Investors are calling for drastic changes in strategy, and one analyst sees privatization as an alternative that is gaining legitimacy
Montreal-based SNC-Lavalin Group Inc. announced Tuesday that Neil Bruce had departed as chief executive after a turbulent year in which the company’s stock dropped by more than half amid looming criminal charges and repeated missteps in its operations.
Chief operating officer Ian Edwards will assume Bruce’s role on the board, and as chief executive on an interim basis, and plans to meet with shareholders for the next two months and undertake a “strategic” review of how to simplify and de-risk the business, according to a company statement.
It marks an abrupt end to Bruce’s almost four-year tenure as chief executive, during which time the company’s stock mostly rallied higher. But last fall, after federal prosecutors announced they would not invite the company to settle criminal charges — alleging its executives paid $47.7 million in bribes to Libyan government officials between 2001 and 2011 for lucrative contracts — the company faltered on multiple fronts. It missed earnings, botched contracts and lost in major markets, and some investors became increasingly vocal in their frustration with the way Bruce communicated setbacks.
“I think he completely lost the confidence of shareholders, and all stakeholders,” said David Taylor, an investor with Taylor Asset Management, adding, “He just over-promised and under-delivered every goddamn time.”
Taylor acknowledged Bruce inherited many of the company’s problems, including the criminal charges. Still, he blamed him for surprising shareholders each time there was a setback in the past few months.
So far this year, a contract with Chilean copper miner Codelco blew up, leading to roughly $350 million in write-offs; and in Saudi Arabia, where the company had been expanding, the opportunities suddenly dried up amid diplomatic tensions with Canada; even the long planned sale of its stake in the 407 toll road in Ontario, which was supposed to inject cash to help the company repair its balance sheet, instead slid off the rails amid litigation between the competing potential bidders.
Each time, Taylor said Bruce initially assured shareholders there was nothing to worry about only to return with bad news.
The result has been multiple revisions to its guidance while Bruce promised the second half of the year would feature cost-cutting and better performance.
“The guy’s taken a beating, but part of it was his own fault,” said Taylor.
On news of his exit, the stock jumped nearly 6.92 per cent to $25.34 as of Tuesday afternoon. Signs that Bruce was preparing to leave had been mounting for months, including the sale of his home in Montreal earlier this year. By Tuesday, he had already returned to the U.K., where his family is based.
The company’s stock has dropped 58 per cent from one year ago when it hit $60.47.
Taylor said the company needs to go further than just hiring a new CEO, and said shareholders should band together to replace the board and push the company to shed assets and explore new strategies.
Billionaire Stephen Jarislowsky, an investor and former director of SNC-Lavalin, told the Financial Post that he blamed both management and the board for the poor performance.
Given that the company faces criminal charges, and likely a trial, in Canada, he questioned how it could attract and retain talented employees. Under those circumstances, it needs to shed many of its assets, particularly in Canada, he said.
“I think that the board is very weak, and … I think that the shareholders should make a great deal of noise,” said Jarislowsky.
So far, the largest shareholder, Caisse de dépôt et placement du Québec, has not publicly called for change at the board; and it did not respond to requests for comment for this article.
Meanwhile, investors and analysts cheered the company’s announcement on Tuesday that the board has tasked Edwards to “develop a plan for sustainable success, that de-risks and simplifies our business model and generates consistent earnings and cash flow.”
Maxim Sytchev, an analyst at National Bank of Canada, on Tuesday applauded the company for taking a strategic review and noted Edwards, who joined the company in 2014, led the infrastructure business for most of his time, which has been a consistent performer.
But he said investors are increasingly calling for drastic changes in strategy.
On Sunday, Sytchev wrote a note advocating SNC-Lavalin consider various strategies including reinventing itself as a pure play consulting firm or taking itself private.
He wrote that part of Bruce’s plan, to implement cost-saving measures designed to save $250 million annually, actually pose a threat to employee morale at its consulting business in the U.K.
“We see privatization as an alternative that is gaining legitimacy as the shares continue to languish,” he wrote.
Copyright Postmedia Network Inc., 2019