SNC-Lavalin in merger talks with WS Atkins

British company fits with plans to shift from energy to lower-risk sectors

SNC-Lavalin Group Inc. confirmed Monday that it is in talks with WS Atkins PLC, the British engineering and construction company, in a deal valued at roughly $3.5 billion.

The offer by SNC-Lavalin Group Inc. to acquire the British company fits squarely within the company’s plans to shift toward lower-risk sectors and away from oil, gas and mining, analysts say.

News of the merger talks broke after the British firm released a statement saying SNC-Lavalin had made an all-cash offer worth 2,080 pence per WS Atkins share.

The Montreal-based engineering, procurement and construction company said it may raise $1.9 billion through pension fund Caisse de dépôt et placement du Québec to fund the deal, comprised of $1.5 billion in debt and $400 million in equity. The firm stressed that the deal is still in the discussion stage.

Analysts said the purchase would align with management’s aims to broaden their asset base.

“It checks almost all of the boxes in terms of the acquisition criteria that SNC has laid out,” said Yuri Lynk, an analyst with Canaccord Genuity in Montreal.

SNC executives have been signalling their intention to pursue an acquisition between $1.5 billion and $4 billion. The company said it was looking to expand into Europe and Asia, and that would target the steadier, lower-growth infrastructure and power sectors.

Oil and gas makes up 37 per cent of SNC-Lavalin’s project orders in backlog, and contributes 45 per cent of the company’s revenues.

“I think it’s a step toward being a more diversified company,” Lynk said. “Yes, oil and gas will shrink as a proportion of the pro forma company, but I’m not sure you want 45 per cent of your business in one sector — especially one as volatile as oil and gas.”

SNC-Lavalin had in recent years signalled that it would expand its oil and gas division, which can offer higher margins than other sectors.

In June 2014, months before oil prices collapsed, SNC-Lavalin purchased oil and gas-focused Kentz Corp. for $2.1 billion in what was then its largest-ever acquisition.

The shift comes after low commodity prices and a weakening global economic outlook put pressure on engineering and construction firms. Last December SNCLavalin announced it would lay off 400 people, most in its mining division. That followed the cutting of 4,000 positions from its global offices in 2014.

WS Atkins is in a number of sectors including rail, nuclear power, water, defence and security, and major highway construction.

Chris Murray, an analyst with AltaCorp Capital Inc., said SNCLavalin CEO Neil Bruce is likely to be very familiar with the company after spending many years in the European market.