Topic: Spinoffs

SNC ponders spinoffs to cut debt burden

General Mills LISTEN:  

SNC-LAVALIN GROUP INC. $27 (Toronto symbol SNC; Manufacturing & Industry sector; Shares o/s: 175.6 million; Market cap: $4.7 billion; Dividend yield: 1.5%; Takeover Target Rating: Medium; is a leading Canadian engineering and construction company that specializes in large-scale infrastructure projects such as roads, bridges, transit systems and water-treatment plants.

SNC’s revenue rose 16.4%, from $8.24 billion in 2014 to $9.59 billion in 2015. That increase was mainly due to its August 2014 acquisition of U.K.-based Kentz Corp., which sells engineering and construction services to oil and gas firms. SNC paid $2.1 billion for Kentz.

Revenue fell 11.6% to $8.47 billion in 2016 as a result of lower revenue from mining clients. In July 2017, SNC paid $3.5 billion for U.K.-based engineering firm WS Atkins plc, the largest acquisition in its history. Atkins specializes in industrial projects such as railways, nuclear power plants, water-treatment facilities and highways. As a result, its revenue gained 10.2% to $9.33 billion in 2017, and rose again in 2018 by 8.0% to $10.08 billion.

Due to costs to integrate its new businesses, SNC’s earnings fell 80.5%, from $8.74 a share (or a total of $1.33 billion) in 2014 to $1.70 a share (or $255.5 million) in 2016. The Atkins purchase lifted earnings to $2.34 a share (or $382.0 million) in 2017. However, lower demand from oil and gas clients forced SNC to write down its purchase of Kentz by $1.2 billion. As a result, it lost $7.50 a share (or $1.32 billion) in 2018.

If you exclude all unusual items, earnings per share fell 59.1%, from $3.20 in 2017 to $1.31 in 2018.

In the quarter ended March 31, 2019, SNC’s earnings before unusual items dropped 72.7%, to $0.21 a share (or a total of $36.9 million) from $0.77 a share (or $136.0 million) a year earlier. Revenue in the quarter fell 2.8%, to $2.36 billion from $2.43 billion. Those declines are due to lower results from its resources and infrastructure businesses.

SNC holds cash of $614.9 million; its long-term debt of $3.0 billion is a high 64% of its market cap.

To help pay down that debt, the company recently agreed to sell most of its 16.77% stake in Highway 407, a toll highway in southern Ontario.

Under the terms of the sale, SNC would have sold 10.01% of 407 to OMERS (Ontario Municipal Employees Retirement System) for $3.0 billion. Depending on the highway’s future performance, SNC would have received additional payments of up to $250 million over the next 10 years.

However, the highway’s other shareholders—Spain’s Ferrovial S.A. (which owns 43.23%) and the Canada Pension Plan Investment Board (40%)—have decided to exercise their right of first refusal over SNC’s shares. However, SNC has disputed Ferrovial’s claim. That firm wants to buy about 52% of SNC’s 407 shares. An Ontario court will hear the case on June 21, 2019.

Regardless of the court’s decision, any sale to the Canada Pension Plan or Ferrovial would be at the same price as the OMERS deal. As well, SNC will have to pay OMERS a break fee of $81.3 million.

SNC’s shares have dropped 52% in the past year. That’s mainly because it continues to face criminal charges that it used bribes to win construction contracts in Libya between 2001 and 2011. If convicted, the courts could ban the company from bidding on new government construction contracts for 10 years. A conviction could also prompt the company to spin off its international operations.

SNC-Lavalin is still a hold.


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