Ottawa rejects MTS Allstream takeover deal, citing unspecified security concerns

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The Canadian government has rejected another high-profile foreign takeover, quashing an Egyptian billionaire's bid to buy a division of Manitoba Telecom Services Inc. because of unspecified national security concerns about the $520-million deal.

Federal Industry Minister James Moore did not spell out the precise reasons for nixing the deal, but in a statement issued Monday evening he noted his decision followed a review of Accelero Capital Holdings' proposal to buy MTS Allstream under the "national security provisions of the Investment Canada Act" – the legislation that governs reviews of foreign takeovers.

The decision is certain to sow confusion among international investors as to how open Canada is to foreign capital.

Mr. Moore's statement also pointed out that the government of Canada relies on infrastructure from MTS Allstream, the company's business services division.

"MTS Allstream operates a national fibre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada."

Manitoba Telecom Services Inc. issued a statement late Monday saying it was "extremely surprised and disappointed" by the federal government's decision, stressing it continues to believe the deal would have been of net benefit to Canada.

MTS Allstream chief executive officer Pierre Blouin said the companies remain in the dark about the government's specific concerns.

"We were extremely surprised by this. There were no indications … that would be an issue," Mr. Blouin said in a telephone interview.

As a result of the deal's rejection, MTS is expecting to take a $35-million hit to its consolidated financial results due to expenses and restructuring costs related to the transaction. Although MTS will examine alternative options for Allstream, securing another deal with Accelero is unlikely.

"I think it sends the wrong signal for investment into the country into telecom," Mr. Blouin said, adding the government should make its position on foreign investment clear once and for all.

"If foreign investment restrictions are removed or lifted, foreigners will come forward like Accelero and be potentially interested to invest in the country. So, if owning a national network that provides services to businesses and government is an issue, well then I think we have to re-look at policies in the country."

This is at least the fourth time since it took office that the Harper government has acted to thwart foreign takeovers.

In 2008, Ottawa surprised international investors by rejecting a bid by U.S.-based Alliant Techsystems Inc. to acquire the space division of Vancouver-based MacDonald Dettwiler and Associates Ltd. on the grounds of protecting Canadian sovereignty.

And in November, 2010, the Conservatives blocked Anglo-Australian BHP Billiton's $38.6-billion offer for fertilizer company Potash Corp., a decision the minister for Saskatchewan, Gerry Ritz, later explained was a move to protect a "strategic resource."

Finally, in late 2012, the government erected new barriers to investment by state-owned companies, fencing off the Canadian oil sands from further control by foreign governments – a decision Tory officials later explained was aimed at China.

Accelero was co-founded by Naguib Sawiris, the wealthy Egyptian businessman who also provided the original financial backing for Wind Mobile Canada, a small player in Canada's wireless market.

The government had no problems with Mr. Sawiris in 2009. At the time, the Canadian Radio-television and Telecommunications Commission ruled that Wind's parent Globalive Wireless Management Corp., with strong Egyptian ties, was insufficiently Canadian-owned and controlled despite the fact it had already purchased spectrum. But the government overruled the CRTC and allowed Wind to start operating late that year.

On Monday night, Mr. Sawiris said he was surprised by Ottawa's decision and had not been given any warning that problems had arisen.

"Throughout this process, we were comforted by Industry Canada that our filings were in order, our submissions complete and constructive, and our proposed binding undertakings serious and substantive so that the transaction would meet the 'net benefit' test," said Mr. Sawiris in a statement.

"We are disappointed by the Government of Canada's unfounded and unexpected decision."