The Motley Fool

Are We Seeing SNC-Lavalin Group Inc.’s Foundations Crumble?

Engineering and construction company SNC-Lavalin Group Inc. (TSX: SNC) was once the leader among its Canadian peers and a top player worldwide. Now it has seen the roughest year in its history, and things continue to go from bad to worse for the company.

Is there an upside that investors could look forward to as the stock price suffers? Or is this the beginning of a major restructuring of the company we thought we knew?

Contract troubles

On Saturday it was announced that Public Works and Government Services Canada would be ending one of its dealings with SNC-Lavalin. Instead, it awarded a building maintenance contract to Brookfield Johnson Controls Canada, which is a joint venture between Johnson Controls Inc. and Brookfield Property Partners (TSX: BPY.UN), a spinoff of Brookfield Asset Management Inc.

This contract is for the maintenance of 3,800 crown properties with an eight-year term worth $9.6 billion, which also includes an option for an additional six years, making the total value of the contract $22.8 billion.

Quebec refuses to pay

It was not a good week for SNC-Lavalin, as it also is having issues with the Quebec government in terms of the newly completed McGill University Health Centre superhospital. The province is refusing to pay the $172 million in charges that were over the original $1.3 billion budget.

This is a very touchy subject for both the province and the company, as former SNC-Lavalin CEO Pierre Duhaime and Executive Vice President of Construction Riadh Ben Aissa are currently facing bribery charges for their roles in securing the contract for this hospital, among other projects.

Mining meltdown

Thanks to the current downtrend in the mining sector, SNC-Lavalin could see a couple of years of reduced revenue. Currently, 45% of SNC-Lavalin’s revenue comes from the mining and energy sectors, and both are seeing dropping prices. Crude is under $80 a barrel, gold is under $1,200 an ounce, and many other metals, such as copper and silver, are seeing below-normal prices.

Even issues such as new taxes in copper-rich Zambia or the construction slowdown in China will have an effect on SNC-Lavalin, as project after project is being delayed or shelved.

Uncharacteristic layoffs

Before the lost federal contract, SNC-Lavalin announced that it would be cutting 4,000 jobs or 9% of its workforce, with 75% of the cuts being outside of Canada. This cost-cutting plan is expected to cost the company $300 million up front and produce $100 million a year in savings starting in 2015.

The long arm of the law

While the mining issues listed above have been credited for the layoffs, others believe that this has been done to generate the cash necessary to cover the fines and penalties stemming from the bribery and corruption scandal.

If legal precedent persists, SNC-Lavalin could be faced with a bill of up to five times the amount of bribes given. What could be even more damaging for the company is if it is found guilty of the charges, it will no longer be eligible to bid on projects for the Canadian government, one if its top revenue generators.

The lost building maintenance contract may just be the tip of the iceberg, as just last month, former executive V.P. Riadh Ben Aissa was convicted in a Swiss court of facilitating $130 million in bribes to earn SNC-Lavalin several projects in Libya. This shows that the company’s hands are not clean, and billions of dollars in potential government projects could go up in smoke along with the stock price.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway has no position in any stocks mentioned.

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