The Government of Canada's decision this week to block the takeover of Allstream by Accelero Capital S.a.r.l. Group compounds the current uncertainty about when national security considerations might prevent foreign acquisitions. The decision was made under the "national security provisions" of the Investment Canada Act ("ICA").
The Regulatory Framework
Under the ICA, a non-Canadian investor seeking to acquire control of a Canadian business over certain financial thresholds must demonstrate that the transaction will result in a "net benefit to Canada." The ICA also gives the Government significant latitude to block a transaction that it determines may be "injurious to national security."
In 2012, the Government changed sector-specific regulations to permit non-Canadians to acquire control over small telecom carriers like Allstream with up to 10% share of the national market for telecom services. Acquisitions of these carriers over applicable thresholds by foreign investors need approval under the ICA. In addition, acquisitions of all wireless providers continue to require a separate approval from Industry Canada under the terms of most spectrum licences.
The Accelero Deal
On May 24, 2013, Accelero announced a binding agreement with Manitoba Telecom Services Inc. ("MTS") to purchase Allstream, the business services division of MTS. The transaction valued Allstream at C$520 million. The Government determined, after a five-month review, that the transaction should not proceed but did not specify its national security concerns.
In a brief statement, Industry Minister James Moore alluded to the fact that Allstream operates a national fibre optic network providing critical telecommunications services to businesses and governments, including the Government. However, no rationale for the decision was provided that might enable an assessment of the nature of the security risk represented by this particular investor or transaction.
As noted by MTS in a press release, the controlling shareholder of Accelero, Naguib Sawiris, an Egyptian telecommunications entrepreneur, is familiar to the Government. Mr. Sawiris' Orascom was a significant shareholder in Wind Mobile, licensed by the Government less than 5 years ago. Press reports also suggest that Accelero offered to forgo Government contracts as a condition of approval.
Consequences of the Decision
The rejection of the Allstream transaction adds to recent uncertainty regarding the Investment Canada regime, and national security reviews in particular. The ICA does not define national security risk, or give any guidance on which targets or investors pose particular concern. The unavailability of reasons, perhaps understandable given national security considerations, raises more questions about how the national security review powers will be exercised. This uncertainty, the apparent lack of transparency in the process suggested by MTS in its press release, and the length of the process could have a chilling effect on foreign direct investment.
The rejection of this transaction appears to be at odds with the Government's recent policy decisions in the telecommunications sector. These include its recent liberalization of the investment regime referred to above, and its stated intention to introduce more competition through greater foreign investment, including by welcoming the U.S. wireless giant Verizon as a potential acquiror of Canadian new entrants WIND and Mobilicity earlier this year.
The net results are: (i) mixed messages regarding the Government's position on foreign investment in the telecommunications sector, and (ii) greater uncertainty for potential investors and market participants about investment reviews and the treatment of national security issues in mergers and acquisitions generally.
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