Canada launches security review into Chinese takeover of Aecon

The planned takeover of a large Canadian contractor by a Chinese firm has been placed under fresh scrutiny by the Canadian government, which has launched a full national security review into the deal.

The decision affects the controversial CAN$1.5bn takeover of Aecon Group by CCCC International Holding (CCCI), a division of state-majority-owned China Communications Construction Company.

Contractors, lobbyists and Canada’s main opposition party have called for further review of the deal, saying it would hurt competition and expose sensitive infrastructure to a foreign power.

But Aecon, whose board and shareholders overwhelmingly support the sale, has hit back, refuting what it calls "misleading information" about the acquisition.

Analysts believe the deal will still go through, but note the complexity raised by its becoming a political issue.

In a further twist, it was revealed this week that a prominent lobbyist against the deal has previous fraud convictions, and Aecon has challenged his claims to be a "major construction executive".

Plan pushed back

Aecon revealed the government’s decision before trading on Monday (12 February), and said the "outside date" for completing the "plan of arrangement" for the sale had consequently been pushed back to 30 March from the original date of 23 February.

In its statement Aecon said the government had given notice under section 25.3 of the Investment Canada Act, which entitles the government to order a review if it considers the takeover could be "injurious to national security".

Aecon said both parties would work with the review to get the deal approved, but company’s share price dipped on the news.

Earlier a national contractors’ trade body, the Canadian Construction Association (CCA), warned Prime Minister Justin Trudeau that the sale would hurt competition because a Chinese-owned Aecon would have the financial clout of the Chinese government behind it.

Aecon rebutted this claim and other "misleading information" about the sale to CCCI in a statement on Friday (9 February).

In it, Aecon denied it would be subsidised by the Chinese government, or that CCCI is ever subsidised in its international activities.

Nor would the takeover mean that a Communist Party secretariat would be established within Aecon, the company said in response to claims made by those lobbying against the deal.

"This is incorrect," Aecon said. "The Party Committee function is a standard practice in China and will be based in Beijing. The purpose of this function is to advise the Board of CCCC on Chinese national strategic opportunities. Corporate decisions by CCCC and CCCI will continue to be made by their Board of Directors."

Sensitive infrastructure

The deal has become a political football in Canada, where the opposition Conservative Party has been pushing Trudeau’s Liberal government to launch a formal national security review.

Some large domestic contractors including Ledcor Group, PCL Constructors and Calgary-based Graham Construction have also been lobbying the government to reject the deal, claiming would hurt competition but also affect sensitive telecommunications infrastructure, nuclear facilities and other infrastructure, where Aecon has contracts.

Aecon refuted this, too, saying it offers only construction services to nuclear clients and owns no intellectual property related to nuclear energy. Nor is it involved in sensitive military installations, Aecon said.

On the competition issue, Aecon pointed out that Canada’s Competition Bureau has already issued a "no action" letter in respect of the takeover, meaning the bureau concluded that the proposed deal is not likely to result in less competition in the construction and infrastructure market, although it can raise objections for a year after the transaction.

Aecon said it still expected the takeover to take effect by the end of the second quarter this year.

Layers of complexity

Some analysts also believe the deal will still go through. Maxim Sytchev, of the National Bank of Canada, noted that the Trudeau government had remained neutral on the takeover.

"Ultimately this transaction is going to close," he told Bloomberg. "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."

Another, Chris Murray, managing director of AltaCorp. Capital Inc., said he believes the government is most concerned about telecoms infrastructure, which could lead to a demand that part of Aecon be divested.

"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 said, reports Bloomberg.

Who is Michael Beattie?

The saga took another twist this week when a prominent lobbyist against the takeover was revealed to have had convictions for fraud and perjury, and was facing new charges of fraud.

Doubts were also raised about claims made by this lobbyist, named Michael Beattie, that he was a "major construction company executive".

During the campaign to stop the takeover, Beattie had been brought to meetings with federal politicians, regulators and media by a law firm, Goodmans LLP, and lobbyists.

But newspaper The Globe and Mail revealed on Monday that Beattie was convicted of fraud and perjury charges in 1993, and more recently was arrested and charged with fraud offences in May 2016.

In its Friday statement Aecon raised the alarm about Beattie, who used Twitter to oppose the takeover, saying Beattie has no discernible background in construction.

"We have been unable to find any evidence that Mr. Beattie is a ‘veteran construction industry executive’," Aecon said. "We know, for example, that his company is not a registered business.

"Neither he nor his company is a member of any Canadian construction association. He has also taken credit for a number of construction projects for which we can find no evidence of his participation."

Sources told the Globe that Goodmans LLP dropped Beattie when the paper revealed the criminal charges.

Image: Canada’s Parliament Buildings, Ottawa (Jonathankslim/Wikimedia Commons)