Investor confidence low in ‘schizophrenic’ Canada amid Aecon deal delays: SNC-Lavalin CEO
MONTREAL — The head of SNC-Lavalin Group Inc. said Canada should avoid being “schizophrenic” in its openness to foreign capital, as delays around the proposed acquisition of a Canadian construction firm threatens to magnify various political squabbles that have already dampened investor confidence.
Neil Bruce, chief executive officer of the engineering and construction giant, said the months-long delays in the proposed takeover of rival Aecon Group Inc. could make Canada appear closed off to certain capital flows at a time when the engineering, procurement and construction industry is becoming increasingly global.
“You’ve got to make up your mind: Do you want to be a closed economy and protectionist, or do you… actually want to encourage inward investment?” he said.
Ottawa is currently reviewing the acquisition of Aecon by China Communications Construction Co. Ltd., a Chinese state-owned enterprise. The deal was announced in October 2017, and must be completed before a final deadline of July 13.
“It’s a fairly simple question, which is: if somebody wants to invest in something in the country and it takes a long time to get an answer, is that a positive or a negative thing? I would say it’s more negative than positive,” he said.
While Aecon and SNC-Lavalin compete with each other for construction contracts, they are also partners on several projects, including the $2.75-billion refurbishment of the Darlington nuclear facility in Ontario.
Criticism of the Aecon deal by politicians and business groups spurred a full-scale national security review of the transaction, which has been ongoing for nearly three months. Some experts have warned the $1.5-billion sale would give the Chinese government indirect access to some sensitive assets in Canada, and therefore poses a risk to the country.
Bruce said delays of the acquisition of Aecon has been compounded by political wranglings over the North American Free Trade Agreement and resource issues.
“I think there’s a lot of question marks at the moment, whether it’s NAFTA or building a pipeline to the West, or whether it’s Hydro-Quebec getting its electricity to the U.S.,” Bruce said. “You can go through a number of things and say: is this the best environment for foreign investment? It’s probably not the best it’s ever been.”
Bruce’s comments come as he nears his three-year anniversary as head of Montreal-based SNC-Lavalin, the largest engineering and project management company in Canada. The firm is now entering the tail end of a long corporate transformation, analysts say, as the company looks to shake off criminal charges that have hobbled it for years.
“They’re finally surfacing,” said Frederic Bastien, an analyst with Raymond James in Vancouver.
The company’s troubles began around 2012, when former CEO Pierre Duhaime stepped down without warning, after news that a former vice-president of the company was being investigated by police. By February 2015, RCMP had filed criminal charges against the company, including for fraud and corruption allegations tied to its operations in Libya.
The company has long called for a deferred prosecution agreement (DPA), which would effectively free the company of charges without forcing it to admit wrongdoing. In exchange, it would have to pay a fine (analysts expect it could be around $200 million) and prove it has introduced sufficient protections to avoid a repeat of its past practices.
Ottawa said it would introduce DPAs in its 2018 budget, though it didn’t provide specific timelines for when they would come into force.
Bruce believes SNC-Lavalin has earned the right to be invited into the DPA process, after the company has spent the last six years changing its operational processes, improving its ethics and compliance program and reshuffling its management team.
“We hope that that would be afforded to us,” he said.
The absence of a DPA has been a consistent lag on the company stock, despite making substantial gains since Bruce took over as CEO, analysts have said. SNC-Lavalin’s stock price has risen from a low of around $35 per share in 2013 to well above $50 today, where it has remained for more than two years. The stock was trading up half a per cent at $56.31 on Thursday.
“As long as the DPA is not settled I think there’s a whole swath of investors that won’t touch it,” Bastien said.
Still, the company’s potential future growth prospects look better than ever, analysts say, particularly following its $3.6-billion acquisition of U.K. firm WS Atkins, which extended the company’s reach into the U.S. and Europe while deepening its engineering and infrastructure know-how.
“We had a few gaps,” Bruce said in justification of the deal. “We didn’t really have a big strong presence in Europe, and we didn’t have the real infrastructure engineering capability in the U.S.”
The acquisition was also seen as a move toward lower-risk sectors after the company’s $2.1 billion purchase of Kentz Corp. in 2014, which widened its exposure to the oil and gas sector at a time when oil prices were collapsing.
Bruce sees the nuclear and infrastructure divisions as the two major growth engines for the company in coming years. Analysts have also said it provides new opportunities in the consulting business, which has been lucrative for the firm.
“Company-wise they’re as good a company as they’ve ever been, but the markets are tough,” Bastien said.
The company has also managed to win major new projects in Canada recently, helping to swell its project backlog to the largest in years.
SNC-Lavalin’s infrastructure expertise could give the company a leg up as it bids on major new public transit projects, analysts say. In February, the company won a project to build the $6.3-billion Réseau Express Métropolitain light rail project in Montreal, one of the largest public infrastructure project’s in the city’s history.
And there are plenty more project bids ahead. Bruce said the Trillium light-rail line in Ottawa, the Gordie Howe bridge in southern Ontario, and a handful of potential oilsands expansion projects could all provide major new revenue streams for the firm.
Prime Minister Justin Trudeau introduced an ambitious infrastructure plan in 2016 as one of his political campaign provinces, planning to spend $186.7 billion on rail, road, sea and airport projects over the next 12 years. The plans also detail spending in so-called “social infrastructure” projects, and smaller subsidies for new bus fleets and waterworks developments. In its first years of implementation, the program has been criticized for widespread delays, with billions of dollars being reallocated to later years than planned.
Bruce said that Ottawa’s infrastructure spending plans are not necessarily a lifeline for EPC firms, but that it provides necessary cushion as companies bid on projects.
“Companies are not looking at individual contracts being a ‘must win’ because there are a number of projects being kicked off.”
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