SNC-Lavalin scandal won't hurt future business, say analysts
A police raid is not a good sign, but despite the turmoil, analysts aren't calling SNC-Lavalin a sell.
Photo: Graham Hughes/Canadian Press
SNC-Lavalin CEO Pierre Duhaime retired in March.(Photo: Graham Hughes/Canadian Press)
Investors will likely have a lot of questions for management at SNC-Lavalin Group when the firm holds its annual general meeting on May 3. Most of these questions can be boiled down to this: What on earth is going on?
The RCMP carried out a search warrant at the Montreal headquarters of Canada's largest construction and engineering firm on April 13 as part of an ongoing investigation. SNC-Lavalin made clear that the probe concerns "certain individuals who are not or are no longer employed" by the company, and that it is fully co-operating with police.
The raid itself was not unexpected. On March 26, the company revealed the results of an independent board committee investigation into $56 million in payments the firm made to commercial agents, typically people on the ground in foreign countries who help SNC-Lavalin win contracts. It then turned over information to the RCMP. The payments, made in 2010 and 2011, were supposedly allocated for three projects but instead went somewhere else. The board committee said it couldn't determine with certainty where the funds ended up. The one person it believes has detailed knowledge of the payments, former executive vice-president of construction Riadh Ben Aissa, is no longer with the firm and did not respond to the board's inquiries. The internal investigation also found CEO Pierre Duhaime improperly approved some of the payments even after two other senior executives refused to do so themselves. He stepped down from his post the same day the findings were released. SNC-Lavalin described his departure as a retirement.
Ben Aissa reportedly had close ties to Saadi Gadhafi, son of the now deceased Libyan strongman, and played a large role in helping SNC-Lavalin secure work in the country, such as a $500-million airport in Benghazi. In February, the company announced Ben Aissa and another executive, Stéphane Roy, had left the company. This came just a few months after Cynthia Vanier, a mediator from Ontario who conducted a fact-finding mission to Libya last year funded by SNC-Lavalin, ended up in prison in Mexico. She and three others are accused of plotting to smuggle the younger Gadhafi and his family from Libya to a safehouse in Mexico. Vanier has denied all charges.
What, if any, connection exists between the RCMP's investigation and SNC-Lavalin's work in Libya is unclear. The company has said it does not believe any of the suspect payments were intended for Libya. No one from SNC-Laval in has been charged with wrongdoing.
The optics are dreadful, however, and the company's reputation has suffered a bruising. Its share price has fallen nearly 30% from a high in January, and RBC Capital Markets analyst Sara O'Brien downgraded the company to Sector Perform following the RCMP search.
One important question is whether any of these events will impair the company's ability to win new business. In this regard, for the most part, analysts are unconcerned. Maxim Sytchev, managing director with AltaCorp Capital in Toronto, issued a note following the raid observing that SNC-Lavalin has secured $2.1 billion in new contracts over the past few months "while facing unprecedented upheaval." SNC-Lavalin also has $1.2 billion in cash, a nice cushion to deal with any potential fines resulting from the RCMP's investigation, Sytchev notes.
Indeed, not one of the 16 analysts following the stock has a Sell rating on it, indicating they believe the scandal will blow over with minimal damage. Given the scandal has already resulted in the departure of the company's CEO, however, the seriousness of the investigation should not be underestimated. There may yet be nasty surprises in store.
More stories from Canadian Business
MSN.ca Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
Should new wireless companies Mobilicity, Wind Mobile and Public Mobile be allowed to fail?
Thanks for being one of the first people to vote. Results will be available soon. Check for results
- Yes, the market will decide if they are competitive enough to survive.
- No, the playing field in the wireless market is not level. The government should help these companies.
- I don't know.