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Chinese Offshore Investment

Canada launches security review of Chinese takeover bid for construction firm Aecon, testing Trudeau’s Beijing ties

PUBLISHED : Tuesday, 13 February, 2018, 3:35am
UPDATED : Tuesday, 13 February, 2018, 8:12am

Canadian Prime Minister Justin Trudeau’s government has launched a full national security review of a takeover bid by a Chinese firm for Canadian construction company Aecon Group Inc, in what may be a test for the PM’s commitment to China.

“This is the next step in this specific case. We are following the advice provided to us by the national security agencies,” Karl Sasseville, a spokesman for Canadian Innovation Minister Navdeep Bains, said in a written statement on Monday. 

The department will continue to “review the potential national security ‎implications, as we have been doing since day one. We never have and we never will compromise on national security.”

The measure, announced by Aecon on Monday, extends the timeline of its proposed sale to a unit of China Communications Construction Co, although it says it expects the deal to close by the end of the second quarter. 

The deal, announced on October 26, was already under a “net benefit” review, which includes some analysis on national security grounds. Monday’s announcement was for an additional national security review that lasts up to 90 days, or longer with an investor’s consent.

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It could emerge as a test of Trudeau’s commitment to deepening ties with China, though his government has never flatly blocked a proposed deal.

Investors had already been betting a takeover of Aecon is no sure thing, with shares last week posting their biggest one-week decline since the C$1.19 billion (US$945 million) offer was made public.

Maxim Sytchev, an analyst with National Bank of Canada, said he still expected the deal to close and that Trudeau’s government has never flatly rejected a takeover.

“Ultimately this transaction is going to close,” he said in an interview on Monday. “I don’t think necessarily it would make a huge amount of political sense to block what we see as a relatively small transaction with no inherent security overlay.”

In a statement Monday, Aecon said Trudeau’s government had given notice under section 25.3 of the Investment Canada Act, a passage that allows the government to order a review if it considers the takeover could be “injurious to national security.”

Aecon pushed the “outside date” to complete its plan of arrangement with the Chinese company to March 30, from February 23. The company called the step “a continuation of the national security review of the proposed acquisition.”

It expects the deal to close by the end of the second quarter, “assuming the satisfaction or waiver” of remaining conditions.

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In a note to clients on Monday, Chris Murray, managing director of institutional equity research at AltaCorp Capital Inc, said he’s “coming to believe that the primary concern of the federal government may be with Aecon’s telecom infrastructure group.”

That could lead to the possibility of a conditional approval that carves out part of the company.

“While we remain positive about the closure of the transaction, we are cognisant that at this juncture, this is now a political process, which adds layers of complexity and uncertainty,” he added.

Aecon continues “to respond to officials from the Investment Review Division” in Bains’s office, Chief Executive Officer John Beck said Friday in separate statement.

“Aecon welcomes the review on the merits of the proposed transaction and will continue to seek to obtain all the necessary regulatory approvals to close the transaction.”

Aecon has already cleared one hurdle – it announced Friday that its takeover was approved by the Canadian Competition Bureau, which later confirmed that it issued a “no action letter” to the company on December 6, 2017, while warning it could still act.

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“The Bureau concluded that the proposed transaction is not likely to result in a substantial lessening or prevention of competition in the construction and infrastructure industry in Canada,” Competition Bureau spokesman Jayme Albert said on Friday in a statement.

Canadian law allows “for a one-year period following the completion of a transaction during which the Commissioner may bring an application to the Competition Tribunal challenging the transaction.”

Trudeau has courted Chinese investment, but efforts to secure more formal ties stumbled during a visit by the Canadian leader in December when plans to launch free trade talks fell through.