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Aecon road crews work on Highway 407, near Highway 427 in Toronto, in this file photo.

Kevin Van Paassen/The Globe and Mail

The delayed $1.5-billion takeover of Aecon Group Inc. by China Communications Construction Co. Ltd. will likely face more hurdles and could fall apart, according to analyst Chris Murray of AltaCorp Capital Inc.

"We believe there is a very low probability of the transaction being approved as is, given security concerns expressed by the federal government and other allies around telecom infrastructure," Mr. Murray said in a report on Tuesday.

The takeover of Aecon, a Toronto-based construction company, by CCCC, a firm majority owned by the government of China, was announced last October and was to have been completed by Feb. 23. However, on Feb. 12, Aecon extended the deal to March 30 as it said it had been told the federal government was conducting a national security review of the proposed acquisition.

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Mr. Murray believes the security question revolves around Aecon's telecom group. Aecon is a large construction company known for work on Canadian landmarks such as the CN Tower in Toronto and the SkyTrain in Vancouver. It is also Canada's largest builder of telecommunications networks, Mr. Murray said, for companies such as BCE Inc.'s Bell Canada.

"Aecon are the folks that are actually building the networks," Mr. Murray said in an interview.

Telecom construction represents about 5 per cent of Aecon's annual revenue of about $3-billion, Mr. Murray estimated, but the business is a sensitive one, given the advanced nature of the digital technologies involved. Bell, Telus and Rogers are moving to build next-generation fibre optics and mobile networks.

Ottawa's move to consider the national security implications of the takeover means the Aecon-CCCC deal "could likely see additional delays to the process, could see the transaction blocked, or could see conditions that would require a divestment of a portion of Aecon's business, mostly likely its Telecom Group," Mr. Murray wrote in his report.

Of 13 deals between April, 2012, and March, 2017, that underwent a national security review, all of them were changed in some way: three were blocked; one was withdrawn; five required divestitures; and four had additional conditions imposed.

"Are they going to block the deal? I don't think so," Mr. Murray said of the federal review. "But you go into the process, the odds are you are not coming out unscathed."

An ordered divestiture – such as the telecom unit – could scuttle the deal, Mr. Murray suggested. He predicted in his report that there is a "reasonable likelihood that the transaction fails" if there are conditions on the deal such as a divestiture.

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The Aecon-CCCC deal is a test of the federal Liberal government under Justin Trudeau, who has made closer ties with China an important part of Canada's foreign policy.

Mr. Murray rates Aecon stock "underperform" and has a one-year target price of $16.75 a share. The stock on Tuesday closed at $18.63, down 8 cents. CCCC has offered $20.37. The stock's recent peak was $20, on Jan. 4, and the price has drifted lower since.

Last fall, Mr. Murray thought a full national security review was unlikely. "This is a fairly unusual process," he said Tuesday. "It led us to think, 'Okay, what are the issues the government's seeing?' Telecom might be one of the sticking points."

Aecon declined comment.

Mr. Murray said Aecon's telecom business would be valuable in a sale but there would be the challenge of a tight timeline to do a deal, if Ottawa orders it, and a buyer would have to be acceptable to the federal government and to Canada's main telecom companies, the primary customers. He said there are probably a limited number of buyers in this scenario.

Last August, Bloomberg News reported Aecon was looking at selling the company, which Aecon confirmed after its stock was halted that day. The stock had been struggling but the news of a potential takeover propelled it higher. Aecon has said the CCCC deal is a good one because a strong parent company will bolster Aecon's ability to win business. Aecon has said it would still be run by its Canadian management team.

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