Canada Rejects MTS Allstream Sale to Accelero on Security

Canada cited security concerns in rejecting Manitoba Telecom Services Inc.’s C$520 million ($504 million) sale of its Allstream unit to an investment firm co-founded by Egyptian billionaire Naguib Sawiris.

Manitoba Telecom shares dropped the most intraday in five years today after the decision. The Winnipeg, Manitoba-based company’s Allstream unit operates a national fiber-optic network that provides “critical telecommunications services to businesses and governments, including the government of Canada,” Industry Minister James Moore said in a statement yesterday. He didn’t elaborate other than to say the sale to Accelero Capital Holdings Sarl Group was blocked under national security provisions in Canada’s foreign investment law.

The decision raises questions over whether Prime Minister Stephen Harper’s government is serious about opening the nation’s telecommunications industry to foreign investment, potentially leaving the market in limbo, said Mark Goldberg, a telecom analyst. Accelero agreed to buy Allstream after the governing Conservatives moved last year to allow foreign companies to compete in the industry.

Gigantic Question Mark

“Fundamentally, it continues to raise a gigantic question mark over the investment climate in Canadian telecommunications,” said Goldberg, principal at Toronto-based consulting firm Mark H. Goldberg and Associates.

Shares of MTS fell as much as 11 percent in Toronto, the biggest intraday drop since October 2008, according to data compiled by Bloomberg. The stock fell 8 percent to C$29.76 at 11:20 a.m. in Toronto. It was little changed this year before today.

Harper’s government has been stepping up scrutiny of foreign investments. The government in June strengthened the national-security provision of its foreign-takeover law, and has increased oversight of state-owned enterprises.

MTS and Accelero issued separate statements saying they were surprised by the move.

“MTS Allstream is extremely surprised and disappointed by this decision,” Manitoba Telecom said in a statement yesterday. “MTS Allstream and Accelero have responded openly and constructively to Industry Canada’s requests for information in the 136 days since the transaction was announced.”

Accelero said it was disappointed in the decision, which it called “unfounded and unexpected.”

Analyst Recommendations

Analysts at Macquarie Capital Markets and Canaccord Genuity today cut Manitoba Telecom ratings to the equivalent of sell.

“The buyer of last resort of Allstream has been rejected by the federal government,” Adam Shine, an analyst at National Bank Financial, said in a note today. He kept his rating as underperform after cutting it on June 12 and continues to see downside risk of 3.5 percent to 5.5 percent. MTS Allstream’s consolidated results will be hit by about C$35 million in one-time charges as part of the transaction, he said.

“As such, valuations for Allstream need to be scaled lower,” Shine said.

Shares of the nation’s three biggest wireless companies rose today. Montreal-based BCE Inc. rose 0.4 percent to C$43.79, Rogers Communications Inc. of Toronto climbed 0.5 percent to C$44.90 and Vancouver’s Telus Corp. advanced 0.7 percent to C$34.03.

Goldberg said the decision may undermine Manitoba Telecom’s ability to finance its acquisition of new spectrum at a planned auction next year and Allstream’s ability to raise funding for operations.

‘Sufficient Funds’

“There are a lot of questions that start with whether MTS will have sufficient funds to bid” in the auction, Goldberg said.

The government has tried to boost competition in the Canadian mobile-phone industry for years by taking measures such as making it more difficult for BCE, Rogers and Telus to make acquisitions and buy spectrum.

Last year, Canada lifted restrictions on foreign investment in the sector for companies with less than 10 percent of market share by revenue and announced it would also limit how much spectrum the three main incumbents could buy.

The government has become more vigilant about the security of the nation’s telecommunications networks, and is considering new rules on foreign wireless suppliers deemed security risks, amid concerns about equipment provided by companies including Huawei Technologies Co., China’s biggest phone-equipment maker, a person familiar with the matter said in March.

Comprehensive Undertakings

Canadian Trade Minister Ed Fast said the same month that Huawei had been banned from bidding on government telecommunications contracts. MTS Allstream said in December it had won a contract to provide Internet services to as many as 850 federal government sites across the country.

MTS said “Accelero has proposed far-reaching, comprehensive and binding undertakings to the Canadian government, including a commitment to invest C$300 million over three years to pursue Allstream’s capital plans.”

MTS said the company and Accelero are reviewing their options.

“We were told right at the end of the afternoon that the minister has now rendered the decision and that was it,” Pierre Blouin, chief executive officer of the Winnipeg-based telecommunications firm said in an interview. “There’s no appeal in that type of process.”

Threaten Security

The Canadian government automatically reviews foreign takeovers of businesses with more than C$344 million in assets under a law called the Investment Canada Act. The law allows the government to block deals deemed to threaten security.

Accelero is the Cairo and Paris-based investment firm co-founded by Sawiris.

In his earlier foray into Canada, Sawiris’s Orascom Telecom Holding SAE backed Wind Mobile, an Ontario-based startup carrier, with a $700 million loan in 2008, helping finance the company’s purchase of wireless spectrum.

Wind Mobile’s initial strategy of offering cheap prepaid wireless service faced competition from other discount operators such as Public Mobile, as well as the established brands.

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