The Canadian government blocked a proposed takeover of construction firm Aecon Group Inc. by a unit of China Communications Construction Co . in the latest move by Western nations weighing national security concerns associated with Chinese investment.
Prime Minister Justin Trudeau’s government announced its decision Wednesday after launching a security review of the C$1.2 billion ($934 million) deal, according to a statement from Innovation Minister Navdeep Bains obtained by Bloomberg News. Aecon later confirmed the takeover offer by CCCC International Holding Ltd. had been rejected. A CCCC spokesman in Beijing said the company couldn’t immediately comment.
U.S. President Donald Trump earlier this year blocked Broadcom Ltd.’s hostile takeover of Qualcomm Inc. because it could “impair the national security of the United States.” Trump has killed several foreign deals involving China since taking office and his administration continues to spar with China over trade. This is the first major foreign takeover blocked by the Trudeau government since he won power in 2015.
“We listened to the advice of our national security agencies throughout the multi-step national security review process under the Investment Canada Act,” Bains said in the statement. “Based on their findings, in order to protect national security, we ordered CCCI not to implement the proposed investment.”
Canada is “open to international investment that creates jobs and increases prosperity, but not at the expense of national security,” Bains added.
Largest Contractor
CCCI’s Beijing-based parent, CCCC, is one of the biggest engineering and construction companies in the world and is the largest contractor building China’s Belt and Road Initiative across Asia through to Africa. Its core businesses include infrastructure construction and design and dredging. The company posted revenue of 460.1 billion yuan ($72 billion) last year.
CCCC is also the company responsible for building the atolls used by the Chinese military in the South China Sea, and it was blacklisted by the World Bank from 2009 to early 2017 for fraudulent practices.
Aecon operates companies across the mining, infrastructure, energy and services industries, building projects from factories, roads and sewers to theaters, book stores and hotels, according to its website.
Stock Falls
Shares of Aecon, which helped build Toronto’s iconic CN Tower, have declined in recent weeks to the lowest since the deal was announced in October on concern that it would be blocked. Aecon’s construction work includes several sectors that could impact national security, including building out the nation’s telecommunications networks.
Aecon closed at C$17.34 in Toronto trading Wednesday, 15 percent below the C$20.37 a share offer from CCCC International to acquire the construction firm. Before the recent declines, there was widespread speculation in Canada that the deal might be approved as Trudeau sought warmer ties with China.
“While we are disappointed with the government’s decision, Aecon is and will continue to be a leading player in the Canadian construction and infrastructure market,” President and Chief Executive Officer John Beck said in a statement late Wednesday. The deal had offered “considerable benefits,” but the company will now move forward, including by reinstating a search for a new CEO, the statement said. Aecon has “a significant pipeline of opportunities ahead of it.”
Clear Evidence
A person familiar with the file, speaking on condition of not being identified, said the government did its due diligence and ultimately followed the advice of Canadian national security agencies that had reviewed the deal and had information that wasn’t publicly available.
Aecon’s project portfolio includes work in sensitive fields such as telecommunications, nuclear power and military housing and training facilities, Anita Anand, a professor of law at the University of Toronto who holds J.R. Kimber Chair in Investor Protection and Corporate Governance, said in an interview before the decision was announced. She had called for it to be blocked.
“There is clear evidence that there are national security issues at play in this transaction,” she said in an earlier interview. If government sees “reasonable grounds to believe there’s a potential injury to national security, then it should intervene.”
Trade Talks
The move comes at a critical point for the future of the country’s trade relationships. Canada is considering launching trade talks with China as it seeks to become less reliant on the U.S. market. It is also haggling with the U.S. and Mexico over how to update the North American Free Trade Agreement.
Chinese acquisitions in Canada’s economy have cooled since 2012, when the previous Conservative government imposed limits on investment by state-owned enterprises in the energy sector following CNOOC Ltd.’s takeover of Nexen Inc. in Alberta.
In 2009, national security considerations were formally added as a consideration under Canada’s foreign investment review process. The Canadian Security Intelligence Service warned in 2012 that some foreign state-owned enterprises may represent a threat to national security.
— With assistance by Scott Deveau, Sheridan Prasso, and Yan Zhang
The federal government has blocked the sale of Canadian construction company Aecon Group Inc. to Chinese interests, citing national security.
The controversial deal between Aecon and China's CCCC International Holding Ltd., also known as CCCI, would have been worth $1.5 billion.
"As is always the case, we listened to the advice of our national security agencies throughout the multi-step national security review process under the Investment Canada Act," Innovation Minister Navdeep Bains said in a statement Wednesday.
"Based on their findings, in order to protect national security, we ordered CCCI not to implement the proposed investment."
The statement did not explain what specific threats to Canada's national security surfaced during the review.
The news was first reported by forexlive.com and BNN Bloomberg.
Before news emerged of the government's decision, shares of Aecon Group rose nine cents to close Wednesday at $17.34 on the Toronto Stock Exchange.
The $1.5-billion takeover of the Canadian construction company by CCCI, a division of a Chinese state-owned company, was put on hold in February so the federal government could conduct a national security review of the deal.
Aecon said at the time it had received notice from Bains' office indicating that the federal cabinet had ordered a continuation of the national security review under section 25.3 of the Investment Canada Act.
That section allows the government to order a review if the minister "considers that the investment could be injurious to national security."
David Lametti the Parliamentary Secretary for Innovation spoke to the CBC's Chris Rands 0:59
"While we are disappointed with the government's decision, Aecon is and will continue to be a leading player in the Canadian construction and infrastructure market," said John Beck, president and CEO of Aecon.
Beck said that while the sale of Aecon is now dead, his company has "secured numerous large-scale projects" and has "a significant pipeline of opportunities ahead of it."
David Lametti, parliamentary secretary to the minister of innovation, said he believes the deal is now dead.
"My understanding is it's done," he said.
Conservative MP Tony Clement — a vocal critic of the takeover deal — welcomed the decision, telling reporters he is glad the federal government listened to its national security advisers.
"It begs the question: how many other Chinese or other state-owned enterprises have gone under the radar, under the automatic review limit and have acquired various companies in Canada that could also be considered national security risks?" he said.
Conservative Tony Clement spoke to the CBC's Chris Rands 1:35
Clement said any purchase of a Canadian firm by a state-owned enterprise — whether it's Chinese, Russian, Saudi or from some another country — should be questioned.
"If they are making investments, first of all they are not making investments necessarily based on market decisions because they are directed by a country, directed by a state. They could be making those investments for strategic or political reasons," he said.
Pushing for a review
The Conservatives had been pressing the Trudeau government for a formal national security review of the takeover.
"The Chinese company poised to take over Canadian construction giant Aecon is rampant with corruption and has just been blacklisted by Bangladesh for that very reason," Clement said in the House of Commons in February.
"We know Aecon has been awarded numerous sensitive Canadian government contracts, including working with our military and in the nuclear sector. When Bangladesh is sounding alarm bells, why is Canada staying silent and not calling for a full national-security review of the takeover of Aecon?"
Aecon's Beck said at the time that the company offers construction and refurbishment support to clients in the nuclear industry but is not involved in sensitive military installations, nor does it own any intellectual property or sensitive proprietary technology related to nuclear energy.
The acquisition of Aecon by the Chinese firm had already cleared most of its hurdles, after receiving the approval of Aecon shareholders, court approval and clearance from Canada's competition regulator.
The 140-year-old company has worked on several Canadian landmarks, including the CN Tower, Vancouver's SkyTrain and the Halifax Shipyard.
CCCI is the overseas investment and financing arm of China Communications Construction Company Ltd. (CCCC), one of the world's largest engineering and construction groups. CCCC is 64-per-cent owned by the Chinese government.
The World Bank banned CCCI from bidding on construction projects for eight years until January, 2017 due to a bid-rigging scandal in the Philippines.
The state-owned company also has been linked to the construction of artificial islands in the South China Sea — work which has led to heightened tensions between China and several other Asian countries.
What happens to trade talks?
Stewart Beck, CEO of the Asia Pacific Foundation — an independent not-for-profit think tank on Canada/Asia relations — said the government's decision could complicate future trade talks with China.
"First and foremost you have to respect the security establishments decision," Beck told CBC News. "I guess from my perspective it's going to create some problems down the road in terms of negotiating a free trade agreement with the Chinese."
The federal cabinet has invoked national security threats to block the proposed $1.5-billion takeover of Canadian construction giant Aecon Group Inc. by a Chinese state-owned enterprise − a decision that is likely to cause a rift with Beijing.
The sale of Toronto-based Aecon – the builder of critical infrastructure and the iconic CN Tower – to China Communications Construction Co. Ltd. (CCCC) was opposed by Canadian construction rivals and two former directors of the Canadian Security Intelligence Service.
Sources with knowledge of the cabinet decision said Ottawa accepted the findings of a national security review that determined the acquisition was not in the country’s national security interest.
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Open this photo in gallery Aecon road crews work on Highway 407, near Highway 427 in Toronto, in this file photo Kevin Van Paassen/The Globe and Mail
Intelligence agencies in both Canada and the United States have warned that companies owned or partly owned by the Chinese government are not merely profit-seeking operations; they are also prone to passing on information or technology to Beijing and making business decisions that could conflict with Canadian interests but serve the agenda of the authoritarian Communist Party of China.
Innovation Minister Navdeep Bains, whose department oversaw the investment review, said in a statement Wednesday: “Our government is open to international investment that creates jobs and increases prosperity, but not at the expense of national security.” In a note to investors Wednesday evening, Aecon said it is reviewing the decision and will have a “more detailed response in due course.”
“While we are disappointed with the government’s decision, Aecon is and will continue to be a leading player in the Canadian construction and infrastructure market,” John Beck, Aecon’s chief executive, said in a statement.
“While we have been prevented from pursuing the transaction, we are moving forward from a position of strength.”
Charles Burton, a former Canadian diplomat who served in Beijing, lauded the cabinet decision but warned China is likely to retaliate.
“We could probably see a renewal of objections to Canadian exports of canola seeds, to start, and possibly other areas where China can sanction Canada.
“They could restrict tourism as they did with South Korea and start to challenge Canadian investment in China,” he said.
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Last month, China’s envoy to Canada, Lu Shaye, waded into the debate over Aecon, saying it was “immoral” for Canadians to criticize Chinese state-owned enterprises as recipients of subsidies and submissive to the Chinese government, adding that these entities are pillars of his country’s economy and must be accepted as such.
Ward Elcock, a former CSIS director who had urged for the deal to be rejected, welcomed Ottawa’s decision.
“A state-owned company will always do the bidding of China,” Mr. Elcock said in an interview Wednesday. “At the end of the day, China is not an ally of Canada. It is a trading partner – and a crucial one. … But having said that, the interests of China are not always going to be the interests of Canada.”
He said the problem with allowing Aecon to be purchased by a Chinese state firm is that the Canadian company plays a significant role in major infrastructure projects, from the refurbishment of nuclear facilities to British Columbia’s massive Site C hydro-electric dam. Mr. Elcock said he thinks the difficulty facing federal decision-makers was that they couldn’t fashion a workable constraint on Aecon’s future activities under Chinese state ownership.
“The problem, I suspect, is there is really no way to put in a restriction that prevents a company that simply pours concrete one day from undertaking a major infrastructure project on another day,” he said.
Our government is open to international investment that creates jobs and increases prosperity, but not at the expense of national security. — Innovation Minister Navdeep Bains
The Chinese embassy in Ottawa said the decision will hurt Canada’s economy. “There is no doubt that the decision made by Canadian government is by no means a good news for the investment co-operation between China and Canada,” the embassy said in a statement.
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“This will seriously undermine the confidence of Chinese investors.”
Aecon, led by Mr. Beck, had played down concerns that have been raised about its involvement in critical infrastructure projects – contracts that would pass on to CCCC if the transaction had been approved by Ottawa.
The Aecon transaction would have been the largest purchase outside of Canada’s oil patch by a Chinese state-owned enterprise, according to the University of Alberta’s China Institute. The bid represented a trend in Canada where Chinese firms are moving beyond the Canadian petroleum sector into other industries in provinces such as Ontario and British Columbia.
Several of Aecon’s largest competitors had asked Ottawa to block the takeover on the grounds that CCCC – which is one of the world’s largest infrastructure companies – had a poor track record when it comes to safety and corruption, and that a state-controlled Chinese entity is not suited to work on projects with security concerns.
Critics of the Aecon deal also expressed concern that China’s one-party state may be able to influence corporate decisions in Canada. Beijing has ordered Communist Party units be placed in all state-owned enterprises.
CCCC obeyed the ruling and recently set up a “Communist Party of China Committee” within its corporate hierarchy. The firm has also helped China assert sovereignty by building artificial islands in the disputed South China Sea.
Mr. Elcock and another former CSIS director, Richard Fadden, who also served as national security adviser to Justin Trudeau and Stephen Harper, had taken the rare step of publicly opposing the takeover as not being in Canada’s strategic interest.
“There is a significant question about whether we should tolerate Chinese state-owned companies, which are essentially under the thumb of the Chinese government, that we should tolerate Chinese companies buying into the Canadian market,” Mr. Fadden said. Cabinet ordered a full national security review of the takeover bid last month under Section 23.5 of the Investment Canada Act, a measure invoked when the federal government believes an investment could be “injurious to national security.”
Aecon was put up for sale last August and was sold to CCCC in October. The Fortune 500 giant is China’s second-largest engineering construction firm and is owned 63 per cent by the one-party state.
In the original auction of Aecon, which played out from August to October of last year, there was an offer for the company from a rival Canadian construction firm, backed by a domestic private equity fund. That offer was for less than $20 a share and the Canadians were outbid by the Chinese, who were willing to pay $20.37 a share for Aecon.
With a report from Andrew Willis
OTTAWA—The federal government has rejected the $1.5-billion sale of Aecon Group Inc. to a state-backed Chinese buyer, effectively bowing to fierce opposition to the deal as Canada navigates sensitive trade talks with the U.S.
In a brief statement seen by the National Post Wednesday, Minister of Innovation, Science and Economic Development Navdeep Bains said Ottawa would block the deal for security reasons, adding that Canada is “open to international investment that creates jobs and increases prosperity, but not at the expense of national security.”
Aecon did not immediately respond to a request for comment.
The decision comes after months of intense opposition to the transaction by Members of Parliament, business groups and domestic construction companies, who argued the deal could give China access to sensitive Canadian IP, and would make local firms less competitive in future project bids. Aecon has contracts to carry out refurbishment and maintenance work on various nuclear facilities, as well as build and maintain several telecommunications lines.
The financial holding division of China Communications Construction Co., Ltd. (CCCC) proposed to buy the Canadian construction firm last year. The Chinese state-owned enterprise is 64 per cent owned by the Chinese government.
China observers have said that state-owned enterprises effectively operate as an arm of the Chinese government, exposing Canada to potential risks if given access to sensitive assets.
“SOEs form an integral part of China’s national strategy for global expansion,” Duanjie Chen, a senior fellow at the Macdonald-Laurier Institute, said at a recent event in Ottawa. “That is a major reason why China has created monstrous SOEs through internal mergers in the first place.”
In February, Ottawa launched a full-scale national security review of the transaction. Such probes investigate foreign-led transactions based on whether it will impact Canada’s defence capabilities or create the potential for proprietary technologies to be transferred outside of Canada.
Aecon, for its part, has maintained that its contracts only involve low-level maintenance and construction work, and don’t involve access to classified IP. It has also rejected claims that Chinese state-backed firms would make local companies uncompetitive, arguing that U.S., South Korean and European conglomerates already have a heavy footprint in the Canadian construction space.
Ottawa’s rejection comes as Prime Minister Justin Trudeau looks to forge trade ties with China, and as Canada continues to navigate sensitive talks with the U.S. around the North American Free Trade Agreement.
U.S. officials have been critical of Trudeau’s approval of Chinese state-backed purchases of Canadian technology companies in the past, including the 2017 purchase of Norsat International Inc. by Chinese firm Hytera Communications Corp., Ltd., a privately held company 52-per cent-owned owned by Chinese billionaire Chen Qingzhou.
Norsat had contracts with U.S. Department of Defence, the U.S. Marine Corps, the U.S. Army, aircraft manufacturer Boeing, NATO, Ireland’s Department of Defence, and others. Trudeau also approved the takeover of Montreal-based ITF Technologies, a fibre-laser technology company, by Hong Kong based O-Net Communications in March 2017, reversing a decision by the former prime minister to block the deal.
U.S. officials were less critical of the Aecon acquisition by CCCC, but had suggested a full-scale review was necessary. Aecon has several contracts to install and maintain various telecommunications lines with Bell Canada, some of which traverse the Canada-U.S. border.
“We do have shared infrastructure that needs to be looked at,” said Micheal Wessel, the commissioner of the U.S.-China Economic and Security Review Commission who said he was not speaking on behalf of the government body.
Chinese ambassador to Canada Lu Shaye had said Canada is being too “sensitive” about Chinese capital flows into Canada, and likened the national security review to “looney” behaviour by Canadian officials.
Lu has said in past media interviews that China would accept a rejection of the deal, but said it would expect from Canada a detailed rationale for the decision. The country has long argued that China unfairly faces a deeper level of scrutiny in foreign takeovers than its peers.
“We just hope the Canadian side could adopt the same standard for Chinese companies compared with other foreign companies,” Lu said.
Trudeau failed to kick off official trade talks with China during a recent trip to Beijing, after trying to include various social, environmental and gender-based stipulations into the talks. China rejected those clauses outright and suggested Canada stick with economic and trade-based discussions.
Shares of Aecon, which helped build Toronto’s iconic CN Tower, declined in recent weeks to the lowest since the deal was announced in October on concern that it would be blocked. Aecon’s construction work includes several sectors that could impact national security, including building out the nation’s telecommunications networks.
Aecon closed at $17.34 in Toronto trading Wednesday, 14 per cent below the $20.27 a share offer from CCCC International Holding Ltd. to acquire the construction firm. Before the recent declines, there was widespread speculation in Canada that the deal might be approved as Trudeau sought warmer ties with China.
With files from Bloomberg News
