Montreal-based engineering firm Snc-Lavalin Group Inc (TSX:SNC) has obviously found itself in the headlines quite a bit this year, but not for the reasons that shareholders would have hoped for.
In February, the RCMP announced that it had charged the firm with corruption charges related to its operations in Libya, including allegations that it had offered bribes to country officials and defrauded the nation of upwards of $100 million between 2011 and 2011.
While the alleged actions would have taken place close to some twenty years ago and the company vigorously maintains that any actions would have involved employees who have long since left the firm, there are likely to be consequences for it and its shareholders going forward.
For one, we can expect greater scrutiny concerning all things SNC, at least for the immediate future.
That has the risk of scaring not only suppliers, but also would-be clients of the firm, who don’t want to be associated with any allegations of scandals, blackmailing and bribery.
That, along with the threat of being delisted from being able to bid on Canadian projects, could threaten the company’s ability to effectively compete for bids for quite some time.
Because of the nature of the business and the fact that the timeline for projects between bidding and completion typically takes several years, that type of impact may not show up in the company’s quarterly results right away, although it’s certainly something investors should be on the lookout for.
Secondly, the recent allegations could hamper the company’s ability to compete for overseas contracts as well.
While we’d like to think that isn’t the case, the fact is that corruption is still a real thing, and while allegations of bribery and scandal are a big deal in Canada, they — at least for now — are far more commonplace in some other parts of the world.
The enhanced level of scrutiny that’s likely to follow the company given that the latest charges have now been made public could interfere with its ability to carry out operations in some of its foreign markets.
That development could have something to do with the company’s announcement following the news of the RCMP investigation that it has plans to exit certain markets and refocus efforts on the likes of countries like Canada, Hong Kong and Australia, among others.
Finally, because of the aforementioned two headwinds, the prudent thing for SNC to do right now is to tighten up its ship in preparation of what could be choppy waters ahead. So far, however, there appear to be some difficulties in accomplishing just that.
Earlier this year, the company announced that it was scrapping plans to sell its 10% stake in 407 Toll highway to pension plan OMERS, and has since found itself embroiled in a legal battle whereby one of its partners on the 407 project, Cintra Global is claiming it has first rights of refusal on any stake in the 407 that SNC is looking to sell, with SNC forcefully disputing those claims.
Either way, the dispute is headed to the courts now, which will delay the sale of SNC’s 407 assets and will likely cost it a pretty penny in legal bills.
Foolish bottom line
In light of the ongoing corruption allegations, the move to focus operations on more developed G-20 nations makes sense and should help set the company up going forward by avoiding the reputational backlash often associated with these types of scandals – whether or not they can be proven in court.
But as long as its name continues to stay in the headlines, at least for now, this will be an investment that I’ll continue to stay clear of.
Making the world smarter, happier, and richer.
