SNC-Lavalin Group Inc. is deepening its ties to the resource sector with a $2.1-billion deal for oil and gas services company Kentz Corp. Ltd. in a move that aims to both bolster international growth and minimize business risk.
Montreal’s construction and engineering giant said the deal marked a milestone that would strengthen the company’s business, and executives say they are increasingly confident in their plans to make the major strategic changes announced in May 2013. The Kentz acquisition not only helps fuel growth, but pushes SNC-Lavalin further past the bribery and corruption scandals that shook the company in recent years.
“We have made SNC-Lavalin a more efficient, integrated and client-focused company, while enhancing our ability to deliver the highest ethics and compliance performance,” Robert Card, chief executive officer of SNC-Lavalin, said on a call with analysts Monday.
London-based Kentz provides engineering, construction and technical support to oil and gas companies in major growth markets such as the Asia Pacific, Australia, the Middle East, and North America. Kentz is listed on the London Stock Exchange and has operations in 36 countries.
The combined business of SNC-Lavalin and Kentz would generate about $10-billion in annual revenue, with 44,500 total employees and $13-billion in backlog fees that are committed to be paid by clients in the future.
“The agreement to acquire Kentz is an important milestone in our strategic plan to become a global tier-one engineering and construction company with a leadership position in oil and gas,” said Neil Bruce, president of resources, environment and water at SNC-Lavalin, on the call. “It fulfills a second strategic objective of increasing the portion or revenues we expect to derive from services.”
SNC-Lavalin’s risk profile is expected to improve as the services business becomes the largest revenue driver. And as SNC-Lavalin is able to offer a broader range of services, it will be able to compete for larger and more complex oil and gas projects, management said. The deal will also increase SNC-Lavalin’s revenues from oil and gas by $4.9-billion, for a total of $5.3-billion.
SNC-Lavalin said the purchase would be accretive to its earnings within one financial year of the deal closing, and estimates $50-million in annual cost reductions through the delisting of Kentz from the London Stock Exchange and the merging of some offices. Both companies’ boards have approved the deal, which is expected to close in the third quarter of the year, pending customary conditions and regulatory approvals.
The deal “makes a lot of sense” from a strategic perspective, said Maxim Sytchev, an analyst at Dundee Securities Corp. Among other factors, “it enables SNC-Lavalin to access liquefied natural gas, upstream [and the] maintenance market, the buckets of oil and gas spend that are growing the fastest,” he wrote in a note to clients.
Mr. Card is leading a strategic plan to restructure the company and refocus the business in the wake of corruption scandals that have damaged SNC-Lavalin’s reputation. These allegations of bribery and fraud involving former executives both in Canada and abroad led the company to shake up management and develop a three-pronged plan to improve profitability and stability. This includes a focus on certain sectors and geographic areas, adjusting assets in its infrastructure concession investments division, and increasing interaction between its business units.
The Kentz acquisition comes less than two months after SNC-Lavalin sold its Alberta-based electricity transmission company AltaLink for $3.2-billion to Warren Buffett’s Berkshire Hathaway Energy. Mr. Card said at the time the proceeds would be “jet fuel” for use by the engineering and construction business.
Mr. Card said Monday that the Kentz and AltaLink transactions together strengthen the company and help propel it forward.
“While we have much work ahead to realize the value of both of these transactions, it gives us confidence to increase our focus on the disposition of other mature assets including Highway 407,” he said, adding that the successful deals could accelerate its plans for a sale of the toll highway it operates and manages.