SNC Scandal Seen Spurring Purge by CEO Card
Robert Card spent his first day at the helm of SNC-Lavalin Group Inc. (SNC) meeting with shareholders about the payments scandal that spawned criminal probes, chopped market value by 22 percent and spurred demands for management change at Canada’s largest construction company.
“He has to clean house,” said Stephen Jarislowsky, chief executive officer of Jarislowsky Fraser Ltd., SNC-Lavalin’s biggest investor. “A lot of people who were there who allowed it to happen are still there. I wouldn’t be exactly happy with somebody who signs checks and didn’t have the right explanations of what accounts this was for.”
Card, who doesn’t speak French, is the first American CEO in the Montreal-based company’s 101-year history. His hiring followed the surprise retirement of CEO Pierre Duhaime on March 26, four weeks after SNC-Lavalin said it was investigating inaccurate payment documentation in its construction unit.
“I’m committed to ensuring the company’s social license to operate remains our top priority,” Card, 57, said today on a conference call. He didn’t answer questions about the scandal, and Chairman Gwyn Morgan said the board is handling all matters related to the case and cooperating with authorities.
Swiss authorities have arrested a former executive vice president, the Royal Canadian Mounted Police has its own inquiry under way, and about C$1.6 billion ($1.63 billion) in market value has been erased. A company inquiry conducted by law firm Stikeman Elliott LLP found about $56 million in improperly booked payments in 2010 and 2011 to agents hired by SNC- Lavalin’s international arm.
“It’s not that uncommon for a new CEO to want to have a conference call to put his mark on the company, but I haven’t seen a whole lot of CEOs come in under these conditions,” Trevor Johnson, a National Bank Financial analyst in Toronto, said in a. “Investors aren’t expecting him to fix this thing within a quarter or two.”
Two senior managers left in February before the case came to light: Riadh Ben Aissa, the ex-executive who was arrested by Swiss officials and who oversaw SNC-Lavalin’s business in Libya, and Stephane Roy, a vice president controller.
SNC-Lavalin’s board earned “a black mark” for having the case unfold on its watch, Jarislowsky said in an April interview. Directors went outside the company to recruit Card, who worked as the international chief at the closely held U.S. engineering firm CH2M Hill Cos. and was undersecretary in the U.S. Energy Department from 2001 to 2004.
“I just want better management,” Jarislowsky said last week in a telephone interview. His firm’s 21.7 million shares of SNC-Lavalin as of Dec. 31 were 14.4 percent of the total outstanding.
Card will have to “clean up” SNC-Lavalin’s corporate culture, said Johnson, who has a sector perform rating on the shares.
“People will be looking toward his ethics, and whether this is a guy they can really believe in,” Johnson said in an interview. “One of the reasons SNC has had so much trouble is that they haven’t had the controls in place the last little while. He will really need to articulate that this is no longer the case.”
Card told analysts and reporters today on the call that while it is “premature” to begin talking about strategy, attracting and retaining the best employees is a priority.
In a note afterward, Johnson wrote that Card “did as well as could be expected.”
SNC-Lavalin rose 0.6 percent to $C38.16 at the close in Toronto, paring the shares’ slide this year to 25 percent. That compares with a gain of 6.2 percent for the 21-company S&P/TSX Industrials sub-index.
The company’s bonds have underperformed a Bank of America Merrill Lynch index of BBB-rated non-financial Canadian debt since Feb. 27, the day before SNC-Lavalin disclosed the payments probe.
Yields on SNC-Lavalin bonds relative to Canadian government debt widened by 37 basis points to an average of 216 basis points as of Sept. 28, while average spreads on the index narrowed by 12 basis points to 185. SNC-Lavalin’s debt rose 0.56 percent in September, trailing the index’s 1.1 percent gain, the data show.
The swoon in the stock may create an opening for an activist investor to swoop in as William Ackman did at Canadian Pacific Railway Ltd. (CP), said Maxim Sytchev, an analyst at AltaCorp Capital in Toronto. Ackman’s Pershing Square Capital Management LP won a proxy fight in May to install a new CEO.
“All these negative issues are creating an overhang,” Sytchev said in a telephone interview. “If the challenges on the engineering and construction side continue, then the probability that something could happen on the activist front increases dramatically.”
On Sept. 18, investigators from Quebec’s anti-corruption squad searched the offices of the McGill University Health Centre as part of a construction-contract inquiry. SNC-Lavalin, which won the C$1.6 billion contract to build the facility two years ago, owns a 60 percent equity stake.
“That adds another dimension to the story,” said Brandon Snow, a principal at Cambridge Advisors in Toronto, the lead manager of the C$1.1 billion Cambridge Canadian Equity Corporate Class (CAMCNEQA) fund, which doesn’t own SNC-Lavalin shares. “Quebec is the most stable part of their business, and that makes me pause much more as a potential buyer of the stock.”
A day after the Quebec raid, an Ontario judge certified a C$1 billion lawsuit on behalf of investors who bought company securities from November 2009 to February 2012. It accuses SNC- Lavalin and executives including Duhaime of “misrepresentations” regarding internal controls, 2010 net income and compliance with the company’s code of ethics.
“We intend to launch a vigorous defense,” Leslie Quinton, a company spokeswoman, said Sept. 28 in an e-mail. “We believe we have always published information appropriately and accurately, following regulatory requirements and best practices regarding timely corporate disclosure.”
Even without the investigations, Card would face headwinds across SNC-Lavalin’s businesses. Sales to mining companies risk being squeezed by what JPMorgan Chase & Co. estimates is a 14 percent drop in industrywide capital spending through 2014.
Card will have to make do without any revenue from Libya, a country that SNC-Lavalin exited last year and one that analysts such as Sytchev say has historically been one of the company’s most profitable regions.
SNC-Lavalin cut its 2012 profit forecast in August after second-quarter earnings trailed analysts’ estimates. Profit for the year will be C$325 million to C$340 million, down from a projection of about C$379 million, the company said.
Card also will be working to master French. Societe Saint- Jean-Baptiste, a French language-rights group, said his Aug. 10 hiring was “unacceptable” because he’s not a Francophone. Quebec Premier Pauline Marois urged SNC-Lavalin before her Sept. 4 election to ensure the new CEO became “at least bilingual.”
That’s part of the plan, according to SNC-Lavalin’s announcement. Card said in the Aug. 10 statement that he and his wife were “looking forward to moving to Quebec and especially to learning to speak French.”
Card “seems to be a guy who’s adventurous, who wants to make a change,” said Jarislowsky. “He certainly doesn’t run away from difficult situations.”
To contact the reporter on this story: Frederic Tomesco in Montreal at email@example.com
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