SNC Mulls New Deals With $2.9 Billion Berkshire Cash

While the ink’s still drying on SNC-Lavalin Group Inc.’s sale of its power-transmission unit to Berkshire Hathaway Inc., Chief Executive Officer Robert Card has potential targets in mind for the $2.9 billion windfall.

Canada’s largest engineering company has zeroed in on potential takeovers to boost its engineering and construction businesses, Card said in a phone interview yesterday after the accord with Warren Buffett’s company was announced. He declined to identify any specific targets. SNC’s stock surged.

“We’re reasonably confident that we have leads on things that make sense,” Card said. “We’ve made no decision at this point on the use of proceeds.”

The sale of SNC’s AltaLink business, which owns more than half the transmission grid in the Canadian province of Alberta, is Card’s boldest move yet since he took the helm of the Montreal-based company in October 2012. The first American CEO of the company, Card has focused on re-establishing SNC’s credentials after a corruption probe and has pursued infrastructure concessions like toll roads and bridges.

“For sure SNC is going to acquire something,” said Maxim Sytchev, an analyst at Dundee Securities Corp. in Toronto. “It’s a huge number.”

SNC shares jumped 5.1 percent to a two-year high of C$52.14 at the close of trading in Toronto. The stock had risen 3.8 percent this year through yesterday.

Sytchev calculates the sale of AltaLink values the business at C$18.75-C$19.40 for each SNC share. Pierre Lacroix, an analyst at Desjardins Securities, values AltaLink at C$20 a share, he said in a note to investors.

“In our view, an acquisition represents a major catalyst over the next six to twelve months,” said Lacroix, who boosted his target price for the stock to C$61 from C$55. “SNC has indicated that it could also entertain a buyback or dividend if a suitable acquisition is not possible.”

Minority Stake

SNC said in November it would consider selling all of AltaLink as well as listing a minority stake on the stock market, in order to free up cash for its traditional engineering and construction units. At the time, Sytchev said the business could be worth C$10.44 to C$23.38 per SNC share, or C$1.58 billion to C$3.54 billion.

“When we started the process, we said this was all about the engineering and construction business for SNC-Lavalin,” Card said. “The real story for us is that this is a big catalyst for growth.”

Created in 2002, AltaLink had C$5.9 billion of assets as of Dec. 31, including 280 substations and about 12,000 kilometers (7,500 miles) of transmission lines. With the purchase, Buffett’s Omaha, Nebraska-based company expands its energy business, which has been growing through acquisitions.

Corruption Scandal

Since taking over, Card has tried to reshape SNC after a corruption scandal involving his predecessor Pierre Duhaime triggered a fraud probe and investor lawsuits. In February, Quebec’s financial markets authority allowed the company to bid again on public contracts in the province after reviewing its “ethics and compliance” program.

With the all-clear, SNC is seeking new infrastructure concessions such as airports, toll roads and bridges to offset slumping sales in divisions such as metals and mining.

In March it reported a drop in fourth-quarter profit and said earnings would be less than analysts’ estimates for 2014 due to a slump in commodity markets and unprofitable road projects. SNC said yesterday it will provide a revised outlook on a pro-forma basis taking account of the sale, when it reports first-quarter results next week.

Card said yesterday that SNC would also reach out to one of the big Canadian pension funds if a deal it’s considering exceeds the proceeds from the AltaLink sale. Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund manager, already owns about 10 percent of SNC.

Strategically Compelling

“If we needed more capital than this provides, for something that was strategically compelling for investors, we wouldn’t hesitate” approaching the funds, Card said. “We’ve told everybody that all options are on the table.”

Yesterday’s agreement also calls for SNC-Lavalin and Berkshire’s energy business to jointly develop “engineering, procurement and construction opportunities.” That relationship should cheer SNC shareholders, Sytchev said.

“Now there’s a relationship with Berkshire Hathaway to develop transmission assets in North America,” he said. “That has to be worth a lot of potential upside to a long-term shareholder in SNC. That’s critical.”

Before it's here, it's on the Bloomberg Terminal.