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SNC Lavalin shouldn’t sell concessions to unlock value: Jarislowsky

Company's largest shareholder would oppose efforts to sell its largest concessions.


September 26, 2012
by The Canadian Press

MONTREAL—One of SNC-Lavalin’s largest shareholders says he would oppose any effort by an activist shareholder to push the engineering giant to sell all or part of its lucrative concessions business to unlock value.

Stephen Jarislowsky, whose company owns more than 14% of the Montreal-based company, said SNC-Lavalin has room to improve but sees no appetite for dramatic change or the need to add more cash.

“I think there’s a need to do something to get more value and it’s by re-establishing the company on an ethical and sound footing the way it used to be always and to look for business,” he said in an interview Tuesday.

The billionaire investor commented after an analyst suggested SNC’s weak market value may prompt an activist investor to push the incoming chief executive to make a bold move.

Maxim Sytchev of Alta Corp. Capital suggested SNC-Lavalin could end up facing the kind of investor-led campaign that resulted in a new chief executive and new directors at Canadian Pacific Railways.

The shakeup at CP was initiated by Pershing Square Capital Management, a New York-based hedge fund led by activist investor Bill Ackman.

“If Pershing could move the needle on much larger CP, there is no reason to think why something transformational could not be accomplished with SNC-Lavalin,” Sytchev wrote in a report.

Robert Card takes over as CEO of SNC-Lavalin on Monday, following a series of controversies about the construction and engineering company’s business practices abroad and its leadership’s oversight of the company’s employees. He will hold a conference call with analysts and media.

Sytchev said investors will give Card, an experienced American businessman, three to nine months to determine what action he will take to improve SNC’s results and valuation.

He said an outright sale of the company is possible but “politically unpalatable” given the reaction to Lowe’s unsuccessful efforts to acquire Quebec-based home renovations retailer Rona.

Consequently, Sytchev said he thinks activist investors will push for a full or partial spinoff of SNC’s concessions assets, which include its stake in the Highway 407 toll road and AltaLink transmission lines business in Alberta.

“A lot of people are doing work in the background and yes I think the probability of somebody stepping up to the plate and maybe becoming more public in that regard, the probability is there for sure,” he said in an interview, unwilling to say who he thinks may lead the charge.

SNC-Lavalin faces a “value disconnect” compared especially to its US peers.

He estimates the concessions are conservatively worth $23 per SNC share, including $14.18 for Highway 407, $6.88 for AltaLink and $1.94 for other investments. That compares with $22.30 per share for its core operations.

SNC could sell “marginal but mature concessions” such as Astoria power plants in the US and pay a special dividend, Sytchev said. The investors could also seek a substantial course issuer bid and for Card to buy a substantial amount of SNC shares in the open market to demonstrate his confidence in the company.

The company’s current share price suggests the market values its core engineering and construction (E&C) business at $1.7 billion, compared to $3.4 billion for concessions.

Sytchev said it’s precisely at this moment when clouds are overhanging the company that people are looking to step in, especially given the rising activist stances taken in Canada over the last five years.

“There’s certainly no guarantee, but clearly I believe the SNC situation corresponds to what an activist investor would look for in a story.”

Jarislowsky described these people as “vultures.”

He added he would expect any such move would be met with opposition from other investors as well as government agencies, and has seen no great accumulation of SNC shares of late.

SNC-Lavalin said on Tuesday that it has been awarded a contract valued at more than US$50 million to provide engineering, procurement and construction services for a mine tailings disposal system at an iron ore project in Chile.

The system will treat 20,000 tonnes of tailings produced by the mine each day.

The project is expected to be completed by the third quarter of 2013. The engineering phase has been completed and construction is scheduled to start in October.

SNC-Lavalin said the contract was awarded by Compania Minera del PacDifico S.A. for work at the Cerro Negro Norte iron ore project in the Atacama desert, one of the driest places in the world.

The technology will allow the tailings to be stored safely and recover about 98 per cent of water, an extremely scarce resource in the region.

SNC-Lavalin is one of the leading engineering and construction groups in the world with offices across Canada and operations in some 100 countries.

©The Canadian Press