Charges hurting business, CEO says
Bruce suggests DPA rules for Canada as way to create an even playing field
Montreal-based SNC-Lavalin Group Inc. reiterated diversification plans at its annual shareholder meeting Thursday, while also repeating calls for a delayed prosecution agreement to help it secure major overseas contracts.
The diversification plan, which will move the company away from its dependence on oil and gas and toward infrastructure and consultancy, was underscored last month when news emerged that the engineering, procurement and construction company was pursuing a purchase of British consultancy firm WS Atkins PLC for $3.5 billion.
“We’ve undertaken an ambitious plan to become a more agile, more performance-driven and more client-centric organization,” SNC chief executive Neil Bruce told shareholders Thursday.
Analysts say the deal will substantially lessen the company’s dependence on fixed-price engineering and construction projects in favour of more stable consultancy services, which could nudge SNC’s share price.
“When you look at their peers globally, consulting companies typically trade at a premium relative to other engineering and construction companies, so we should expect a rearranging on the shares once the transaction closes,” said National Bank Financial analyst Maxim Sytchev.
SNC generates as much as 45 per cent of revenues from its oil and gas division. Analysts estimate the WS Atkins acquisition could reduce that to closer to 30 per cent, a move that was widely supported in the investment community.
“It significantly derisks SNC’s business model,” Sytchev said.
“Part of the attraction of this acquisition was to rebalance a little bit of the portfolio, because when you have almost half of your EBITDA coming from oil and gas it places a big bet on a single commodity.”
The flight from commodities marks a sharp strategic turn for the company, which in 2014 increased its exposure to the energy industry through the $2.1-billion purchase of oil and gas-focused Kentz Corp.
Meanwhile, Bruce also called for delayed prosecution agreements (DPAs) in Canada, which he said would put the company on equal footing with its rivals during major bids on overseas projects.
DPAs have been used in the U.S. and U.K. for years as a way to defer prosecution for corporations, giving them a window to improve their business practices.
Bruce said the absence of DPAs adversely impacts SNC’s ability to win bids due to their tarnished reputation.
“The way that we’ve got the system currently without a DPA in Canada puts us at a real disadvantage in comparison to our international — specifically the U.S. and European — competitors,” Bruce told reporters Thursday.
“We’ve lost contracts, we believe, on the basis of two competitors who have availed themselves of DPAs, and have won contracts on the basis that we are viewed as being under charges,” he said.
SNC has been serving a 10-year ban since 2013 that prohibits the company from bidding on any World Bank-financed projects. The company has for years been marred by allegations that it bribed Bangladeshi officials to secure the $2.9-billion Padma Bridge project, on which the World Bank served as the lead financier.
The firm reported an adjusted net income from engineering and construction of $60.7 million, 40 cents per diluted share, over the first quarter of 2017, aligning with most analyst expectations. Its general and administrative expenses of $107.8 million, a 12 per cent drop from the year prior.
The way that we’ve got the system currently ... in Canada puts us at a real disadvantage in comparison to our international competitors.