SNC - SNC-Lavalin Group

[longlake95]

Yup, thats it in a nut shell. Politics and scandal aside, their engineering services are world class. I know some mining engineers and they sub contract SNC and they don't bat an eye when hiring SNC.

I added this week at 23, after the down pressure of being kicked out of the MSCI world index. On November 26 SNC traded a whopping 11 million shares as the indexes dumped SNC. I guess markets aren't efficient after all, LOL. I think this pull back is no-brainer.

 

LL

 

 

 

[no_free_lunch]

I appreciate the feedback longlake.  Your comments on the other thread resulted in me investigating SNC and making the position, so thanks for that as well.

 

It's still a small/medium position but I am likely to increase it after I do a bit more work on it.

[longlake95]

it's a 6% position for me. Ya, my valuation is fuzzy, the range of outcomes is higher than I'd like. But, I like the back stop of the asset value behind the concession business combined with the good probability that earnings normalize over time....it's a good set up.  I really like that JF is back in...I believe Jarislowsky was on the board for many years - he know what SNC's earnings power is.

 

 

[wisowis]

https://montrealgazette.com/news/local-news/snc-lavalin-jury-in-corruption-trial-finds-bebawi-guilty-on-all-counts

 

 

Former SNC-Lavalin executive vice-president Sami Bebawi has been found guilty on all counts at his fraud and corruption trial.

 

Superior Court Justice Guy Cournoyer refused a request by Crown prosecutor Anne-Marie Manoukian that Bebawi be held in custody until a sentencing hearing on Thursday, saying his behaviour had not raised fears of him becoming a fugitive.

 

Bebawi, 73, courteously shook hands with Crown prosecutors before leaving the courthouse with his defence team. He refused to comment.

 

Manoukian said the jury had to study a large number of documents during its more than three days of deliberations, including evidence on foreign holdings, expert testimony on forensic accounting and legal concepts involved in the charges.

 

“We’d like to thank the members of the jury for their devotion to this trial as well as the deliberations and the work they had to do to render justice in this complex case,” she said.

 

Manoukian said the Crown would reveal its sentencing request at Thursday’s hearing.

 

Each of the convictions carries a maximum penalty of up to 10 years for money laundering and possession of property obtained by crime and up to 14 years for fraud.

 

Prosecutor Richard Roy said the case has demonstrated Canadian authorities’ determination to combat international business fraud.

 

“This case is another example of Canada’s commitment to fighting corruption of public officials and implementing its obligations under international conventions to fight corruption in international business,” he said.

 

The jury had been deliberating since Thursday in the trial, which began six weeks ago at the Montreal courthouse.

 

Serving as the firm’s executive vice-president from 2000 to 2006, Bebawi faced five charges in all: fraud, bribing a foreign public official — former dictator Moammar Gadhafi’s son, Saadi Gadhafi — laundering the proceeds of crime, and two counts of possessing property obtained by crime.

 

Throughout the trial, the Crown positioned Bebawi as the man behind what it described as SNC-Lavalin’s “business model” in Libya: paying millions in kickbacks and bribes to keep obtaining lucrative contracts.

 

“The company adopted an unusual, unlawful and dishonest practice,”  Manoukian told jurors in her closing arguments, “by artificially inflating the prices of contracts, paying bribes and misappropriating money for personal gain.”

 

A forensic accountant who analyzed SNC-Lavalin’s financial statements testified the firm transferred more than $118 million to Swiss bank accounts tied to a shell company. That company had been established by Bebawi’s subordinate in Libya, Riadh Ben Aissa.

 

“The amounts went in and out almost on the same day,” Sophie Déry told jurors. “It was an account used only as an extra layer when distributing money.”

 

Of that money, the Crown argued, Bebawi pocketed nearly $30 million. The millions were transferred into his and his uncle’s bank accounts.

 

The money was also used to pay Saadi Gadhafi in hopes of leveraging his influence in the country. The gifts culminated with the firm agreeing to buy Gadhafi a $25-million yacht shortly after he helped it secure a multimillion-dollar contract, the trial heard.

 

Bebawi did not testify or present a defence in the case.

 

In its closing arguments, his defence counsel argued the millions Bebawi received were not the result of crimes but rather company-approved bonuses for successfully manoeuvring complicated contracts in Libya’s difficult working conditions.

 

The defence also argued that Saadi Gadhafi should not be considered a foreign public official  — a key component for the corruption charge  — and that the Crown had built its case on unreliable witnesses.

 

Bebawi was not the leading force behind the firm’s Libyan dealings, it argued, but rather a middleman of sorts between Ben Aissa and CEO Jacques Lamarre, whom the defence says Bebawi often passed decisions off to.

 

“Ben Aissa understood the company and Libya better than Sami Bebawi,” defence lawyer Alexandre Bien-Aimé told jurors. “He was very well connected there, not Sami Bebawi.”

 

Ben Aissa, the Crown’s key witness in Bebawi’s case, pleaded guilty in Switzerland to charges of corrupting a foreign public official and laundering money in connection with his role in Libya. While in detention, he signed an agreement to co-operate with Canadian authorities.

 

Bebawi is the only SNC-Lavalin executive to be tried in Canada on corruption charges tied to the firm’s dealings in Libya. Another executive, Stéphane Roy, had faced similar charges, but they were stayed this year because of unreasonable delays.

 

Bebawi had also benefited from a stay of proceedings in a separate case in which he was charged with obstructing justice.

 

The jurors in his corruption case were presented evidence that an undercover investigation from the RCMP revealed that, through his lawyer, Bebawi had offered Ben Aissa a $10-million bribe to change his testimony.

 

The charges against Bebawi and the lawyer alleged to have been involved in the bribe, Constantine Kyres, were stayed this year because of delays. They had been filed in 2014.

 

SNC-Lavalin Group Inc. itself is expected to head to trial on corruption charges in 2020. It’s alleged the company paid Libyan government officials nearly $48 million between 2001 and 2011.

 

It is that case that’s behind the so-called SNC-Lavalin affair that ensnarled Prime Minister Justin Trudeau in controversy this year.

 

[no_free_lunch]

There was talk in summer of changes to the statute that covers SNC losing federal contracts. They wanted to water it down so officials can make the sentence less lengthy. Currently they could lose federal contract access for 10 years.

 

I am not sure how meaningful bebawis trial is. If anything it provides some cover as at least government can point to some type of punishment.  However with a minority government I don't know how much they can really do.

 

The whole thing is really too bad. I can't see other countries going after their own like this. It would be like Germany banning vw from selling domestically because of the emission scandal.

[Cigarbutt]

There was talk in summer of changes to the statute that covers SNC losing federal contracts. They wanted to water it down so officials can make the sentence less lengthy. Currently they could lose federal contract access for 10 years.

 

I am not sure how meaningful bebawis trial is. If anything it provides some cover as at least government can point to some type of punishment.  However with a minority government I don't know how much they can really do.

 

The whole thing is really too bad. I can't see other countries going after their own like this. It would be like Germany banning vw from selling domestically because of the emission scandal.

I've followed SNC for a long time. Their record, at some point, was very impressive (almost too good to be true) and it is too bad that such a record, at some point, included inputs that crossed lines that shouldn't have been crossed. Opinion: What happened with the superhospital contract is simply disgusting and evidence eventually showed (even if most of it was not disclosed due to early pleas) that the rot was global and profound. Corporate culture slipped sometimes in the years 2000s and eventually reached the point of no return.

 

The Bebawi case implies massive transfers of $. It is hard to imagine how the top guns and the Board were not aware of the dealings. It went further than 'wilful blindness'. The negative aspect of recent legal outcomes is that it shows how deeply the poor culture impregnated the crown jewel. The positive aspect is that those events happened a while back, public admonishments help to forgive and forget and recognition of cultural change comes with a lag.

 

Keeping access to contracts will be key and is achievable but the cost of redemption may be very high. It seems that they will come around but expensive fines should be expected. Siemens went through this in the 2000's. They also were threatened with loss of access to important sources of contracts. They used a different strategy than SNC and reacted to the issue more head-on which was more painful but which allowed to get out of the mess more decisively. 'Corruption' in construction contracts, especially in certain jurisdictions, is always present but needs to be contained. For the Siemens case, it is interesting to note that, up until 2002, the German tax code had a separate line item for cost of doing business where companies could claim costs related to bribing foreign officials.

 

https://www.npr.org/templates/story/story.php?storyId=98317332

https://www.theguardian.com/sustainable-business/recovering-business-trust-siemens

 

[finetrader]

I believe SNC will eventually get a DPA. Will cost them about 100M$CAD.

It it just the right thing to do for most stakeholders.

 

If it happens, the stock will fly.

[longlake95]

Agreed - the government HAS to fine them for optics...but It will be very minor and it won't move the needle. SNC is an important business in Canada's PPP solution and a world class operator at the engineering level - a little less stellar at the C suite and board level. Its not in the governments best interest to snuff out SNC. People will love SNC again when its back in the 50's in a few years. LOL.

 

[no_free_lunch]

So I am really hoping you guys are right, and that there is just a fine.  However, technically that isn't an option currently unless they can somehow get a DPA or whatever the term is and that has been rejected.  Now that it is in trial things are a lot messier.  They actually might need to change statutes to impact the outcome and to do they will need to get one of the other parties to agree to the terms.  I don't know, maybe they can just slip it in with some other bill, they have their ways.  To me, this is the most critical thing to watch for.  As soon as you see legislation on amendments to that act, this becomes a strong buy for me.

[finetrader]

DPA is still in the cards

 

https://globalnews.ca/news/5013229/david-lametti-snc-lavalin-affair-jody-wilson-raybould/

[Cigarbutt]

^"If you don't like the law, change the law, don't break it."

https://policyoptions.irpp.org/magazines/may-2019/conflicts-written-into-deferred-prosecution-agreement-regime/

 

I would say though that the bad apple phenomenon went to the core and actors have not been exactly forthcoming. These circumstances would tend to go against a simple slap on the fingers.

[finetrader]

https://policyoptions.irpp.org/magazines/may-2019/conflicts-written-into-deferred-prosecution-agreement-regime/

 

long story short: former AG used bad judgment. this needs to be rectified

[absolutbrian]

Trading halted this morning. My guess is that it's linked to the court case but nothing was announced.  SNC is returning to court for a pre-trial hearing in a Montreal court on several corruption-related charges.

 

I believe the company is on the right path. The decision earlier this year to withdraw from fixed-priced contracts was a good one. SNC is focusing on engineering services, which have a lower risk and higher margin profile that comes with more predictable cash flows.

An example of the "new" SNC is this: a $10 billion, 10-year nuclear services contract awarded by the U.S. Department of Energy to a joint venture that includes SNC. It's a long-term contract. Engineering services is really the direction in which they are going.

 

2020 will be the year where a lot of those fixed price contracts will be coming off the balance sheet. Once that backlog is executed/cleaned up, the valuation profile should look like a WSP or Stantec, or Jacobs, which trades at higher metrics.

 

Of course there are still risks associated to the fixed-price contracts and legal issues. But again these issues and potential losses are already reflected in the stock price. So you are not paying your ball eyes out.

 

One massive source of the Lump-sum-turn-key problems was the Chilean Codelco contract, which is now completed and in the past. As of Q3-2019, 84% of the $3.2b LSTK projects are light train related, which is one of SNC's strenght (or less risky).

 

As for the corruption legal case, we are talking about another 3-4 years unless some action is taken before (message to the government to get their act together and do the right thing and move on. Are we really to drag this for another couple years? There's no way the Liberals want the word SNC to come back in the next election.)

[absolutbrian]

Headline: SNC-Lavalin reaches agreement to plead guilty to charges of corruption in Libya

 

This was fast. A division of SNC-Lavalin Group Inc. will plead guilty to fraud charges related to work the company did in Libya. The crown has suggested a $280m fine paid over 5 years and a 3 year probation for SNC-Construction.

 

More to come...

[no_free_lunch]

Thanks absolutbrian,

 

The prosecution and defence are both recommending a $280-million fine to be paid over five years, and that SNC-Lavalin Construction, the division in question, be placed on probation for three years.

 

https://www.cbc.ca/news/canada/montreal/snc-lavalin-trading-court-libya-charges-1.5400542

 

This sounds really positive to me.  This shouldn't bankrupt the company and the fine is actually lower than I expected.

[finetrader]

SNC stock resumed trading

 

market is lovin it

[no_free_lunch]

This press release provides some more details on what the probation means.  You can make your own interpretation but from my perspective, as an investor, it critically means they are not going to be banned from federal contracts.  This seems to have been the best case scenario.  The fact that they were able to get the settlement done so quickly is excellent.

 

As a shareholder I'm lovin it.  As a canadian citizen, not so much.

 

SNC-Lavalin Group Inc. will comply with the probation order for the three-year period. Accordingly, SNC-Lavalin Group Inc. will engage an independent monitor who will provide initial and annual reports, executive summaries of which will be posted on the company's website, and will make any changes to its compliance and ethics programs that are identified by the independent monitor and are required. SNC-Lavalin group is already subject to monitoring by Public Services and Procurement Canada and the World Bank, and has put in place a robust ethics and compliance program that meets the highest international standards.

 

On behalf of the Board of Directors, Kevin G. Lynch , Chairman said, "We are pleased to settle these legacy issues and remove these legal uncertainties overhanging the Company. We feel this settlement is fair, and we deeply regret this past behaviour which was contrary to our values and ethical standards. The company has changed a great deal, embraced a world-class integrity regime and culture, and going forward we have renewed confidence about the Company's future."

 

Ian L. Edwards , President and Chief Executive Officer, SNC-Lavalin commented, "This is a game-changer for the Company and finally allows us to put this issue behind us. I apologize for this past misconduct and welcome the opportunity to move forward. We are beginning an exciting new chapter that is focused on our future growth and further de-risking our business. I want to thank all of our stakeholders, and especially our employees, for their continued dedication and support."

 

https://finance.yahoo.com/news/snc-lavalin-group-settles-federal-164400647.html

[absolutbrian]

The fine of $280 million paid over 5 years is much lower than the $500m anticipated.

 

From a valuation standpoint, the stock currently implies that SNCL Engineering Services is trading at an EV/LTM EBITDA of 9x (assuming the worst-case scenario for the completion of LSTK projects and future settlement of C$280m). This is still well below the average for engineering services peers of 13.3x.

 

[Cigarbutt]

So SNC negotiated a very good deal.

280M is at the lower end of the expected range and is to be paid overtime..

They were able to obtain this by pleading guilty to a reduced count, by promising to behave during the probation and after having shown that the turnaround had been started. They are now very likely to maintain access to national bidding, which was an existential threat. Apparently, from court documents, a 705M fine had been contemplated and, effectively, the 280M will include forfeiture from Libya profits estimated at 150M.

The market now reflects this new reality and the decision now to hold is based on a buy-and-hold decision grid, so it has become a different story.

https://www.theglobeandmail.com/opinion/editorials/article-snc-lavalin-got-what-it-wanted-its-still-a-win-for-the-rule-of-law/

Overall the process was messy, erratic and not terribly elegant, and many people will be left unhappy but IMO this ends up pretty much where it should have. Good luck to the longs.

[absolutbrian]

Interesting hirings at SNC that hints at the direction the company will take.

 

Louis G. Véronneau is the Chief Transformation Officer. A new post created.  Louis is a M&A expert. The read here is that SNC will look into divesting certain assets in its restructuring and redeploy the proceeds to create value. Louis was the guy at Bombardier that sold the Series C to Airbus and other assets. My assumption is the resource sector is on the block and to reinvesting the proceeds in engineering services.

 

There's also the newly created role of President of Infrastructure Projects and on an interim basis, to the newly created role of Executive Vice-President Infrastructure Services. I don't know anything about them except they are there to improve performance. I see this as a good sign.

[longlake95]

Agreed. They seem to be moving at a good pace to re-focus the business and improve the street's view of SNC.

[no_free_lunch]

Any thoughts on SNC?  It is back to where it was before the court case settled.  Maybe their earnings get whacked this year but at some point, peope will go back to work and I  can see the government trying to boost the economy with infrastructure spending programs.

 

SNC also has a much cleaner balance sheet than in the past.  The are down to $2b in long-term debt against maybe $300m+ free cash flow.  This is down from some $3b in LT debt in the past.  If markets stay down I don't see why they couldn't gear up and do an acquisition.  The debt would be quite lucrative too.

 

 

[Dazel]

SNC has had a tough year but the company looks like it’s trading for about 40 to 50 cents on the dollar. Anyone interested in the thesis stockhouse SNC thread has some good analysis. If posters want I will expand on it here.

 

I owned it during the Canadian government debacle which they settled and I sold it in the 30’s...I have been building a good position back. If sold it in pieces it’s likely worth about $50 bucks...trading for $23.25 today.

 

The key asset is hidden which they call capital but it’s a royalty portfolio. It’s world class They still own 6.67% of the 407 after selling 10.1% in 2019 to shore up their balance sheet. Book value on the portfolio is a little over $400m but it’s worth at least $2.5b...

 

https://www.snclavalin.com/en/media/press-releases/2019/05-04-2019

 

 

 

If you back out this asset SNC trades for a little over $8.

 

[longlake95]

At these low interest rates the capital portfolio is probably worth quite a bit more. Yes, SNC is worth 40-50. They have to roll of the LTSK projects and start printing some solid quarters.

 

 

 

 

[Dazel]

I would like to see Fairfax make a lot of money at SNC and be part of the turn around of a Canadian Icon. The turn has been made in my opinion and there is a window because the market does not see it. And there are short sellers controlling the float. Which is good for us all...they are giving us an artificially low share price. 40 cents now...but likely more like 25 cents longer term. I think Fairfax will have some room to take another large position now (blackberry is likely sold or hedged). We are planning on riding Fairfax coattails to new all time highs...

 

SNC could help them get there. A taking private transaction by Fairfax would be best for Fairfax with partners the Caisse and Jarisolowsky Fraser and Omers. They would separate capital and engineering and Prem could help SNC grow in India. Prem was schooled as a chemical engineer at ITT in India. This is a no brainer but would be difficult because it would take longer term profit potential from current shareholders but they would likely take $33 if it was tomorrow.  I would personally like to see Fairfax make another great deal monetarily and reputation wise to prove Prem still has it!

 

 

If Fairfax was to take a passive stake here is what I would recommend. They could do this buy buying in the market and looking at buying some or all of RBC’s 13% of SNC.

 

Disclosure I own Fairfax and SNC.

 

 

1. Restore SNC's reputation and gain back the respect of the investment community, customers, and shareholders. This is the most important job the CEO has. "The Quan" (Jerry McGuire)...

Love, Respect, community and the dollars too.

 

How?

1."SNC goes green slogan"...save the world and make greenbacks for shareholders. I would spend a lot of money on this in a marketing campaign but more importantly make it a culture with in the company workforce. Reward green behaviour and make it the number one priority across all platforms. Use BP (look at what SNC is doing with BP) as the story and do joint marketing with them and other clients projects that promote this movement. This is the most important move for SNC right now. There should be substantial resources of time and money spent on this...SNC owes the world for a small piece of their past...time to make it up. This is the way to do it...action.

 

 

2. It appears the only way to unlock the appreciation of the market of Capital's value is to sell some or all of it with the intention of buying back shares with the proceeds. Fairfax long time partner Omers purchased SNC’s 10.1% (SNC still owns 6.7%) of the 407 but were rebuffed after the Ontario teachers pension acted on their right to match any sale of the 407. Omers were paid $80m break up fee by SNC. Fairfax and Omers are aware of the remaining 407 value and the other royalties assets in the capital portfolio. They are $3b undervalued on SNC’s balance sheet. This is VERY material because the book value of $400m makes SNC balance sheet look weak. That asset is worth $3.5b...$3B in missing in all the computer models etc which allows SNC to trade so cheaply.

 

This would be ratings agency, analysts and shareholder friendly as the value will be unlocked and balance sheet asset will no longer be hidden from the public. More importantly, the share buybacks will ensure cash flow per share in the future will rise on a smaller share count.

 

3. Integration and execution of  1. And 2. Know your strengths and weakness. A CEO cannot do it all

alone SNC is a big company. I would hire a team of Green specialists to build on the culture that is progressing and for passsing this message on to the public. Make it the number one priority it will be worth it monetarily as well...It is the way of the future in business. With capital sold the rest of the company trades for pennies on the dollar...so buybacks should be large at these prices and slowed after the stock rises..to which point dividends would rise more.

 

Retain an advisor specifically overseeing the value of internal assets and to over see the buyback program. Why? Short sellers are manipulating the share price in over the counter market OTC...management is unaware because they are running the day to day business. Hire someone to take advantage of this by looking for block trades during times when your share price is down. In other words,  let the short sellers do it because it will allow you to buy back more shares cheaper! Have  a strategy, you need someone who is looking for sellers to buy big volume at the lowest possible price to maximize the return to shareholders on the buy back program. On the evaluation of assets...is it bettter to sell the capital assets off in pieces or as a whole? What is the maximum price SNC can get? SNC needs someone internally to be evaluating this. Should they do a Spac or IPO of their Carbon Capture techonoly now while they can get a great return on that asset? These aspects of SNC are outside of a CEO and CFO normal job. Warren Buffett or a Prem Watsa are not running SNC...hire the best investment banker in the buiness for this as part of your strategy.

 

As the CEO it is my job is integrate 1. And 2. SNC pensions are a function of the stock price and moral at a company is largely effected by their share price. If 1. And 2. Are done properly then the shares will likely triple at least. Lastly, the past. If were CEO I would be closing the book on the past now..Governemnet lawsuit over and Lstk cash drain over I would let shareholders know that future is 1. and 2. And stick to your plan.