SNC-Lavalin Braces for More Fallout From Payments Scandal

SNC-Lavalin Group Inc. (SNC) may still face more fallout from probes that uncovered improperly booked construction payments, helped topple the chief executive officer and led to a former vice president’s arrest.

Costs may keep climbing past the C$5.4 million spent so far on an internal investigation and related matters, Canada’s largest engineering company said yesterday. SNC-Lavalin already has booked an additional C$5 million for severance payments to ex-CEO Pierre Duhaime, who stepped down in late March.

Beyond those expenses, the Montreal-based company is awaiting the results of criminal investigations in Canada and Switzerland, and searching for a new CEO. That chore may take at least three months, and possibly longer, according to the interim chief, Ian Bourne.

“If you’re a highly qualified CEO, you don’t want to step into a hornet’s nest and tarnish all the hard work you have done before taking the top job at SNC,” said Trevor Johnson, a National Bank Financial analyst in Toronto.

“On the flip side, SNC is one of the best-known engineering companies in the world and CEOs are very driven individuals,” Johnson said in an interview. “Surely someone would appreciate the challenge of going to SNC given how successful the company has been up to this year.”

Annual Meeting

SNC-Lavalin’s annual meeting yesterday in Toronto marked the first time all shareholders could hear directly from executives since the company disclosed Feb. 28 that it was investigating inaccurate payment documentation in its construction unit.

The shares tumbled 23 percent from Feb. 27 through yesterday, helping make SNC-Lavalin this year’s worst performer among the 21 industrial companies in Canada’s benchmark S&P/Toronto Stock Exchange Composite Index, based on data compiled by Bloomberg.

SNC-Lavalin fell 1.9 percent to C$37.31 yesterday at the close in Toronto.

The company’s independent investigation and severance costs trimmed first-quarter profit by 7 cents a share, Maxim Sytchev, an AltaCorp Capital analyst in Toronto, told clients in a note. He rates the stock as outperform, and National Bank Financial’s Johnson rates it as sector perform.

Expenses tied to the inquiry may rise as SNC-Lavalin cooperates with law enforcement agencies investigating the scandal, Chief Financial Officer Gilles Laramee said on a conference call. “At this stage we are not in a position to estimate or provide a forecast of that.”

‘Hit on Earnings’

Johnson said he estimates that SNC-Lavalin may report second- and third-quarter costs from the investigation of C$5 million in each period.

“It’s unfortunate,” he said. “It will be a hit on earnings, but we would not expect those costs to continue past this year.”

SNC-Lavalin’s internal inquiry, conducted by the law firm Stikeman Elliott LLP, found about $33.5 million in payments in the construction unit were incorrectly booked in 2011 and an additional $22.5 million was improperly recorded in 2010 and 2011, according to the company.

The $33.5 million of expenses from so-called agency agreements were authorized by Duhaime, “in breach” of the company’s ethics policy, after other executives refused to approve them, the company said. Duhaime stepped down in late March.

SNC-Lavalin characterized customer support yesterday as “strong” and Sytchev said the company’s competitive position wouldn’t suffer long-term harm.

Challenging Year

Finding and hiring a new CEO while cooperating with authorities’ investigations will help make 2012 the company’s most challenging year, and the probes are likely to reveal more than they have so far, executives said.

“The reality of these police investigations means that they are going to find some other stuff,” said Bourne, who had been a director before taking on the interim CEO post. “I would be quite surprised if there weren’t some more things that surface.”

SNC-Lavalin said last month it was cooperating with a Royal Canadian Mounted Police inquiry that led to a search of its headquarters. Swiss authorities said April 30 a criminal probe resulted in the arrest of former Executive Vice President Riadh Ben Aissa and “uncovered suspicion of corruption, fraud and money laundering, all in relation to business conducted in North Africa.”

Ben Aissa, a dual citizen of Canada and Tunisia, oversaw SNC-Lavalin projects in Libya.

Libya Backlog

Work in Libya accounted for about 7 percent of SNC- Lavalin’s backlog when the rebellion against dictator Muammar Qaddafi broke out in February 2011, and all work was suspended as employees were evacuated. SNC-Lavalin posted a C$39.3 million loss last year on projects in the North African country, according to a March 26 filing.

The company is “actively” looking at getting back into Libya, Bourne said on the conference call.

Since SNC had broken ground on a number of projects in the country before pulling out, “to back away would be tough,” said Johnson, the National Bank Financial analyst.

“Obviously the optics are challenging, but they want to be in North Africa because they have a lot of roots there,” he said. “They would be throwing away their entire legacy.”

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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