The last time I saw SNC-Lavalin boss Neil Bruce was in March in London and he seemed miserable. Now he’s gone. On Tuesday, the Montreal engineering and construction company announced his departure. His exit should come as no surprise and was probably a relief for SNC’s biggest shareholders, notably the Caisse de dépôt et placement du Québec.
Did he walk or was he pushed?
It’s likely that both came into play, culminating in a mutual agreement that he would hit the road. By the time we met, he must have been utterly sick of the Ottawa political circus that prevented the company from avoiding a criminal trial through a deferred prosecution agreement (DPA).
At the same time, Mr. Bruce had become an irritant among the federal politicians working the SNC file and a disappointment to shareholders who were sitting on a 60-per-cent loss in the last year alone. No, it wasn’t Mr. Bruce’s fault that SNC was, allegedly, engaged in criminal activity before he arrived at the company in 2013 and that a DPA didn’t land on its lap. Still, the SNC crisis wasn’t getting any better under his watch, the opposite in fact.
Mr. Bruce had sold his Montreal house and moved his family back to London (he is Scottish and owns a house in south Oxfordshire). He admitted to me that he had been approached by headhunters, even if he insisted, not entirely convincingly, that he was still committed to SNC.
The biggest clue that he was heading for the off-ramp came from his promotion of Ian Edwards, a fellow Brit who was president of SNC’s infrastructure sector and who was recruited by Mr. Bruce in 2014. In January, Mr. Edwards was appointed chief operating officer, effectively No. 2 in the company, amid rumours that he was being fast-tracked up the ranks to replace Mr. Bruce.
With Mr. Bruce gone, Mr. Edwards is interim chief executive and under orders from the board “to undertake a review of the strategic direction of the company on an expedited basis.” Note that the press release does not say that SNC will search for a new CEO. The omission suggests Mr. Edwards, a civil engineer, will get the top job. This is the corporate equivalent of becoming the new prime minister of Brexit Britain.
Mr. Edwards could give the company a new start. Evidently, some investors think he will – the shares rallied on Tuesday. But how?
A Quebec judge ruled last month that prosecutors have enough evidence to sustain a criminal trial against SNC, which is accused of bribing Libyan officials between 2001 and 2011 to win contracts. Theoretically, a DPA, a corporate get-out-of-jail card that is widely used in some Group of Seven countries in exchange for hefty fines and commitments to prevent future moral lapses, could magically appear; the Canadian legislation exists for this. But a DPA seems unlikely. Every effort by the Prime Minister’s Office to secure one for SNC has backfired, spectacularly so.
Under Mr. Bruce, SNC was already taking protective action as the criminal trial loomed. There was cost cutting. The company would focus more on services, instead of turnkey engineering and construction projects; downgrade its Canadian infrastructure business; and bulk up its overseas operations, which includes Atkins, the British engineering consultancy. It was bought under Mr. Bruce’s watch in 2016 for US$3.5-billion and immediately boosted the company’s work force by 18,000.
In 2012, SNC had 20,000 Canadian employees. Today, the number is about 9,000. The rest of the employees – 43,000 – work outside of Canada. The Canadian headcount is bound to shrink and will shrink fast if a criminal conviction prevents it from bidding on federal contracts.
SNC’s legal overhang might make it toxic to potential investors or takeover artists. But the company is no basket case, all the more so since most of its business is outside Canada. It is not in financial crisis, maintains an investment-grade rating and well-funded pension plans. The company has a massively valuable investment in Ontario’s Highway 407 toll road (SNC is reducing its stake to about 7 per cent from 17 per cent through a sale, likely to an existing shareholder).
SNC looks inexpensive. Its equity value has plummeted to $4.2-billion, meaning a bidder would be able to buy the company for not much more than its debt value. The Caisse de dépôt et placement du Québec, which owns 20 per cent of SNC, would be one possible bidder. Another would be cross-town rival WSP Global, a big-name design and engineering consulting company. Alternatively, the company could be split up, with its Canadian operations run separately as the work on the remaining contracts is finished. The rest of the company could be rebranded – the SNC name is no longer an asset – and run from Britain or the United States.
The key to making an offer for SNC is determining how much damage a criminal conviction would inflict on the company. If that damage is largely limited to the Canadian operations, it may not be as severe as some investors fear.
Mr. Bruce’s time was up at SNC. His overhaul of the company to make it less Canadian was the right strategy. True, there were problems, such as the disaster in Chile, where the state-owned mining company terminated SNC’s US$260-million contract to build two sulphuric acid plants. But they can be overcome. Mr. Bruce was bitter and angry in his final months at SNC and no one – not him, not his investors, not the politicians wrapped up in SNC’s attempts to secure a DPA – was happy.
Mr. Edwards has a chance to start afresh. SNC still has a lot going for it. His challenge will be to convince investors and key employees that the company is not a lost cause. But that won’t be easy, given its starring role in one of the biggest political storms Ottawa has seen in years.