‘No longer a pariah’: SNC-Lavalin stock shoots up after settlement of criminal charges
In the clearest sign yet that SNC-Lavalin Group Inc. is turning its fortunes around after a tumultuous year, the Montreal-based engineering and construction firm announced its construction division would plead guilty to fraud in a complete settlement of criminal charges that had placed a cloud over the company.
The news came after SNC-Lavalin’s shares were halted on Wednesday morning before the company was expected to appear in court on criminal charges that its executives paid $48 million in bribes to Libyan officials between 2001 and 2011 in exchange for lucrative contracts.
By midday, trading had resumed and SNC shares jumped 20 per cent to $29.01.
The company said a Court of Quebec accepted its guilty plea to fraud and that all charges have been withdrawn. The settlement with prosecutors, which reportedly took months of negotiations, requires the company to pay a $280 million fine over five years, to face three years probation, and to hire an independent monitor to review its ethics and compliance program.
SNC-Lavalin did not obtain a so-called deferred prosecution agreement, under which it may have been able to avoid pleading guilty to a felony. Instead, its construction subsidiary pleaded guilty to fraud, a criminal offence that could preclude it from bidding on federal contracts — a key source of business. The company said it did not believe it would face such a ban, although attorneys questioned whether problems might arise.
“I don’t think they’re out of the woods yet,” said Christopher Burkett, a corporate defence attorney at Baker & McKenzie who was previously a crown prosecutor, “but certainly given their statement they seem to have some confidence that they’ll be able to manage the situation.”
Burkett, who has worked on cases where an affiliate of a company convicted of a criminal offence bid on federal contracts in Canada, said there is an extensive review process to determine if the entity bidding on federal work received any benefits from the criminal offence.
The Integrity Regime, which governs whether a company convicted of a criminal offence is debarred from bidding on federal contracts, lists fraud as a crime that can lead to debarment. But the statute appears to specify that only fraud committed against Her Majesty is relevant, and SNC appears to have committed fraud against Libya, he said.
Burkett added that SNC likely would face scrutiny when bidding for government work, not only in Canada but around the world, as a result of its guilty plea.
Across the country, SNC-Lavalin is still working on some of the biggest transit projects including light rail projects in Toronto, Ottawa and Montreal, as well as hydroelectric, nuclear, wind and other energy projects and any ban on obtaining new work could have an impact.
In a statement the company said while the guilty plea could lead to some risks, it does not anticipate any long-term material adverse impact. SNC predicted it would not be debarred from bidding on federal contracts, and noted that SNC-Lavalin Construction Inc., the subsidiary that pleaded guilty, has not bid on any contracts since 2015.
“This is a game-changer,” SNC-Lavalin chief executive Ian Edwards said in a statement, “… and finally allows us to put this issue behind us. I apologize for this past misconduct and welcome the opportunity to move forward.”
This is a game-changer … and finally allows us to put this issue behind us
SNC-Lavalin chief executive Ian Edwards
While SNC is set to pay one of the largest corporate fines in Canadian history, the resolution is in line with many analysts’ expectations. Indeed, Bay Street has remained bullish on the stock even as itsank 70 per cent since mid-2018 amid uncertainty connected to its criminal case, and a series of missteps and problems in its businesses.
Derek Spronck, an analyst with RBC Dominion Securities, on Wednesday kept his $37.50 price target on the company, far above its current share price.
“The settlement clears the way for SNC-Lavalin to finally put behind them past issues and focus on the new strategic direction of the company, which we view as a positive,” Spronck wrote. “The fine is within our expectations, it appears SNC-Lavalin remains in a position to continue to bid on Canadian Government funded contracts, and we think the SNCL-Services division is wholly undervalued.”
Maxim Sytchev, an analyst with National Bank of Canada Financial Markets, wrote that the deal lifted a “legal overhang” on the stock and signalled that SNC is “no longer a pariah.”
“In all instances, the reported $280-million fine (and) a three-year probation versus the feared outright ban on public work is far removed from the worst-case scenarios that have floated around the company,” Sytchev wrote, putting a $32 price target on the company.
In recent months, some analysts had noted the company appeared to have turned the page under its newly installed chief executive Ian Edwards, who has been pushing plans to de-risk its business model.
But the company’s problems have been varied and widespread.
The potential ban from federal contracts came into national focus earlier this year after former Attorney General Jody Wilson-Raybould accused Prime Minister Justin Trudeau and his close advisers of pressuring her to allow the company to negotiate a deferred prosecution agreement, rather than face trial on charges it paid bribes to win lucrative work in Libya.
As details of the dispute leaked, and a rift between Trudeau and Wilson-Raybould widened, SNC found itself enmeshed in a political scandal that compounded as a steady stream of bad news emerged about the criminal accusations.
Meanwhile, numerous problems started popping up in its various business divisions. Earlier this year, the company said a diplomatic rift between Saudi Arabia and Canada resulted in a sudden loss of business in the oil-rich country, which once provided an important source of work and where thousands of its employees are based.
It also faced missteps in its high-risk, high-reward lump-sum turnkey contracts, more often referred to as LSTK projects. In those contracts, a company agrees to build major projects at a set price and can keep any profits, but alternatively must pay for any cost overruns.
In March, the Chilean copper miner Codelco abruptly cancelled an LSTK contract with SNC after a dispute about the quality of the work, resulting in a $260-million write-off at the time.
Edwards, who took over as interim CEO in October, immediately said the company would no longer bid on such contracts, and instead focus on less-risky work such as servicing nuclear facilities and engineering projects where it is not responsible for cost overruns — a strategy that has helped the company’s stock recover from $16 this August.
National Bank’s Sytchev suggested much of the company’s future will be determined by Edwards’ new strategy. “Now as remaining legal issues can finally be resolved, the overhang rests solely with the remaining LSTK projects the company is working through,” he wrote.