Aecon decision a signal about future takeover proposals

Blocking sale shows infrastructure deals to face deep security reviews by Ottawa

MONTREAL — The federal government’s decision to block the proposed $1.5-billion takeover of Aecon Group Inc. by a Chinese state-owned company signals Canada’s infrastructure sector has joined the oilsands, defence and aerospace industries in requiring special security protection, according to a Canadian security expert.

“The Aecon decision suggests that any major takeover of a major Canadian critical infrastructure company would be looked at very closely on national security grounds,” said Wesley Wark, director of the Security and Policy Institute at the University of Ottawa.

Economic Development Minister Navdeep Bains confirmed the government decided to block the Toronto-based company’s deal to be acquired by CCCC International Holding Ltd. after markets closed Wednesday.

Ottawa announced a full national security review of the transaction in February as experts urged the government to proceed cautiously when weighing any investment bids by Chinese state firms and to be as transparent as possible in reviewing the proposed deal.

“We listened to the advice of our national security agencies throughout the multi-step national security review process under the Investment Canada Act,” he said in a news release.

“Our government is open to international investment that creates jobs and increases prosperity, but not at the expense of national security.”

Bains didn’t provide details about what specifically prompted the decision, and spokesperson Karl Sasseville said Thursday that the government can’t comment on specifics when it comes to national security issues. He also said that under the Investment Canada Act, each transaction is evaluated based upon its facts and merits.

Aecon has a long history of participation in Canadian construction and engineering projects such as the CN Tower, Vancouver’s SkyTrain, the St. Lawrence Seaway and the Halifax shipyard.

The Aecon takeover bid was the test case and other large companies would also likely face a deep security review, depending on the nature of the purchaser, Wark said.

While that doesn’t mean all takeovers would be ruled out, concerns over state-owned companies, especially Chinese ones, extends to other acquisitions in the construction sector by foreign buyers, he said in an interview.

“I think the big news coming out of Aecon is that critical infrastructure protection is going to get a very, very close look at in almost all circumstances.”

Wark said the government made the correct decision and possible retaliation from the Chinese government depends on how the decision is explained to them by Ottawa.

Former Conservative industry minister Tony Clement said the government made the “responsible decision.” But he tweeted that the move raises questions about other Chinese state-owned enterprises flying under the radar and purchasing strategic assets below the automatic review trigger.

Aecon shares plummeted more than 16 per cent Thursday afternoon, losing $2.85 at $14.49 on the Toronto Stock Exchange to their lowest level since late August, when the company announced it was launching a strategic review that included a potential sale. Shares ended the day at $14.67.

The stock market was already pricing in a certain degree of deal uncertainty before the announcement, with the company’s share price on Wednesday about 15 per cent below CCCC International Holding Ltd.’s offer price of $20.37 per share, said financial analyst Frederic Bastien of investment firm Raymond James.

Bastien said the price could fall even lower as the stock moves from hedge and arbitrage funds back into the hands of fundamental investors. However, he noted that the company is still in a better position than it was a year ago.

“Takeout or not, we argue the construction giant is a stronger company now than it was prior to the transaction announcement, and will eventually be valued as such,” he wrote in a report.

The company announced in October that it had signed a deal to be acquired by CCCC International, but the agreement has been controversial ever since.

The company said it was disappointed with the government’s decision and will continue to be a leading player in the Canadian construction and infrastructure market, having participated in projects such as the CN Tower, Vancouver’s SkyTrain, the St. Lawrence Seaway and the Halifax shipyard.

CEO John Beck will remain in his position until a permanent replacement is found, while the sales process it had initiated will end.

Analyst Derek Spronck of RBC Capital Markets said he believes other buyers are unlikely in the near term and the company will move forward as a stand-alone company.