Investors sensing a Warren Buffett moment in SNC Lavalin should look before they leap
In every crisis, there is opportunity. Or at least that’s what everyone from presidents like JFK to fictional villains like Littlefinger in Game of Thrones would have us all believe.
It certainly sounds good, especially to investors, who might be tempted into contrarian plays simply because they are, well, contrarian. After all, in a world where headlines and twitter feeds drive sentiment, there’s always the possibility the market overshoots one way or the other, presenting a chance to buy low or sell high. Be greedy when others are fearful, fearful when others are greedy. Works for Warren Buffett, right?
Well, it might look like there is just that kind of Buffett moment popping up, in the shape of SNC-Lavalin (TSX:SNC). The Montreal-based engineering company faces corruption and fraud charges that are at the heart of the Ottawa-based Justin Trudeau/Wilson-Raybould scandal now dominating the nation’s political headlines. The stock has been suffering: it ended Wednesday trading at $37.03, way off its 52-week high last spring, when it surpassed $60. Not all of this can be put down to the charges, or to the scandal: earlier this month, the company reported a fourth-quarter 2018 loss of $1.6 billion and slashed its dividend for the first time in decades. SNC-Lavalin shares’ dividend yield is now a paltry 1.1 per cent, even with the stock depressed.
But it’s fair to say the scandal in Ottawa isn’t helping the stock price any, and that’s not likely to change anytime soon. Appearing before the House of Commons justice committee on Wednesday, Wilson-Raybould said that as justice minister and attorney general she faced “consistent and sustained” pressure from the Prime Minister’s Office to stop the criminal prosecution of SNC-Lavalin and instead negotiate a remediation agreement, which would have resulted in some fines.
That seems a pretty clear case of attempted political interference in the decisions of the attorney general, which is apparently a no-no. No doubt much political brouhaha will ensue, for weeks or even months; for SNC-Lavalin, having its name invoked in such a negative frame is unlikely to do much good for investor sentiment.
But if and when the dust clears, then what? The most obvious challenge is the fire under the political smoke: the charges against the company. The court case could be heard sometime this year, but the charges date back to 2015, and the alleged offences date back much further. Four years ago, the RCMP alleged that the company offered bribes of almost $50 million to one or more public officials in Libya between 2001 and 2011, when the African country was ruled by Muammar Gaddafi. (The dictator died in 2011.) The company has pleaded not guilty. It has also pointed out that since the alleged transgressions it has changed its management team and its board, established a “world-class ethics and compliance framework,” and since 2012 has “settled every single matter or accusation brought against us,” as it said in an op-ed published on iPolitics.ca last December.
How that case will turn out — and how long it will take to resolve — is now a matter for the courts. Should the company be convicted, it stands to be barred from Canadian government work, and thousands of jobs, especially in politically important Quebec, could be on the line. The impact on earnings would be less clear. On the upside, Canadian operations are a small part of SNC-Lavalin’s overall revenue — it operates in more than 50 countries — and it could probably make do without them. On the downside, being labelled a pariah in its own country might be a roadblock to contracts in other jurisdictions.
Given the long history of this case already, and the way the Canadian courts and appeals work, either of those outcomes could be years away. But in the meantime, the case highlights how vulnerable SNC-Lavalin and its international operations are to political risk. One element of that is indeed the retroactive and extraterritorial nature of the Corruption of Foreign Public Officials Act, which seems to have been getting tougher under Trudeau’s Liberal government. The recent allowance for deferred prosecution agreements, which brought the CFPOA into line with U.K. and U.S. practice, isn’t really a sop to corporations: under them, companies might not have to face prosecution, but on the other hand the government does not have to prove its case in court.
As well, Canada no longer exempts under the CFPOA so-called facilitation payments — which are basically payments to low-level officials to grease the wheels of routine government functions — but other jurisdictions, notably the U.S., still do. Not a big deal, maybe, but it could put international Canadian companies like SNC-Lavalin at a disadvantage over the long term.
The other political risk, which has kind of got lost in the Trudeau/Wilson-Raybould kerfuffle, is Canada’s foreign policy, specifically with Saudi Arabia. Frosty relations with the Saudis — which really started getting cold after Foreign Minister Chrystia Freeland called for the release of jailed human rights activists in a tweet last summer — were a contributing factor in the company writing down more than $900 billion in oil and gas assets last quarter. For a government that supposedly is doing everything it can to save SNC-Lavalin, the federal Liberals really haven’t been doing it any favours.
As it stands, short of charges getting dropped and the Saudis changing their minds on Canada, there are a few potential backstops to SNC-Lavalin’s slide. One is its ownership stake in the 407 toll highway in Toronto, which is probably worth several billion; the company has said it’s weighing its options for sale. Another would be some kind of white-knight takeover — though at the current share price, long-time shareholders might not realize much of a premium on any offer. As well, there’s the chance of action from Quebec, where Premier Francois Legault has suggested local investors could put together a “blocking” stake in the company to avoid a takeover and the loss of a provincial corporate heavyweight.
We’ll see, of course. But given that the upside and downside risks look pretty fairly balanced right now, investors might want to take a longer look before seizing on the SNC-Lavalin crisis as a Buffett-esque opportunity.