Two large foreign firms circling SNC-Lavalin

SNC-Lavalin Group Inc. has been approached “informally” by at least two large foreign engineering firms that are weighing a possible takeover of the beleaguered Canadian engineering and construction giant, the Financial Post has learned.

According to sources familiar with events at the Montreal-based company, among the potential buyers said to be interested are giant Spanish civil and engineering firm Actividades de Construccion y Servicios S.A. (ACS), whose subsidiaries currently partner with SNC on a number of projects; and Australia’s Worley Parsons, which has publicly stated it would like to expand its presence in Canada.

“People are circling. It’s a big prize, it’s worth having,” said a source, who spoke on condition of anonymity. “The conversations have been informal, rather than direct overtures.”

A primary concern among potential bidders is the 10-year ban on federal public works contracts that SNC-Lavalin could face if it is convicted of criminal corruption charges laid by the RCMP in February against the firm and two of its corporate affiliates. The risk of losing a decade of government work has been a key reason why the overtures have so far remained informal.

The charges — one count of bribery under Canada’s Corruption of Foreign Public Officials Act and one count of fraud — are both linked to SNC-Lavalin’s activities in Libya over a 10-year period ended in September 2011. The company has insisted that it is not guilty of the charges, and attributes the wrongdoing to individual executives who have since been dismissed and who face separate criminal charges.

So far, sources said that SNCLavalin has not been receptive to the propositions. “Acquirers have shown up at the door to say ‘how do we engage in a conversation because we want to buy,’ and they are getting snowballed a little bit,” said one source close to the discussions.

A spokesman for SNC-Lavalin responded to inquiries Tuesday by email, saying the company “is not engaged in any discussions of this nature with any companies.” When asked whether the struggling engineering giant has received solicitations from potential suitors, Louis-Antoine Paquin, manager of media relations, replied, “all I can say at this point is that we are not engaged in any discussions with anybody.”

SNC-Lavalin’s CEO Robert Card has warned that any ban resulting from criminal convictions could be fatal to the company, which depends heavily on government contracts in Canada. Moreover, he has worried the reputational damage could also affect SNCLavalin’s ability to secure international work. And he has said that the company that had long been among the most respected in the Canadian business establishment would become susceptible to a takeover.

Given the risks to SNC-Lavalin as a going concern, potential suitors are reportedly hopeful the federal government will not be hostile to a foreign takeover. They are said to be encouraged by the Conservative government’s plans to unveil a new procurement-integrity framework outlined in the April 21 federal budget.

“It would be pointless to approach the company with an offer and put it into play when there are so many non-commercial factors to be evaluated,” said another source. “Everyone is circling hoping they’ll be able to get a signal from Ottawa.”

Sources told the Post that the parties pursuing SNC-Lavalin have suggested a restructuring plan in order to get traction with the company’s board of directors that would divide the company in two. It would be one that the directors could plausibly put in front of Infrastructure Minister Denis Lebel, outgoing Justice Minister Peter MacKay and the PMO for approval.

In its current form, the strategy is to separate SNC-Lavalin’s tarnished assets from its unsullied ones, introducing even more ethical standards than the company implemented after it was engulfed in scandal, while containing the reputational damage by pleading guilty to the corruption charges and paying fines.

Investment bankers devised a plan that would restructure the 104-year-old firm by creating one discrete entity to house the intellectual property — namely the engineers, the bulk of the 40,000 employees, including 5,000 jobs at head office in Montreal, the construction projects and contracts and the infrastructure assets, such as the 108-kilometre Highway 407 toll route in Toronto.

A second entity would house the tainted international subsidiaries and the contracts and affiliations in Libya, Algeria and Bangladesh that are either directly linked to the RCMP’s corruption charges or are associated with them.

“What they are trying to do is ring-fence the contaminated parts of the business that smeared head office in Canada,” said a Bay Street source. “Sometimes, an outsider can do what the company can’t do for itself as a defendant.”

Meanwhile, a legal source familiar with the company conceded that although SNC-Lavalin’s board has been “cool” to solicitations, “giving the stiff arm doesn’t mean they’re being irresponsible. It means they are doing what they should be doing: getting a much bigger premium.”

In fact, most industry analysts say SNC-Lavalin is trading well below its fair value — as much as 70 per cent below — closing Tuesday at $45.60 on the TSX. The buyers are motivated to move in on the distressed company now while it is discounted, but the company’s directors will want to fetch the highest price possible for shareholders, most of them large Canadian pension funds and money managers, led by the Caisse de dépôt et placements with 12.17 per cent. For now, the board appears inclined to push forward with its business plan and inevitably hope for a bidding war.

Nonetheless, several sources close to the engineering giant said senior management has already begun “notionally” separating the company’s assets to determine which contracts would be affected by a ban under the anti-corruption laws, along the lines outlined by the investment bankers.

“The focus is to try to find a new home for this once-great company and not have it go down under the weight of its own misery like Nortel,” said an insider who asked not to be named, referring to the collapse to of the giant telecommunications equipment maker in 2009 amid allegations of accounting fraud.

The RCMP alleges that SNC offered bribes worth $47.7 million to one or several unidentified public officials, and its subsidiaries SNCLavalin Construction Inc. and SNC-Lavalin International Inc. are alleged to have defrauded various Libyan agencies of about $130 million.

The company, which designs and builds projects in a range of industrial sectors and has offices in more than 50 countries, has vowed to “vigorously defend” itself against the charges, and has dismissed them as “without merit.” In a statement after the charges were laid, SNC-Lavalin also noted the charges “do not affect the company’s right and ability to bid or work on any public or private projects.”

So far, that has proven true. In April, two months after the criminal charges were laid, the federal government selected a consortium led by SNC-Lavalin to build the new Champlain Bridge connecting Montreal to communities on the south shore of the St. Lawrence River, a contract worth $3 to $5 billion.

The focus is to try to find a new home for this once-great company and not have it go down ... like Nortel.