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Oct 10, 2018

SNC plunges as Canada rules out negotiated deal on graft charges

SNC-Lavalin shares sink after Ottawa says fraud trial to go forward

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SNC-Lavalin Group Inc. (SNC.TO) tumbled the most in more than six years after Canadian prosecutors ruled out a negotiated settlement with the company over past corruption charges.

The Public Prosecution Service of Canada won’t open negotiations for a so-called Remediation Agreement, SNC-Lavalin said in a statement Wednesday. Canada’s biggest engineering and construction company said it “strongly disagrees” with the government’s position and is reviewing appeal options.

The rejection of settlement talks increases the threat to SNC’s business, especially if the graft allegations hang over the company’s reputation and impair its ability to win new construction contracts. The Royal Canadian Mounted Police charged SNC in 2015 with attempted bribery and fraud related to projects in Libya. The builder said at the time that it would “vigorously” defend itself.

“This is a surprise,” said Chris Murray, an analyst at AltaCorp Capital in Toronto. An unwillingness by prosecutors to negotiate an agreement “prolongs the uncertainty around the timing of the conclusion of this matter,” while “raising questions around SNC’s ability to bid on future federal government contracts.”

SNC sank 14 per cent to $44.58 at 3:01 p.m. in Toronto after sliding as much as 15 per cent for the biggest intraday decline since February 2012. SNC’s drop was the largest on the S&P/TSX Composite Index, which fell 1.6 per cent.

New System

SNC would risk becoming a takeover candidate if its stock swoon is prolonged, Murray said.

“If the company continues to trade at depressed valuations, it may be forced to look at strategic alternatives,” he said.

The public prosecutor’s office determined that the criteria for remediation agreements set out by the country’s criminal code “were not met,” said spokeswoman Nathalie Houle, in response to questions about SNC. She didn’t elaborate.

Canada recently adopted a system, similar to mechanisms in other Group of Seven nations, that allows companies to defer prosecution in exchange for fines, remediation and cooperation. SNC had hoped to use the system, saying it allows for the “fair, effective and globally competitive resolution of issues for Canadian corporations.”

Court Risk

Since 2012, SNC-Lavalin has taken steps to improve its ethics and compliance while overhauling its senior leadership team. Chief Executive Officer Neil Bruce told analysts in August that the company was “optimistic” about being invited to settlement talks by prosecutors.

Absent an agreement, SNC will probably proceed through the court system to fight the criminal charges, which could take “several years,” Derek Spronck, an analyst with RBC Capital Markets, said in a note to investors.

If the company is found guilty, the SNC units that are charged would be barred from bidding on Canadian government contracts for 10 years and “face a fine that would not exceed the benefit acquired from the illegal activity,” Spronck said.

The Mounties have indicated that the benefit was $150 million to $200 million, Spronck said.