SNC-Lavalin faces renewed questions over future following bombshell report

MONTREAL — SNC-Lavalin's sudden return to the spotlight brings renewed focus on the beleaguered engineering firm's health, along with the potential economic consequences if it continues its path of decline.

SNC-Lavalin Group Inc.'s bidding prospects, reputation and stock price have been causes for concern in a year that has seen its own financial woes conflated with its role in a political scandal that continues to dog Prime Minister Justin Trudeau.

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Canada's ethics commissioner said Wednesday that the prime minister improperly pressured the attorney general to overrule federal prosecutors to grant the construction giant a sweetheart deal on corruption charges, bringing SNC's pending criminal trial back into the headlines.

But it remains unclear whether a conviction for the company, which employs some 8,700 people in Canada, would result in the dire economic fallout the government has feared.

The engineering giant is facing criminal prosecution over alleged bribes to Libyan government officials while pursuing business in that country. Under the current rules, a conviction includes a ban on federal contracts for up to 10 years.

About 29 per cent of SNC-Lavalin's $10.06 billion in revenues in 2018 came from Canada, down from roughly 60 per cent of revenue in 2014. Analysts estimate that up to one-half of home-turf revenues stem from federal contracts.

Neil Bruce, who stepped down as CEO in June, repeatedly said the company lost out on between $5 billion and $6 billion in contracts over the past five to seven years as competitors sought to persuade customers the company is too hot to handle — an impression only heightened in the glare of the Ottawa firestorm.

"At IBM we called this 'FUD' — fear, uncertainty and doubt," said Karl Moore, an associate professor at McGill University's business school.

"Your key competitors go, ‘Where there’s smoke, there’s fire’ — cliche, but it makes governments, which is one of their big, big customers, nervous about whether they’re going to be around."

SNC-Lavalin, which has seen its market value fall by more than 60 per cent since January, began to claw its way back from a 15-year-low in its stock price last week before shares slumped again Wednesday.

Its shares closed down 57 cents, or 3.21 per cent, at $17.21 on the Toronto Stock Exchange.

Trudeau and his aides had argued that a criminal trial could trigger the company's exit from Canada and the loss of thousands of jobs — a claim that was later underscored in an internal SNC-Lavalin document obtained by The Canadian Press. It outlined a "Plan B'' that the company presented to federal prosecutors last fall in which, absent a remediation agreement, it would split the company in two, move its offices south of the border and chop its Canadian workforce to 3,500 from 8,700 before eventually shuttering its domestic operations.

While an exit from Canada may not be on the schedule, SNC-Lavalin is already on track to slim down its domestic labour force after interim chief executive Ian Edwards announced the company will quit the field of fixed-price construction projects — where the bid winner eats any cost overruns — and pivot to a more stable business model that revolves around engineering services.

"Their withdrawal from the business certainly leaves a bit of a void in the Canadian marketplace," said analyst Chris Murray of AltaCorp Capital.

"Our expectation is that others will come forward, including maybe international companies, to maybe fill those voids. But at the same time expect that the cost of that competition is likely going higher," he said.

Though rivals such as Aecon Group Inc. and WSP Global Inc. are poised to gain from a retreating SNC, the group of companies compliment each other on ground that might otherwise be ceded to foreign competitors.

Aecon is currently partnered with SNC-Lavalin on four major projects: Montreal's REM light-rail project, Toronto's Eglinton Crosstown LRT and the refurbishment of the Darlington and Bruce nuclear plants.

SNC-Lavalin’s exit from construction opens the door to Aecon and other builders. And as SNC begins to scale down operations amid a freshly withdrawn financial guidance — already slashed three times since January — WSP Global continues to scoop up engineering firms and forecast double-digit revenue growth through 2021, when it expects to generate up to $9 billion and overtake SNC’s workforce with close to 65,000 employees.

Companies in this story: (TSX:SNC)

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