Security Trumping Investment Risks Canada BlackBerry Deal

Canada’s heightened focus on national security at the expense of commerce is undermining the ability of companies like BlackBerry Ltd. (BB) to attract foreign investors.

The government cited national security concerns in rejecting the purchase of a Canadian telecommunications business by a foreign buyer this week, the first time it has made such a reference in blocking a deal since a national-security provision was added to the nation’s takeover law in 2009. The move comes amid increased scrutiny of foreign companies in strategic industries such as energy and technology. Cabinet minister Tony Clement said Oct. 8 national security would play a role in assessing offers for struggling smartphone maker BlackBerry, which is seeking a buyer.

“National security is the ultimate trump card,” Iain Grant, president of the consulting firm SeaBoard Group, said from Montreal. “If competition and the consumer interest is the prime focus of the government, national security still trumps that.”

Prime Minister Stephen Harper appears to be heeding concerns raised by intelligence authorities about the safety of data networks and other infrastructure. That may clash with his government’s vows to increase competition in the wireless industry and attract foreign capital to develop Canada’s natural resources.

Sensitive Role

The government referred to unspecified security concerns as it blocked the C$520 million ($500 million) sale of Manitoba Telecom Services Inc. (MBT)’s Allstream unit to an investment firm co-founded by Egyptian billionaire Naguib Sawiris. Industry Minister James Moore didn’t elaborate on the decision other than to say the deal with Accelero Capital Holdings Sarl Group was blocked under national security provisions in Canada’s foreign investment law. Industry Canada spokeswoman Jessica Fletcher declined to comment when reached by Bloomberg News yesterday.

BlackBerry is soliciting rival bids after agreeing last month to a tentative $4.7 billion offer from Toronto-based Fairfax Financial Holdings Ltd., its largest shareholder. Under that pact, BlackBerry has until Nov. 4 to consider other proposals that could come from the U.S. or Asia while Fairfax and a group of investors conduct due diligence and line up financing. Fairfax CEO Prem Watsa has said his bidding consortium has a strong Canadian contingent however he has yet to name any of his partners.

Share Trading

Shares (BBRY) of Waterloo, Ontario-based BlackBerry dropped 15 cents to $7.96 at 10:07 a.m. in New York. Manitoba Telecom, based in Winnipeg, rose 6 cents to C$29.30 in Toronto.

BlackBerry’s share of the global smartphone market has tumbled in recent years to less than 3 percent as Apple Inc. and Samsung Electronics Co. have gained share, according to research firm IDC. BlackBerry retains a sensitive role operating secure e-mail servers for clients including the Pentagon and NATO.

A foreign bid for BlackBerry would raise similar issues as the Allstream transaction since both firms run infrastructure involving sensitive data, said David Skillicorn, a computer science professor at Queen’s University in Kingston, Ont.

“The U.S. government is a BlackBerry customer, and a number of other pro-western governments are BlackBerry customers,” he said by phone Oct. 8. “It’s not just the Canadian government that’s going to want to stick their oar into this. Other governments are going to be saying, ‘Hang on a second, we have a stake in this too.’”

More Aggressive

The Canadian approach to information-technology security is becoming more aggressive since a U.S. congressional committee warned of the risks of using equipment sold by Chinese phone-equipment makers Huawei Technologies Co. and ZTE Corp. in October 2012, Skillicorn said.

The U.S. House Intelligence committee said ZTE and Huawei, China’s biggest phone-equipment maker, provide opportunities for Chinese intelligence to tamper with U.S. telecommunications networks for spying. Huawei denied the allegation at the time and ZTE said the committee’s conclusions were unconvincing.

Canada is considering new rules for foreign wireless suppliers it deems security risks, a person familiar with the discussions said in March. Huawei supplies Canadian carriers such as BCE Inc. (BCE) and Telus Corp. A Huawei spokesman said at the time the company takes steps to assure network security, while BCE said it maintains the highest level of security and Telus declined to comment.

Consolidating Technology

Companies interested in bidding on contracts to help manage government data centers must submit a list of suppliers of their products and services, according to a July presentation by Shared Services Canada, a federal agency that is consolidating government information technology. Companies must also agree to be audited throughout the contract period, according to the presentation.

Communications Security Establishment Canada is working with Shared Services Canada to reduce the risks of online threats and will assist with the “pedigree analysis” of supply-chain information submitted by bidders, according to the presentation.

CSEC chief John Forster said in a speech yesterday the agency is working to ensure security considerations are “embedded” in the government’s contracting process.

Signals Intelligence

CSEC, a World War II-era signals-intelligence agency founded to break enemy code, is monitoring security for the government. CSEC and the U.S. National Security Agency spied on Brazil’s Mines and Energy Ministry, Globo TV reported this week, citing documents leaked by fugitive security analyst Edward Snowden. CSEC’s Forster declined to comment yesterday.

In acquisitions involving potentially “sensitive” sectors of the technology industry, foreign investors may need to seek the advice of former security and intelligence officials to gauge the risk of the deal being blocked, said Sandy Walker, co-head of competition and foreign-investment practice at the Toronto office of law firm Dentons Canada LLP.

Industry Minister Moore “may want to have Allstream relaunched as a more viable, interesting company in the marketplace,” said SeaBoard Group’s Grant, referring to the government’s push to open the wireless industry to more competition. “As soon as someone from National Defence puts their hands up, a hush falls over the room.”

To contact the reporters on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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