Former SNC-Lavalin director Jarislowsky demands shareholder vote on ‘cruel’ 407 sale
May 1, 2019 by The Canadian Press
TORONTO—A former director of SNC-Lavalin Group Inc. is calling for a shareholder vote on what he describes as the company’s “cruel and Machiavellian” decision to sell the bulk of its stake in Ontario’s 407 toll highway operator for $3.25 billion.
Stephen Jarislowsky said the sale runs counter to responsible management, as the firm’s 407 assets comprise about four-fifths of the $5.86-billion market capitalization of a company that he suggested derives only a thin strip of its value from its legacy engineering business.
“The board’s decision regarding the 407 in my opinion lacks ethics and goes counter to fiduciary exercise of responsibility. At the very least in this case, a free vote by the shareholders should be mandatory before the 10 per cent sale of the 407 is permitted even if current law permits it,” he said in a “personal note” posted Monday on the website of the Canadian Foundation for Advancement of Investor Rights, where he sits on the board.
Listed companies seeking to sell off a business that amount to 50 per cent or more of their assets — defined based on the balance sheet or other criteria such as revenue — must hold a shareholder vote, according to Toronto Stock Exchange rules. Market capitalization is not one of the measures, however.
Jarislowsky likened the investment in the toll highway to a government bond and said it promises higher profits as Toronto-area road traffic increases, estimating its value would double in 10 years.
“Why would one not remain invested in such a superb asset after having suffered in the market?” he asked. “With this 407 sale, shareholders are forced by its own board to gamble on rescuing a now near-worthless asset, a deal that strikes me as cruel and Machiavellian,” he added, despite the engineering and construction unit’s eight per cent boost in revenues to $9.82 billion last year.
“In effect, SNC-Lavalin as valued today is not an engineering company,” Jarislowsky said, less than two years after the firm’s purchase of British engineering giant WS Atkins.
SNC-Lavalin said in an email April 30 that “selling capital assets is very much in the ordinary course of our business.”
“The potential sale of a portion of Highway 407 ETR has been publicly disclosed every time it was considered,” said spokesman Nicolas Ryan, noting the company had been publicly mulling the partial sale for about eight months before the April 5 announcement.
The deal will see the OMERS pension plan buy a 10.01 per cent stake in 407 International Inc., reducing SNC-Lavalin’s interest to 6.76 per cent. The other owners of the toll highway are a subsidiary of Ferrovial S.A., holding a 43.23 per cent stake, and the Canada Pension Plan Investment Board with 40 per cent.
SNC-Lavalin plans to use the proceeds from the 407 deal to bolster its balance sheet and help pay down a $1.5-billion loan from the Caisse, Quebec’s pension fund manager. The engineering and construction firm previously paid off $500 million of the 2017 loan — which went toward the Atkins purchase — and aims to pay another $600 million upon closing.
OMERS will pay $3 billion to SNC on the closing of the deal and an additional $250 million over 10 years, conditional on certain financial targets related to the performance of the toll highway.
The deal is expected to close within a month.
The company’s shares have hovered near 10-year lows of around $34 since Feb. 11, when it slashed its profit forecast for 2018 by more than 40 per cent and halted all bidding on future mining projects.
That reduced guidance came two weeks after it halved its forecast from November amid a diplomatic feud between Canada and Saudi Arabia — a key source of oil and gas revenue — and delays on its project with Codelco, Chile’s state-owned copper mining company, which has since cancelled the contract.
The 407 deal was announced on April 5 in the wake of allegations that top government officials pressured former attorney general Jody Wilson-Raybould to overturn a decision to prosecute the company on corruption charges instead of negotiating a remediation agreement.