal government, the fate of the company at the centre of the storm is no less certain.
Former justice minister Jody Wilson-Raybould’s refusal to interfere in the prosecution of Quebec-based engineering and construction giant SNC-Lavalin, despite apparent pressure from the Prime Minister’s office and other government officials, means the company is likely headed for a court showdown on criminal fraud and corruption charges over alleged bribery in Libya.
If convicted, the company could face a 10-year ban on bidding for Canadian government contracts. It could also find itself restricted from some international work, with bodies such as the World Bank cracking down on corruption.
A criminal proceeding couldn’t come at a worse time for SNC, which is already struggling with the underperformance of its mining and oil and gas segments, as well as the fallout from a diplomatic spat between Canada and Saudi Arabia, where SNC has significant operations. Those issues forced SNC to issue two profit warnings in recent weeks, and to slash its dividend.
They have also prompted talk of whether the company might need to take radical steps to reshape — or even break up — its operations in order to survive. With that in mind, the Financial Post examined five potential scenarios, from decamping to another jurisdiction to hiving off portions of the company, and assessed what they would mean for SNC.
1. Leave Canada
According to her testimony, Jody Wilson-Raybould was told by government officials, including Prime Minister Justin Trudeau, that SNC might pull up stakes and move out of Quebec if it was not offered a so-called deferred prosecution agreement, a type of arrangement new to Canada that allows companies to settle criminal cases without the stain of a conviction. She said Michael Wernick, the top civil servant in Ottawa, told her a move to the U.K. was likely. Though it is not known if SNC itself made such a threat, shifting headquarters to another jurisdiction — with the United Kingdom being the most likely destination — would not be out of the realm of possibility for the company. SNC already has significant operations in the U.K., where in 2017 it bought WS Atkins plc, a design, engineering and project management consultancy, for $3.6 billion. While a move might appear to offer SNC a fresh start and give it the opportunity to negotiate future concessions from a different, potentially more accommodating government, most company watchers see the option as more of a bargaining chip than a real plan. “Moving could reduce the uncertainty, but I just don’t see how this happens,” said Frederic Bastien, an analyst at Raymond James who covers the company. On top of the fact that such a move would not stop a prosecution, or relieve SNC of other potential legal liabilities, it would also mean turning its back on Canada, where it has 9,000 employees and does nearly 30 per cent of its business. There is also the complicating matter of a loan agreement the company signed with the Caisse de dépôt et placement du Québec to raise funds for the Atkins acquisition, in which in agreed to keep its headquarters in Quebec until 2024.
2. Find a hometown saviour
Nowhere is the angst over the future of SNC-Lavalin more intense than in its home province of Quebec. In recent days, Quebec Premier Francois Legault has weighed in, warning that the company could be susceptible to a takeover or significant job attrition given its weakened state. Those concerns raise the possibility that one or more of the major players in Quebec could step up and buy the company outright. The most obvious candidate would be the Caisse de dépôt et placement du Québec, which manages $309.5 billion on behalf of Quebec pension funds and insurance plans — and which is already SNC’s largest shareholder. Michael Sabia, chief executive of the Caisse, has vowed to “be a rock” for the company and observers take him at his word: Over the past year, the Caisse has boosted its stake from 14 per cent to 20 per cent. History also dictates that it is prepared to step in to shore up Quebec firms. A recent example would be the pension giant’s financial support of Bombardier Inc., in which it invested $1.5 billion in 2015 amid speculation the transportation giant might fall into foreign hands. But the Caisse isn’t the only possibility. “You’re more likely to see the Fonds de solidarité FTQ start building a position given (Quebec Premier) Francois Legault’s show of support for the name,” says Bastien, the Raymond James analyst. Created by Quebec’s largest central labour body, the Fonds has a mandate to make investments to create and protect jobs and promote economic growth in Quebec. A Quebec buyout wouldn’t absolve SNC of its legal problems, but deep-pocketed backers would at least help it to weather the storm, and keep it firmly planted in the province.
3. Good SNC, Bad SNC
While SNC might be tempted to try to find a buyer for the entire company, finding one at the right price could be a challenge, according to three lawyers with decades of experience in mergers and acquisitions. That’s because legal liabilities would be transferred with SNC in any sale, meaning it could be forced to unload at a discounted or even “fire sale” price — unless a creative solution can be found. The veteran dealmakers suggest one option might be to bifurcate the company in an attempt to isolate the business that triggered the legal liability stemming from the bribery allegations. “There are precedents,” said one lawyer based in Toronto, adding that the tactic has been used more often in the United States, usually to manage cases of insolvency or bankruptcy. “It’s sort of the good company/bad company, good assets/bad assets (split), which happened a lot in the financial crisis in the financial sector in the U.S.,” the lawyer said. “But it’s happened in other insolvency contexts where you try to ring-fence the bad assets and sell the good assets.” Another dealmaker pointed to the recent announcement that Gap would spin off its better-performing Old Navy division into a separate, publicly traded company to separate the brand with strong sales from the weaker one. In the case of SNC, he suggested, the “bad business” could be left in one jurisdiction, with the “good business” moved to another, friendlier one. But isolating the troubled business of SNC wouldn’t be as straightforward as the division of Gap and Old Navy, and would require some creativity to manage the rights and desires of all stakeholders, according to multiple M&A specialists who spoke on condition of anonymity because their firms may do, or have done, business with SNC. Even if it were to successfully conceive such as split, the good business might also have to change hands, one suggested. “You have to assume that SNC is thinking about what-if scenarios (and) one of the what-if scenarios is at some point they may be worth more in the hands of somebody else and if somebody else can maybe be able to cleanse this problem that has become so toxic for SNC,” said the dealmaker.
4. Asset sales
In the event of a downturn in business due to a conviction, SNC does have at least one significant asset it could sell to combat a cash crunch. SNC’s stake in the 407 toll road that skirts Toronto to the north has been rumoured to be on the block before, as recently as August when the company itself suggested it might sell part of its holding in a bid to unlock shareholder value. While there would be no shortage of bidders, some question whether there is enough of an incentive to sell without a larger, more encompassing solution to the company’s problems. SNC’s 16 per cent stake in the 407 could be worth billions, and is often used by analysts to set a floor on the company’s stock price. Claude Lamoureux, former head of the Ontario Teachers’ Pension Plan Board, notes that the 407 provides a steady income stream that offsets lumpier revenue from other operations. Spinning it off would be easy, Lamoureux said, “but at the same time, it weakens SNC.” Bastien, the Raymond James analyst, said a sale of the 407 on its own would not be enough to change his view on SNC stock. “I’m not a fan of companies selling their best business to shore up struggling ones,” he said. In a recent note to clients, he said SNC’s dividend cut “suggests to us a partial sale of Highway 407 may not be imminent after all.”
5. Maintain the status quo
Even if SNC faces a 10-year ban from bidding on federal contracts, there is no indication that it would be unable to complete projects in which it is already involved. Those include the Champlain Bridge in Montreal, which is under way, and the Réseau Express Métropolitain (REM) transit Line in Greater Montreal. That however, may be small consolation, as company watchers note that the legal cloud hanging over SNC will undoubtedly make it difficult to secure new business, which in turn could lead employees to look for opportunities elsewhere. SNC will also have to deal with the other business issues that have plagued it, including a dispute with a client related to a mining project in Latin America, growing tensions between Canada and Saudi Arabia over human rights and other potential legal issues. One possible solution, as reported by the Financial Post this past week, could come from a change in the rules that ban companies convicted of bribery from participating in government contracts. Officials are understood to be looking at the possibility, but the political climate might make such a change untenable for now. It could, however, come into play at some future point in time, potentially throwing SNC a lifeline. Despite the political hot potato the company and its troubles have become, legal sources have also quietly suggested that Wilson-Raybould’s replacement as attorney general could take another look at whether the company should be offered an opportunity to negotiate a deferred prosecution agreement.