Estimates of the value of the Champlain Bridge contract to SNC-Lavalin Group Inc.'s revenue have ballooned to as much as $2.5-billion as investor attention shifts to the engineering firm's ability to complete the project at a decent profit.
"We knew this contract was going to be big. But on a $12.3-billion backlog, I don't have to do the math for you, it's huge," said Yuri Lynk, an analyst at Canaccord Genuity in Montreal. "We're worried about them not executing properly. It's the main risk that comes to mind."
The Canadian government announced late Wednesday that it picked a consortium led by SNC-Lavalin and Spanish partner Grupo ACS to design, build, finance, operate and maintain Montreal's new Champlain Bridge over a 35-year period.
The St. Lawrence River span, which replaces an existing bridge nearing the end of its life, will be a public-private partnership project, meaning the SNC group has to deliver the work at a pre-determined fixed price and by set dates.
SNC's win surprised investors, many of whom had assumed the federal government would shy away from giving public work to a company facing charges of corruption and fraud. The allegations against SNC relate to its dealings in Libya and have not been proven. The company has said it will plead not guilty.
Federal officials said the SNC consortium submitted the lowest-cost, technically compliant proposal, which will help ensure value for taxpayers as well as high-quality infrastructure designed to last more than a century. SNC and its group partners have already been involved in construction of several bridges, including the Port Mann bridge in Vancouver and the Bay Bridge in San Francisco.
Initial estimates on the contract's value to SNC were in the range of $1.5-billion. But a declaration Thursday by consortium partner ACS that the deal is worth €1.85-billion ($2.4-billion at current exchange rates) for its 50-per-cent portion alone suggests the value of SNC's other 50 per cent has been underestimated and could top $2.4-billion as well. The information was reported by Reuters.
The work will be added to SNC's infrastructure and construction backlog. The business unit, which includes projects like hospitals, mass transit and water treatment plants, has posted losses on earnings before interest and taxes for the past two years. SNC announced this week it will replace the executive in charge of the business.
SNC officials declined to comment Thursday. The shares rose 1.7 per cent in Toronto trading to close at $43.60.
Chief executive officer Robert Card has said the company is increasingly confident it has improved project delivery and risk management in the infrastructure and construction unit. But questions were being raised Thursday about just how aggressive it had to be in its Champlain bid to secure the contract.
"You don't want to be destroying your future profitability just to show the market that you still have the ability to win work," said Dundee Capital Markets analyst Maxim Sytchev. "Would they be as aggressive if they had $20-billion worth of backlog? Probably not."
Questions remained Thursday as to what the federal government would do with the Champlain Bridge project in the event SNC is convicted of corruption charges.
Under current federal procurement rules, SNC would be banned, or debarred, from bidding on federal work for 10 years and the government could terminate the existing bridge contract with the company. More likely, Ottawa would pursue the contract and impose oversight and monitoring measures on the construction and subsequent maintenance.
Federal ministers insist they've prepared for that contingency. But this is largely new territory for Canada.
"The government is bound to run into conflicts between its desire to promote companies like SNC-Lavalin and maintain some sort of debarment or responsible supplier regime," said Brenda Swick, a lawyer at McCarthy Tétrault in Toronto who specializes in international trade and government contracting. "The problem for the government is they haven't thought it out."