SNC-Lavalin will face criminal charges, analyst says, but buy it anyway

SNC-Lavalin will face criminal charges, analyst says, but buy it anyway by Nicolast van Praet, January 10, 2013, Financial Post
It’s only a matter of time before SNC-Lavalin Group Inc. faces criminal charges under Canada’s corruption laws, an analyst at Canaccord Genuity says, arguing the engineering giant has sufficient cash on hand to handle any subsequent penalty and lawsuit damages, and that risk-tolerant investors should buy in because its business fundamentals remain strong. “We see charges likely forthcoming because of the high-profile nature of this case and we believe the [federal] government may be under international pressure to act,” Montreal-based analyst Yuri Lynk said Wednesday in a 29-page research report. He said the United States could get involved should Canada fail to charge the company. Since Parliament passed the Corruption of Foreign Public Officials Act in 1998, there have been only two convictions and the country has been chastised by anti-bribery groups as a result, Mr. Lynk noted.

The most notable conviction to date has been that of Calgary oil and gas company Niko Resources Ltd., which paid a $9.5-million fine in 2011 after admitting it bribed a Bangladeshi government minister. SNC will probably be the third company convicted under the law, but the resulting fine is likely to be “quite manageable,” the analyst said. Using the Bonny Island bribery case in Nigeria as a precedent, he estimates SNC will be forced to pay out about $100-million, a fine that would nevertheless “send a strong message that Canada is taking the enforcement of its anti-corruption laws seriously.”

Bonny Island is one of the largest corruption cases in U.S. history. The decade-long scheme, which resulted in plea deals with the U.S. Justice Department starting in 2009, involved US$180-million in bribes allegedly paid to Nigerian government officials to win a construction contract for a liquefied natural gas facility in that country.

The World Bank said in a statement June 29, 2012 that it has credible evidence pointing to a “high-level corruption conspiracy” among Bangladeshi government officials, SNC-Lavalin executives and private individuals in connection to the project. In another case, Pierre Duhaime, SNC’s chief executive officer until he was dismissed in March for breaching corporate policy, was arrested by Quebec’s special anti-corruption police squad Nov.28 on charges of fraud, conspiracy to commit fraud and using forged documents related to the engineering company’s contract to build and maintain the McGill University Health Centre’s new $1.3-billion super-hospital. Another SNC senior executive, former construction unit head Riadh Ben Aissa, faces the same charges. SNC last year disclosed the results of an internal investigation that found $56-million worth of agent payments requested by Mr. Ben Aissa had been misallocated. The company said it does not know where the money went and turned over all its documentation to police. Swiss authorities have been tracing Mr. Ben Aissa’s activity in North Africa as part of an ongoing fraud and corruption investigation and are holding him in detention.

SNC-Lavalin faces two class-action lawsuits, one in Quebec and one in Ontario, seeking total damages of nearly $2-billion ($13 per share) by investors who lost money after the company announced the internal probe. Mr. Lynk estimates SNC could pay between $110-million and $260-million to settle these. The Ontario suit has already been certified and the Quebec class action suit could be certified on Thursday, the analyst said. In all, he calculates the engineering firm faces an estimated payout of $360-million. The company has $550-million in freehold cash, enough to absorb the hit. The events of the last year have delivered a blow to SNC’s reputation but not a permanent one that will cripple its long-term earnings power, the analyst concludes. [Emphasis added]

[Refer also to: Swiss Probe $139M SNC-Lavalin Laundering Case, (ex EnCana CEO) Gwyn Morgan SNC-Lavalin Chair says company aiming at improving compliance, but won’t comment on allegation $22.5M payment linked to MUHC superhospital project ]

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