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PRINT EDITION
As SNC CEO eyes options for turnaround, key rival already holds playbook
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By NICOLAS VAN PRAET
  
  

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Thursday, June 13, 2019 – Page B1

MONTREAL -- As SNC-Lavalin Group Inc. interim chief executive Ian Edwards starts meeting stakeholders in his review of the company's strategic direction, he could look to a key rival for inspiration on how to execute a turnaround.

Some 2,400 kilometres south in Dallas lies the headquarters of Jacobs Engineering Group Inc., a company that has generated one of the sector's most successful corporate reversals in the past five years, says Canaccord Genuity analyst Yuri Lynk.

The key: Exit the highest-risk businesses and reorganize to become a more pure-play engineer consulting-services company, even if it's at the expense of revenue growth.

"SNC is burning hundreds of millions of dollars a year in cash through poorly executed lump-sum, turnkey contracts," Mr. Lynk said in a research note.

"While SNC is in a much tougher spot than Jacobs was, we believe similar bold moves are necessary [to those that Jacobs took] to turn the company around."

Calls for SNC to take dramatic action underscore the expectations that Mr. Edwards faces from most investors to deliver a blueprint for substantive change.

Although the CEO is working with valuable assets - such as a stake in Ontario's Highway 407 toll road - and SNC enjoys an investment-grade credit rating, it also has some troubled divisions.

His predecessor, Neil Bruce, made a big bet on oil and gas by buying Kentz Corp. for $2.1-billion in 2014 before the sector declined. SNC has also struggled with problematic loss-making contracts with clients such as Chilean miner Codelco and continues to suffers reputational damage from bribery and fraud charges related to its past business dealings in Libya.

Many shareholders, such as David Taylor of Toronto-based Taylor Asset Management, have their own prescriptions for the path SNC should take. The company has to be far more predictable and get out of volatile and competitive business lines that require a lot of capital. The large shareholders, including the Caisse de dépôt et placement du Québec and Royal Bank of Canada, have to get that message to the board and help dictate strategy, he said in an interview.

"Just stop bidding on [these infrastructure and resource] projects and wind these businesses down," Mr. Taylor said. "They absolutely suck cash."

SNC says Mr. Edwards, who replaced Mr. Bruce in a move Tuesday that set off a 7-per-cent rally in the shares, is being asked to develop a plan that will deliver "sustainable success" by lowering risk, simplifying the business model and generating consistent earnings and cash flow. The company did not provide answers to several questions put to it by The Globe and Mail Wednesday about the circumstances surrounding Mr. Edwards's appointment and what strategic options would be considered.

Jacobs, an engineering and construction company like SNC, struggled to meet its earnings guidance for years because of project writeoffs and other issues before shifting its focus to engineering services and digital capability, according to Mr. Lynk.

In remaking itself, Jacobs shocked many observers in 2018 by selling its energy, chemicals and resources unit, which had been a central element of its strategy for decades, he said.

Jacobs also bought CH2M Hill, a leading professional-services company to bulk up in consulting.

SNC-Lavalin already has a key consulting asset to build on: The British-based Atkins business it bought in 2017. Atkins is winning projects on work such as transit, roads and airports and is expected to generate an 11.7-per-cent margin on earnings before interest taxes, depreciation and amortization (EBITDA) both this year and next, according to National Bank of Canada equity analyst Maxim Sytchev. Atkins maintained its margins - although sales decreased - during the past financial crisis, he said in a report this month.

"The biggest risk to Atkins operations is not Brexit but engineering talent leaving for greener pastures," Mr. Sytchev said.

The analyst offers another option for SNC, however: a go-private transaction. In a report - titled The Level of Apathy is Palpable. Why Stay Public? - he estimates enough SNC shareholders could be persuaded to tender their stock to a possible white knight, such as the Caisse or another investor, at a price of $38.37 a share for a deal to go through.

Mr. Taylor, however, isn't convinced that SNC shareholders would bite at that price.

He said all the net asset value analysis he's examined shows SNC can climb to $50 to $55 a share.

"Let's wait and see what the strategy is," he said. "Because if the strategy is the proper strategy, we can get $50."

SNC-LAVALIN (SNC) CLOSE: $25.50, UP 15¢

Associated Graphic

SNC-Lavalin says interim chief executive Ian Edwards is being tasked with developing a plan that will deliver 'sustainable success' by lowering risk, simplifying the business model and generating stable earnings and cash flow.

DARIO AYALA/REUTERS


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