From the editor… SNC-Lavalin retreats from construction, but don’t expect a bonanza
August 22, 2019 by David Kennedy
The writing’s been on the wall for months, and a few weeks back, SNC-Lavalin Group Inc. finally confirmed the speculation.
Facing a laundry list of problems, the company said it plans to turn away from construction, stop taking on lump-sum turnkey contracting work and refocus its business on engineering services.
The move came a month after the departure of former CEO Neil Bruce, who led the company for a relatively rocky four years. 2019 in particular, has been gruelling for the Montreal-based company, which has seemed to careen from one issue to the next. A tiff between Canada and Saudi Arabia, where SNC-Lavalin conducts a considerable amount of business, the cancellation of a major Chilean mining contract, poor financial results and a Canadian political scandal, with the company and its legal troubles at the centre, have halved SNC-Lavalin’s market value over the past few months.
With shareholders reeling, the company announced the reorganization effort in late July. It will splinter off its engineering, nuclear, infrastructure services and capital businesses into one segment. Its mining, oil and gas and infrastructure construction division will form a secondary unit.
While SNC-Lavalin’s oil and gas and mining businesses are focused mainly overseas, the changes to its infrastructure segment are certain to shake up the Canadian construction market. It plans to complete its current backlog of building projects by 2024, but will not pursue new lump-sum contracts. In line with this decision, it will pull out of the procurement processes for several high-profile jobs, such as Vancouver’s Broadway subway extension project and Montreal’s Louis-Hippolyte Lafontaine tunnel rebuild.
SNC-Lavalin has had a hand in countless jobs across the country, and on the one hand, the company’s retreat from a major part of the Canadian construction market is a major change. There will undoubtedly be some extra business up for grabs. Still, when looking at the amount of on-site work the company has actually done in recent years, contractors should probably temper their expectations about filling any sort of major void.
According to Canaccord Genuity analyst Yuri Lynk, who has advocated the company divest its construction business entirely in recent months, only about 500 of the 6,600 people employed in SNC-Lavalin’s Infrastructure unit were working in construction roles in 2017. With the bulk of the firm’s workforce dedicated to engineering, “most” of the construction scope of projects has been subcontracted. While this is nothing novel in construction, SNC-Lavalin has taken the practice further than most.
It’s also worth noting the embattled company is nearly certain to remain a major player on the engineering side. Even under a complete construction divestment scenario, which hasn’t quite happened, Lynk said in a note to clients earlier in the year that SNC-Lavalin could continue to hold a prominent spot in large-scale P3 projects coast to coast. Instead of disappearing from construction consortia entirely, it will likely take on a different – and as it sees it, less risky — role.
“By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source, and as a result we expect to see a material improvement in the predictability and clarity of our results,” Ian Edwards, the company’s interim president and CEO, said in the corporate retooling announcement.
As SNC-Lavalin exits the construction stage complaining about high risks, Canada’s contractors simply need to continue doing what they’ve always done, taking the risks in stride and out-executing their Montreal-based rival.
This column first appeared in the August 2019 issue of On-Site. Click here to read through the full issue.