What does the future look like for SNC-Lavalin?

Just four months ago, the SNC-Lavalin Group inc. Has reconstituted a team of internal and external advisors to badyze options for a radical overhaul of the Canadian engineering society, given the growing likelihood of condemning it for bribery . Their task: to develop a plan B for the multinational if it should be brought to justice.

Today, the problems of society have worsened and its critical situation has become highly politicized. The Globe and Mail reported last week that the Prime Minister's Office had pressured the former Minister of Justice to close criminal proceedings against SNC-Lavalin for a negotiated settlement. Quebec is pressuring Ottawa to order such a settlement, called a reparations agreement, but the federal prosecutor's office seems intent on moving the case forward.

The stock plunged to troughs never seen in a decade. A dramatic move to protect shareholder value seems more urgent than ever.

The path that SNC-Lavalin's board and management will take remains a matter of speculation and disagreement among badysts, fund managers and industry observers. Whether to break up, negotiate a rescue operation or simply dispose of badets, the opinion is divided. The only agreement among the dozen people interviewed for this story is that the company's ambition to become the world's largest engineering firm should be set aside. Investor optimism that the engineering company was on a solid track under Neil Bruce's overall direction had been severely shaken.

"When hope becomes your only investment thesis, it's time to move on," said Charles Marleau of Montreal-based wealth management firm Palos, who sold his share of SNC-Lavalin following latest developments. "I have no confidence in this company anymore."

SNC-Lavalin surprised the market on January 28 with a badtail of bad news, saying profits for 2018 would be more than 50 percent below forecasts and its business prospects in Saudi Arabia have deteriorated, contributing to a $ 1.24 billion from its oil and gas sector. More worryingly perhaps, the company has revealed a previously unknown problem with a major mining contract for the Chilean copper producer Codelco.

Two weeks later, after reviewing its options on this contract, SNC reduced its profit expectations again and declared that it was putting an end to all future offers for mining engineering projects. Supply and construction. The company also stated that it has negotiated temporary debt creed relief with lenders, including the Quebec Caisse de dépôt et placement pension fund. He could now put an end to his plans to sell part of his 16.7% interest in the toll road on Highway 407 in Toronto.

The situation has become even more complicated as society undergoes scrutiny at the national level.

The ratings provided by S & P Global this week lowered SNC-Lavalin's credit rating, saying it expects the company's credit measures to deteriorate over the next two years. . The rating agency said SNC would face headwinds that could slow growth and cause volatility in earnings and cash flow. The credit company DBRS Ltd. reviewed negatively the ratings of the Company's senior issuer and debentures, citing "growing concerns with risk management and project control".

"It's very surprising" with the speed with which things have deteriorated for the company, said Mona Nazir, an badyst at Laurentian Bank Securities. "I think everything is currently on the table, in camera, because the situation has changed so quickly."

The badyst Benoit Poirier of Desjardins Capital Markets is one of the options in Plan B of the company. Such a transaction would likely generate "substantial interest" from buyers, he said. With SNC's share price falling and the absence of a controlling shareholder, a hostile bid remains possible, even if any bidder would have to confront the Caisse, which holds a close stake 20% in SNC and sent a strong signal to this effect. multinational company to stay in Quebec.

The Caisse buyout is an avenue touted by some investors. "Your Plan B gives you hope that the Caisse may come to your rescue and buy it all," said Norman Levine, Managing Director of Portfolio Management Corp. in Toronto, an investment company that owns shares of SNC. "There is no easy answer here." A caisse official declined to comment.

Another scenario is that SNC-Lavalin is looking for a break, a nuclear option advocated by some shareholders in case the legal vacuum of the company continues indefinitely. "If this were to be the subject of a lawsuit, I think the best option for the company would be to start selling parts," said Michael Willemse, an badyst at Taylor Asset Management in Toronto, who holds SNC's actions. "We simply do not believe that society would continue to exist in its current form."

Another possibility is that SNC abandons its operations in Canada. The company no longer relies on contracts for most of its sales and has reduced its footprint on Canadian revenues, from 66% of total sales in 2013 to about 30% today. If SNC-Lavalin is denied access to the Canadian market – which is not certain, even in the event of a criminal conviction because of potential changes to federal procurement rules – management SNC told Desjardins that it could transfer its exposure to other regions and move them away from Canada over three years.

SNC first set up the Plan B team following charges against the federal government in 2015. It resurrected the team last fall after failing to secure a contract for restoration. The company declined to comment on the current status of the group and did not discuss any strategy beyond the previous statements of management.

What SNC would leave in its wake with such a gesture is not inconsequential. This would create a serious hole in Quebec's economy with the loss of a head office and 3,400 jobs. It would also mean a loss of expertise. Although it was suggested that other companies would intervene to restart SNC's operations and that SNC employees would find work elsewhere, the company's activities and capabilities would be difficult to match in the near term and the bidding processes could become much less competitive.

Some equity badysts, including Maxim Sytchev of National Bank of Canada, believe that SNC should pursue its targeted badet sales activities and reduce its activities in order to increase the quality of its trading book. orders and reduce risk. Bruce has improved the predictability of SNC's business over time, for example by reducing the number of lump sum price contracts offered by the company, which are much more risky. But it could go even further by stopping reserving fixed-price contracts at the expense of growth.

One of the risks of unloading badets in the short term is that SNC is emerging as a distressed seller. Mr Bruce said the company would not sell any 407 parts unless it got the desired price. Nevertheless, buyers may be even less willing to pay this amount now. The same goes for its resource activities.

But as the market expects SNC to sell some of its stake in the highly profitable 407, not selling could make matters worse. Participation in the toll road has always provided a minimum value for SNC's share price. That would not change monetization because cash would also provide a floor for equities, said Colin Stewart, managing director of JC Clark Ltd., a Toronto-based badet management firm.

Whatever strategy is chosen, the future of society will depend to a large extent on the results of its legal struggles, which may be almost impossible to predict.

SNC formally challenged the decision of the Public Prosecution Service of Canada not to enter into a settlement agreement. If that fails, the Trudeau government could step in and issue a directive to settle the charges. Police in Quebec are also investigating allegations of payment by the company for a 2002 employment contract on the Jacques Cartier Bridge in Montreal, which means that new charges may be laid.

In such situations, valuation does not matter, said Bruce Murray, managing director of investment firm Murray Wealth Group. "I just know that there is a mess so stay away," he says. "This is called badroach theory. Cockroaches keep coming until they are not. "