Significant step forward in the Company’s strategy to enhance focus on its growing Engineering Services business
SNC-Lavalin Group Inc. (TSX: SNC), a fully integrated professional services and project management company, has entered into a binding agreement to sell its Resources Oil & Gas business, a significant step forward in the Company’s strategy to reduce its risk profile and accelerate its ongoing transition to becoming a leading provider of professional engineering services and project management solutions.
The Company has also completed its previously announced review of legacy Lump-Sum Turnkey (“LSTK”) litigation matters, which was expanded to include all other significant claims, while concurrently reassessing the costs associated with its three remaining Canadian light rail projects in light of COVID-19. The actions that the Company is taking today resulting from these reviews, together with the sale of the Oil & Gas business, reduce the remaining financial uncertainty associated with SNC-Lavalin’s legacy businesses, while allowing the Company to further focus on its strategy of realizing the value and growth potential of Engineering Services business.
Strategic divestiture of the Resources Oil & Gas business. The Company has entered into a binding agreement to sell its Oil & Gas business, including Services and LSTK, de-risking operations and reducing LSTK delivery and warranty obligations, and accelerating the realization of SNC-Lavalin’s strategy. Closing is targeted for Q2 2021, at which time the transaction is expected to generate a gain on sale, as the elimination of foreign exchange cumulative translation adjustments (“CTA”) should be greater than the fair value write down taken in Q4 as an “Asset Held for Sale”. The net cash impact for the transaction is expected to be minimal.
A charge of $95 million on the retained Resources business, related to historical legacy positions and one remaining LSTK mining project, will be taken in Q4 2020.
Review of legacy LSTK litigation matters and commercial claims completed. To ensure a holistic review of legacy risks, taking into account new and updated information, the previously announced risk review was expanded to include all significant litigation matters and commercial claims receivable, resulting in $140 million of provisions and $155 million of commercial claims receivable reduction in Q4 2020, which are largely non-cash in nature. The Company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters.
Remaining Canadian LSTK infrastructure projects continue to progress well, costs to complete reassessed in light of COVID-19. Projects continue to be affected by unprecedented COVID-19 challenges, the primary driver in $90 million of charges to be taken in Q4 2020, largely reflecting the decision to delay recognition of any COVID-19 related revenue.
Previously announced financial outlook for SNCL Engineering Services reconfirmed.
“Over the past 18 months, we have made significant strides in advancing our strategy and de-risking the business. Following the introduction of our new strategy in July 2019, we have significantly improved our operating cash flows and demonstrated that our Engineering Services line of business is resilient and can deliver strong results,” said Ian L. Edwards, President and CEO of SNC-Lavalin Group Inc. “The sale of the Oil & Gas business further simplifies and de-risks our business and allows us to enhance our focus on growing our high potential core Engineering Services business. I would like to thank all of our Oil & Gas employees for their contributions over the years and wish them well in the next stage of their journey.”
“As previously announced, we have undertaken a rigorous risk review of our legacy LSTK litigation matters, which we expanded to include all other significant current litigation matters and legacy commercial claims receivable. Concurrently, we have also reviewed our remaining Canadian light rail transit LSTK projects to consider, in particular, the significant impact and challenges that COVID-19 has had, and will continue to have, on costs. The objective of this exercise was to further ensure we are taking a prudent and reasonable view of these projects in light of the ongoing COVID-19 situation and further reduce uncertainty on the final financial outcome,” added Mr. Edwards.
“Since my appointment in September 2020, the Board has overseen the work of management and external advisors in assessing and reducing the Company’s risk areas and quantifying the LSTK financial risks. Our goal is to reduce remaining financial uncertainty of the Company’s legacy issues. The sale of the Oil & Gas business allows us to enhance our focus on the future growth potential and profitability in SNC-Lavalin’s Engineering Services business. We believe this approach supports our overall objective to unlock and ultimately create long-term shareholder value,” said William L. Young, Chair of the Board.
Strategic divestiture of the Resources Oil & Gas business
On February 8, 2021, SNC-Lavalin Group Inc. entered into a binding agreement to sell its Oil & Gas business, including Services and LSTK, to Kentech Corporate Holdings Limited. The transaction is subject to regulatory approvals and satisfaction of customary closing conditions and the closing is targeted for Q2 2021.
In line with the Company’s strategy, the sale of the business, which includes all ongoing and recently completed Oil & Gas LSTK projects, is expected to significantly reduce operational and execution risks and will simplify the Company’s corporate structure and enable management to dedicate more time, effort and resources to growing the higher margin and more stable Engineering Services business. The transaction is also an important milestone in the Company’s journey towards its sustainability business strategy, as highlighted in the Company’s 2019 Sustainability Report.
At closing, the transaction is expected to create a gain on sale. The Oil & Gas business will be classified as an “Asset Held for Sale” in Q4 2020 and is expected to result in a fair value write down in the range of $260 to $295 million, which is almost entirely non-cash in nature. At closing, the transaction is expected to generate a gain on the sale in excess of the fair value write down, after accounting for the elimination of foreign exchange CTA included in the historical carrying amounts of the disposed Oil & Gas business.
The remaining Resources business will be mainly comprised of Services projects in the Mining & Metallurgy (“M&M”) sector. The remaining Resources project positions, including historical claims and litigation matters, have been reassessed based on the latest information, including ongoing commercial discussions with clients. An updated cost forecast was also completed in Q4 2020 on the one remaining Resources M&M LSTK project, which is expected to be completed in 2021. Based on these actions for the remaining Resources business, a charge of approximately $95 million, for which approximately 30% is non-cash, will be taken in Q4 2020.
Source: Company Press Release