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The Quebec government has signalled it will work to prevent an acquisition of SNC-Lavalin, with Premier Francois Legault saying it is important to 'protect their headquarters here.'

Paul Chiasson/The Canadian Press

The Quebec government is renewing its vow to back SNC-Lavalin Group Inc. as a strategic asset to the province in the event of a hostile takeover after the engineering firm issued a brutal profit warning this week.

The storied Montreal-based multinational is one of roughly 10 corporations the government of Premier François Legault has identified as strategic to the province, meaning it carries a financial weight and profile vital to the economy. The government has signalled it would work to prevent SNC-Lavalin from being acquired in concert with pension fund manager Caisse de dépot et placement du Québec as the engineering firm finds itself more exposed than ever after its latest stock rout.

“I worry a lot about SNC-Lavalin," Mr. Legault said on Thursday. “I want to make sure that we do all we can do to protect their headquarters here ... The decrease in the company’s share price has left the company very vulnerable."

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The defensive posture around SNC highlights a shift in Quebec attitudes toward its big corporate champions that’s been building for years. No longer indifferent to seeing head offices decamp to Toronto or elsewhere and the gutting of decision-making power, Quebec’s business and political leaders are adopting an increasingly hardened stand on the need to shelter the province’s most cherished companies and nurture their growth.

“We need to kind of be close to companies and understand what they’re going through,” Pierre Fitzgibbon, the province’s Economy Minister, said in an interview. “SNC-Lavalin is clearly in black on my list,” he said, while the government has also identified “a lot of grey names" of more questionable priority. Quebec won’t automatically take stakes in strategic companies because that would be cost prohibitive and send the “wrong signals to the market,” the Minister said. Rather, the government intends to work to anticipate any major issues affecting the firms and act as needed through Investissement Quebec, a financing arm of the provincial government, for example, by buying enough shares to contribute to a blocking minority.

Rarely, if ever, has a Quebec premier articulated so directly his intention to protect a corporate head office. For Mr. Legault’s CAQ government, it’s about well-paying jobs – both direct and indirect. And it’s about Quebec rebuilding some of its economic power to contribute more to Confederation, something that begins with a stable of big private-sector winners.

SNC-Lavalin took the market by surprise on Monday when it said profit for 2018 would come in more than 50 per cent lower than previous guidance. The company disclosed previously unknown trouble with a major mining contract that analysts say was with Codelco in Chile and growing uncertainty about new oil and gas contract prospects in Saudi Arabia. As the shares fell to decade lows, SNC was passed in market capitalization by WSP Global Inc. for the first time, losing its crown as Canada’s biggest engineering firm by that measure.

In some ways, it’s déja vu for investors.

For the better part of the past seven years, the company has been repeatedly pulled under by a tide of negative news. It started with the disclosure of $56-million worth of undocumented payments and later spiralled into one of Canada’s biggest corporate ethics scandals with the arrest of SNC’s former chief executive officer and the conviction in Switzerland of another senior manager for bribing the son of deposed Libyan dictator Moammar Gadhafi. The former CEO, Pierre Duhaime, pleaded guilty to a charge of helping a public servant commit breach of trust for his role in a graft case involving the construction of Montreal’s $1.3-billion MUHC superhospital.

The pain continued this past October when SNC-Lavalin said the Public Prosecution Service of Canada decided against negotiating with the company on a settlement that could have suspended and eventually stayed federal bribery and fraud charges against it. Neil Bruce, SNC’s CEO, is trying to close that dark chapter in the company’s 108-year history. He has said it has probably cost the firm more than $5-billion in lost revenue and continues to damage its reputation worldwide.

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SNC-Lavalin’s turbulent decade

As of Friday Feb 1, 2019

$65

5

60

1

2

3

4

55

50

45

40

35

30

25

20

‘09

‘10

‘11

‘12

‘13

‘14

‘15

‘16

‘17

‘18

March 6, 2009

SNC-Lavalin announces CEO Jacques Lamarre will step down after 13 years, relinquishing control to executive vice-president Pierre Duhaime. Duhaime was later arrested by police and, on Friday, pleaded guilty to lesser charges in a bribery scandal related to the construction of a Montreal hospital.

1

Feb. 28, 2012

SNC-Lavalin says it is launching an investigation into inaccurate documentation of payments by its construction unit. It is later revealed that police are probing the matter in Switzerland and Canada.

2

Feb. 19, 2015

RCMP lays rare corruption and fraud charges against the company related to work in Libya.

3

Oct. 10, 2018

SNC-Lavalin says Canada’s Public Prosecution Service declined to enter into negotiations with the company on a deal that could suspend and eventually stay federal corruption and fraud charges against it.

4

Jan. 28, 2019

Profit warning, disclosure of trouble with a mining contract, and writedown of its oil and gas business related to uncertain future prospects in Saudi Arabia.

5

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

SNC-Lavalin’s turbulent decade

As of Friday Feb 1, 2019

$65

5

60

1

2

3

4

55

50

45

40

35

30

25

20

‘09

‘10

‘11

‘12

‘13

‘14

‘15

‘16

‘17

‘18

March 6, 2009

SNC-Lavalin announces CEO Jacques Lamarre will step down after 13 years, relinquishing control to executive vice-president Pierre Duhaime. Duhaime was later arrested by police and, on Friday, pleaded guilty to lesser charges in a bribery scandal related to the construction of a Montreal hospital.

1

Feb. 28, 2012

SNC-Lavalin says it is launching an investigation into inaccurate documentation of payments by its construction unit. It is later revealed that police are probing the matter in Switzerland and Canada.

2

Feb. 19, 2015

RCMP lays rare corruption and fraud charges against the company related to work in Libya.

3

Oct. 10, 2018

SNC-Lavalin says Canada’s Public Prosecution Service declined to enter into negotiations with the company on a deal that could suspend and eventually stay federal corruption and fraud charges against it.

4

Jan. 28, 2019

Profit warning, disclosure of trouble with a mining contract, and writedown of its oil and gas business related to uncertain future prospects in Saudi Arabia.

5

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

SNC-Lavalin’s turbulent decade

As of Friday Feb 1, 2019

$65

5

60

1

2

3

4

55

50

45

40

35

30

25

20

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

March 6, 2009

SNC-Lavalin announces CEO Jacques Lamarre will step down after 13 years, relinquishing control to executive vice-president Pierre Duhaime. Duhaime was later arrested by police and, on Friday, pleaded guilty to lesser charges in a bribery scandal related to the construction of a Montreal hospital.

1

Feb. 19, 2015

RCMP lays rare corruption and fraud charges against the company related to work in Libya.

3

Oct. 10, 2018

SNC-Lavalin says Canada’s Public Prosecution Service declined to enter into negotiations with the company on a deal that could suspend and eventually stay federal corruption and fraud charges against it.

4

Feb. 28, 2012

SNC-Lavalin says it is launching an investigation into inaccurate documentation of payments by its construction unit. It is later revealed that police are probing the matter in Switzerland and Canada.

2

Jan. 28, 2019

Profit warning, disclosure of trouble with a mining contract, and writedown of its oil and gas business related to uncertain future prospects in Saudi Arabia.

5

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

But Monday’s disclosure matters for several reasons, including the fact it probably sets back Mr. Bruce’s target to reach $5 in total earnings per share by 2020 by at least one year. On the flip side, it has galvanized SNC-Lavalin backers. While the news has shaken market confidence in the engineering firm, some of its key stakeholders are doubling down on their commitment to the company.

Caisse de dépôt et placement du Québec, SNC’s biggest shareholder with a roughly 20 per cent stake, said this week that short-term bumps in the market don’t change its views on the company’s “solid performance prospects” over the years to come. The pension fund manager has boosted its position in SNC in recent months and would add more shares in the event there is an attempt by a private equity firm or other hostile player to seize control of the company, according to a person familiar with the matter who was granted anonymity because he wasn’t authorized to speak by his employer. The Caisse is working “in complementarity” with the government, Mr. Fitzgibbon said.

Montreal fund manager Jarislowsky Fraser Ltd., a long-time shareholder in SNC-Lavalin, is also taking a long-term view, telling The Globe and Mail this week that the market is failing to give enough credit to the company’s “many positive attributes,” including the ever-improving quality of its revenue stream and solid backlog. “Despite this [week’s] short-term setback, some of which is outside of SNC’s and the current management team’s control ... the leadership team have been moving the company in the right direction,” said Charles Nadim, co-head of equities.

There is no known takeover bid for SNC-Lavalin at the moment. Mr. Bruce said in December that buying the company would be difficult because of its size and the fact its investor base is 80-per-cent Canadian. But that was before the latest trouble was disclosed. SNC’s market valuation was $8.3-billion at the time. It has now dropped to about $6.4-billion.

Any buyer would also inherit a number of problems with which SNC-Lavalin management is struggling. Mr. Bruce, who was named CEO in September, 2015, was assigned to fix the company’s spotty earnings performance and execute on key contracts such as Toronto’s Eglinton LRT light rail line. He has made much progress, lowering costs and revenue risk while expanding the company’s capabilities with the acquisition of British engineering firm WS Atkins PLC.

But legacy issues, including the corruption file, continue to eat up his time and energy. So he’s appointed a chief operating officer for the first time to make sure contract blunders don’t happen again. The two men are now conducting a new review of SNC’s operations, including its oil and gas business in the Middle East, to determine whether there are any problems. They’ll report their findings to the market on Feb. 22, along with financial guidance for 2019.

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“We believe it is prudent to assume they will take a big step back relative to consensus expectations and come in closer to those achieved in 2017,” analyst Frederic Bastien of Raymond James said. “Considering SNC has since added Atkins’s 18,000 professionals to its roster, that’s a disheartening thought.”

Acquiring Atkins was done with the help of the Caisse, which provided SNC-Lavalin with a $1.5-billion loan secured by the value and cash flows of SNC’s interest in the Highway 407 toll road. The pension fund also took $400-million in SNC equity.

The backing came with conditions, notably that SNC’s headquarters has to remain in Quebec for seven years while senior management also has to be based there. Analysts say the Caisse could seek similar guarantees in future partnerships with Quebec firms as a way to carry out its dual mandate – promoting Quebec’s economic development while earning the best possible returns for depositors.

There is no doubt that SNC-Lavalin’s operational centre of gravity has shifted toward Europe and the Middle East in recent years as its Canadian business has shrunk. The company currently employs about 8,500 people in Canada (including about 3,400 in Quebec), less than half the 20,000 it had in 2013, spokesman Nicolas Ryan said.

Still, the firm’s work is deeply intertwined with Canadians' lives and nowhere more so than Quebec. Its project footprint in the province is both broad and visible. The company steered or worked on Montreal’s Ville Marie Expressway as well as the Olympic Stadium and massive James Bay hydroelectric network. It has almost completed Montreal’s Champlain bridge and was also recently selected to build the city’s new REM light rail transit system.

“There’s been a certain detachment by Quebeckers towards SNC-Lavalin but the fact is Quebec just doesn’t have many multinational companies of this stature,” said Louis Hébert, a management specialist at Montreal’s HEC business school. Mr. Hébert said he believes the firm deserves to be protected because of its wider impact on Quebec society.

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“If you’d asked me 10 years ago if there was a danger in doing this, I’d have said yes,” Mr. Hébert said. “But no longer. Almost every government and every country does it. And I think we’ve be naive not to do it also.”

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