Industry Canada Blocks Sale of Allstream Due to National Security Concerns

Yesterday, Minister of Industry James Moore (the “Minister”) announced that Accelero Capital Holdings’ (“Accelero”) proposed $520 million acquisition of Allstream, a division of Manitoba Telecom Services Inc. (“MTS"), would not be allowed to proceed under the national security provisions of the Investment Canada Act (the “Act”).

Background

Allstream is a division of MTS that provides telecom services to businesses across Canada.

Accelero is a private-equity firm which specializes in telecommunications. According to MTS’ press release, several of the firm’s principals are “well-known and experienced group of telecom executives who have previously been permitted to invest in and operate telecom assets in a number of countries around the world, including Canada (through Wind Canada)."

The parties to the transaction had provided significant binding undertakings to the Canadian Government, including a commitment to invest $300 million over three years to pursue Allstream’s capital plans.

Investment Canada Act and National Security

The Canadian Government automatically reviews foreign takeovers of businesses with more than C$344 million in assets under the Act. Amendments made in 2009 also permit the Canadian Government to prohibit transactions believed to be “injurious to national security”.

Without disclosing specific reasons for rejecting the transaction, the Minister noted that “MTS Allstream operates a national fibre optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada”.

Canada’s rejection of the Allstream/Accelero transaction is the only the third time since 1985 where the Canadian Government has formally blocked a significant foreign takeover. In 2010, the Canadian Government cited the importance of the fertilizer industry to the national economy to block BHP Billiton Ltd.’s $39 billion bid for Potash Corp. of Saskatchewan Inc. In 2008, the Canadian Government blocked the acquisition of Canadian aerospace company MacDonald Dettwiler & Associates to Alliant Techsystems on grounds of national security.

Additionally, while not formally blocked, signals from Ottawa regarding potential national security concerns prompted Vimpelcom Ltd.’s bid to abandon its efforts to acquire control of wireless provider Wind Mobile was withdrawn in June of this year. Based on the outcome in the Allstream and Wind Mobile transactions, it appears that the Canadian Government will closely scrutinize and potentially block foreign acquisitions of control of Canadian telecom providers (including both wired and wireless operations) under the national security provisions of the Act.

The Minister’s rejection of the Allstream transaction also clearly affirms that the net-benefit and national security reviews under the Act are distinct processes that must be both successfully concluded before a transaction will be allowed to proceed.