Did the Prime Minister’s Office panic over SNC-Lavalin’s story of impeding doom? Or did they have real numbers showing the future effects of a criminal prosecution?

In the last few weeks the Canadian media have feasted daily on the political controversy over Prime Minister Justin Trudeau’s treatment of the former Attorney, General Jody Wilson-Raybould. This controversy arose over SNC-Lavalin’s repeated meetings with the Prime Minister’s Office, intended to persuade the PM to persuade the AG to intervene in a criminal prosecution of that company.

The SNC-Lavalin story that the PM, the PMO and the Clerk of the Privy Council, Michael Wernick told was that unless the company was protected from criminal prosecution there would be catastrophic consequences, not just for the now-reformed company but also, collateral damage for other, innocent parties: the company’s employees, shareholders and pensioners. I have seen no public numbers to quantify the estimated extent of these damages, merely the assumption that they would be catastrophic and unjust. The PM seemed to have assumed that most, if not all of SNC-Lavalin’s 9,000 Canadian employees are likely to become unemployed. He has responded to his critics by saying that there is nothing wrong with his trying to protect these 9,000 Canadian jobs.  But what if those jobs aren’t at risk, and don’t need his protection?  Did the PM just risk his career and his government over an exaggeration?

If convicted of criminal offences, SNC-Lavalin would, potentially, be banned for 10 years from Canadian federal government contracts, although the 10 years may change soon with a change in federal procurement policy now under active consideration. The change would permit an official in the Department of Public Services and Procurement Canada to reduce the now-standard 10 year ban to a shorter one that this official deems appropriate. This official would not be part of Canada’s prosecutorial service, with guaranteed independence. Rather, he or she would be part of the Department, reporting to a Minister, who is a member of Cabinet. In that situation there may be nothing unlawful in the PMO or the PM encouraging the Minister to pressure the official to reduce a ban from 10 years to any shorter number of years, as long as that pressure did not amount to dictation.

If SNC-Lavalin is convicted, the company would probably face one of two scenarios, both of which would be inconvenient and costly, but not fatal.

First, and most likely, assuming a reasonable fine upon conviction, even with a full 10 year federal government ban there would probably only be a minor negative effect on long-term profits and employment.  Look at what has happened in the recent past. As a penalty for an earlier corruption-related event, the World Bank, in 2013, banned SNC-Lavalin for 10 years. The World Bank ban resulted in similar bans from all the other multinational development banks, such as the Asian Development Bank, the Inter-American Development Bank, the African Development Bank and the European Bank for Reconstruction and Development. For example, the African Development Bank Group banned some 120 SNC-Lavalin affiliated companies in numerous countries. That was more than five years ago. Was there a catastrophic effect?

Despite all these bans, the company’s revenues and profits have grown since 2013. Remarkably, the company’s 2017 Annual Report (2018 is not yet published) shows a 50% increase in the number of employees world-wide in that year.

In 2013 total revenues (in $C) were $7.9 billion, growing to $9.3 billion by 2017 (+17.7%). However, the 2013 net income of $35.8 million grew to $382.0 million by 2017 (+106.7%), while adjusted consolidated earnings per share increased from $0.74 to $3.20 (+ 432%). (It was only in the painful last quarter of 2018, with its problems in Saudi Arabia, that the company’s revenues and profits have declined, along with a sharp drop in its share price, but not because of these bans).

The consensus of 12 stock market analysts since August 2018 has remained buy/hold, with no sell recommendations, anticipating a recovery in the SNC-Lavalin stock price.

SNC-LAVALIN-GROUP consensus

When Michael Wernick told the House Judicial Committee that the SNC-Lavalin stock had recently tanked, his comments implied that the reason was the market’s fear of prosecution. However, the existence of the prosecution has been known for a time, and probably factored into the share price. The 4th Quarter problems in foreign markets like Saudi Arabia are new, and thus, only recently factored in.

A federal government ban of even 10 years would affect only a part of SNC-Lavalin’s Canadian business, which is a small part of its global business. Over 80% of SNC-Lavalin’s employees are outside Canada. Most of its  projects, and most of its revenues and profits, come from outside Canada.  A Canadian federal government ban would be limited to Canadian federal government projects.  However, there are also provincial and municipal projects, as well as non-government projects (such as the $1.5 billion McGill University Hospital project.

What remains unknown is whether, after a conviction in Canada, any other countries or development banks would also impose such bans. If so, would they cause any significant financial damage? Or would they have no noticeable effect, just like the World Bank ban?

The second scenario is a takeover by another engineering and construction firm. This would be politically unpleasant for both the federal and Quebec governments, especially if the purchaser was from outside Canada. But there are companies in Canada such as PCL or Aecon that could take it over. The value of SNC-Lavalin is in its contracts, and in the engineering and other employees working on them.  Anyone acquiring the company’s assets would preserve their value by keeping the human assets: the employees working on contracts.

The PM’s concern about SNC-Lavalin’s almost 9,000 Canadian employees, even if these jobs were threatened, must be kept in perspective. As a Canadian employer, SNC-Lavalin is not even in the top 50 in Canada:

http://www.globeinvestor.com/series/top1000/tables/employers/2003/

In any event, the risk of such unemployment of the workforce in Canada is minimal. If the company is building a bridge or a hospital, the customers will want them completed, not abandoned, half finished, for someone new to try to complete on time and on budget. Regardless of who might, hypothetically, take over the control of SNC-Lavalin’s business, the purchaser would need to keep all or almost all of SNC-Lavalin’s Canadian and non-Canadian employees.

The damage to existing shareholders is also unlikely to be devastating. The shares of an international construction company will always be somewhat risky, with price volatility. Share purchasers must recognize the risk, particularly given a history of bribery. Almost all the company’s shares are held by large mutual funds and institutional investors, fully capable of assessing risk. The largest shareholder owns only some 2.5% of the shares, while most others own a fraction of that. All of these investors have large, diversified portfolios. SNC-Lavalin shares represent, typically, only 2-3% of their total holdings. Even if SNC-Lavalin’s shares became completely worthless these investors would scarcely suffer.

The unsubstantiated prediction of SNC-Lavalin’s imminent death, unless rescued by the Prime Minister, reminds me of Mark Twain’s response to a newspaper report that he had died:

“The report of my death was an exaggeration.”

Are the reports of SNC-Lavalin’s certain death (without a remediation agreement) also an exaggeration? If so, the SNC-Lavalin lobbyists have done a better job for their company than the Prime Minister’s advisors have done for him.