SNC-Lavalin Group Inc. will pocket about $2.8 billion after selling a 10 per cent stake in Highway 407, but the price is slightly less than analysts were expecting and is unlikely to do much to turn around the fortunes of the Montreal-based global engineering firm.
“With the company facing execution and macro headwinds abroad as well as political and legal controversy back home, it is hard for us to picture how its valuation materially improves in the short term,” Frederick Bastien, an analyst at Raymond James Ltd., said in a note to clients.
Criminal charges SNC is facing over alleged bribery to obtain contracts in Libya years ago are at the heart of a scandal plaguing the Liberal government of Justin Trudeau, with allegations of political pressure aimed at helping SNC secure a deferred prosecution agreement that would have allowed it to avoid a criminal trial and a possible 10-year ban from bidding on federal contracts.
SNC filed documents with the Federal Court of Appeal on Friday, in which it argued the firm should get a previously denied shot at negotiating such an agreement because of new facts that emerged from testimony before a parliamentary committee looking into the matter. A lower court last month tossed out the company’s bid for judicial review of the 2018 decision by the Director of Public Prosecutions that SNC would not be invited to negotiate a remediation, or deferred prosecution, agreement.
Separate setbacks for SNC include quality control issues at a mine in Chile, and fallout from a diplomatic spat between Canada and Saudi Arabia.
The toll-road transaction announced by SNC on Friday will help shore up the company’s balance sheet, and the engineering firm will remain a minority shareholder in the southern Ontario highway with a 6.76 per cent stake. The buyer of SNC’s 10 per cent stake is the Ontario Municipal Employees Retirement System (OMERS).
“This is a truly unique and exceptional asset that we believe has been undervalued by the market for many years,” Neil Bruce, SNC’s chief executive, said in a statement.
“Through this transaction, we are able to benefit from crystallizing some of this value, while retaining an interest in a successful Canadian infrastructure asset that we are proud to have helped build.”
Bastien said analysts had valued the engineering firm’s nearly 17 per cent stake in the 407 expressway at $27.84 per SNC share, while the announced transaction pegs the value at $27.
Through this transaction, we are able to benefit from crystallizing some of this value, while retaining an interest in a successful Canadian infrastructure asset that we are proud to have helped build
SNC CEO Neil Bruce
The company’s shares were trading at $33.85 on the Toronto Stock Exchange on Friday afternoon, nearly two per cent lower than the previous day’s close, and down almost 45 per cent from the high of $60.82 in June.
“With the partial sale of this strategic asset unlikely to catalyze the stock, we believe it is still best to follow the SNC story from the sidelines,” Bastien said in his note to clients.
The 407 transaction is expected to be completed within about two months, and the proceeds will help shore up the balance sheet through measures including debt repayment and a possible share buyback, analysts said. About $600 million is designated to pay down a portion of a loan extended by the Caisse de depot et placement du Quebec.
In his statement, Bruce said SNC and the Caisse renegotiated terms of a $1-billion loan agreement forged in 2017, which was supported by SNC’s stake in the 407 toll road. He said the new agreement “meets the objectives of both parties.”
The $3.25 billion gross proceeds from SNC’s partial sale of the 407 peg the full value of the electronic, barrier-free toll road at around $32 billion. The Ontario government sold it in 1999 for $3.1 billion, which was about double its investment in the expressway at that time.
A Spanish company, Ferrovial SA subsidiary Cintra Global S.E., owns about 43 per cent of the 407, while the Canada Pension Plan Investment Board owns 40 per cent.
SNC said the partial sale of its stake is subject to shareholders’ rights, including rights of first refusal. A spokesperson at CPPIB declined to say whether the Canadian pension management organization has first refusal rights on the 407, which generally give co-owners of an asset the right to buy out a seller at a price equal to or greater than one arranged with an outside bidder.
With files from The Canadian Press