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The federal government blocked the sale of Canadian construction giant Aecon Group Inc. to a Chinese state-owned enterprise on Wednesday – a move that could have repercussions over trade between the two countries. Here are six things you need to know about the decision.

The deal

Toronto-based Aecon was put up for sale in August. As part of the auction, Aecon drew interest from a Canadian rival, but ultimately China Communications Construction Co. Ltd. delivered the higher bid at $20.37 a share, amounting to a $1.5-billion takeover. CCCC is China’s second-largest engineering construction firm and is 63-per-cent state-owned.

Chinese firms have been active buyers in Alberta’s oil patch, and the Aecon bid reflected a move toward other industries for deal-making. The transaction would have been the largest purchase outside the oil patch by a Chinese state-owned enterprise, according to the University of Alberta’s China Institute.

Why the deal was blocked

Ottawa cited national security concerns in its decision. “Our government is open to international investment that creates jobs and increases prosperity, but not at the expense of national security,” Innovation Minister Navdeep Bains said Wednesday in a statement.

Since the deal was announced in October, several parties have openly derided the takeover and urged Ottawa to block it, largely on grounds that a builder of critical Canadian infrastructure would be owned by an enterprise inextricably linked to China’s one-party state.

“A state-owned company will always do the bidding of China,” Ward Elcock, a former CSIS director, told The Globe after the decision came out. “At the end of the day, China is not an ally of Canada. It is a trading partner – and a crucial one. … But having said that, the interests of China are not always going to be the interests of Canada.”

Ottawa had ordered a national security review of the deal under Section 25.3 of the Investment Canada Act, which allows for reviews of transactions that “could be injurious to national security.”

Trudeau cabinet blocks Chinese takeover of Aecon over national security concerns

How China reacted

As expected, the Chinese government was not happy with Wednesday’s decision.

“We are opposed to political interference under the pretext of national security,” said Lu Kang, a spokesman for the Chinese foreign ministry. “We hope the Canadian side can abandon prejudices and create a level playing field for Chinese enterprises.”

The Chinese embassy in Ottawa also decried the decision. “There is no doubt that the decision made by Canadian government is by no means a good news for the investment co-operation between China and Canada,” it said in a statement.

“This will seriously undermine the confidence of Chinese investors.”

China warns Canada to ‘abandon prejudices’ after Ottawa blocks Aecon deal

The bigger picture

The Aecon dust-up is the latest chapter in Canada’s complicated trade relationship with China.

Back in 2012, China’s state-owned CNOOC Ltd. acquired Calgary-based oil and gas company Nexen Inc. for $15.1-billion, which sparked no shortage of public debate, along with a government review. Ultimately, the governing Conservatives approved the deal, but banned state-owned enterprises from acquiring any further majority stakes in the oil sands.

More recently, Canada and China have circled one another on the subject of free trade. Prime Minister Justin Trudeau attempted to launch formal free-trade talks during a visit to China in late 2017, but the effort faltered as Beijing balked at demands to include labour standards in negotiations.

Time will tell how the Aecon decision affects immediate trade, along with talks on a bigger bilateral relationship.

Commentary: It’s back to figuring out what Canada truly wants from China

The fallout

For one, Aecon has been plunged into some uncertainty. Though the company struck an upbeat tone after the decision, it has reinstated its search for a new chief executive officer.

The situation is not entirely gloomy, however. As many analysts have noted, the company had secured several lucrative contracts since the proposed takeover was announced, including one for the Finch West Light Rail Transit project in Toronto.

More broadly, the situation could spark a trade spat.

“We could probably see a renewal of objections to Canadian exports of canola seeds, to start, and possibly other areas where China can sanction Canada,” said Charles Burton, a former Canadian diplomat who served in Beijing.

China was Canada’s No. 2 destination for goods exports in March, according to the latest monthly data from Statistics Canada.

The Aecon portfolio

Over several decades, Aecon has been involved in many landmark infrastructure projects. Here is a selection.

  • The CN Tower is seen under construction in 1973. (Photo by Dennis Robinson / The Globe and Mail)Dennis Robinson/The Globe and Mail

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How investors reacted

Aecon shares plunged on Thursday, though several analysts who cover the company found reason for optimism.

“Aecon is better positioned than it was one year ago,” said Raymond James analysts Frederic Bastien and Matt Borys, citing the company’s various “contract wins.”

“While we are disappointed by the outcome, we believe it offers a nice opportunity for long-term investors to revisit the story,” said Desjardins Securities analyst Benoit Poirier. “We continue to like [Aecon] for its strong business fundamentals, pristine balance sheet and record backlog.”

With reports from Robert Fife, Steven Chase and Nathan VanderKlippe

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