Canada's rejection of Aecon deal not unprecedented

(Simply Wall St.)

Earlier this week, the Canadian government stepped in to stop a deal that would have seen Toronto-based construction company Aecon taken over by a Chinese state-owned enterprise. The decision not only caused Aecon’s stock to drop to its lowest price in a year, it could also impact overall trade relations between Canada and China.

After being reviewed under the Investment Canada Act, the C$1.51 billion deal was deemed “a potential injury to national security” and immediately squashed. The act gives the government the power to review the acquisition of any existing Canadian business as well as the establishment of a new Canadian business by non-Canadians. Aside from its purpose to protect national security, deals subject to review must also offer a “net benefit” to Canada based on:

  • The effect on employment, resource processing, utilization of parts and services produced in Canada, and exports from Canad
  • The degree and significance of participation by Canadians in the business and in any industries in Canada
  • The effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada
  • The effect of the investment on competition within any industry in Canada
  • The compatibility of the investment with national industrial, economic and cultural policies
  • The contribution to Canada’s ability to compete in world markets

Hardly the first rejection

This isn’t the first deal reviewed under the act, nor is it the first to be rejected (it’s the fifth). It does however, further strain relations between Canada and China at a time when our prime minister has publicly expressed wanting to do the opposite. In an official response to the decision, the Chinese embassy in Ottawa warned that it would “seriously undermine the confidence of Chinese investors.”

Previously, in 2017, Ottawa actually approved two deals with Chinese-owned companies, Norsat and ITF Technologies. Norsat was a Vancouver-based company that developed satellite systems for the Canadian Coast Guard and U.S. Department of Defense. While approval means everyone ultimately decided that government security wouldn’t be compromised, it’s obvious to see where the concern came from in that case. In 2014, Beida Jade Bird’s plans to open an alarm manufacturing plant in Quebec were rejected. According to the Financial Post, unnamed sources claimed the rejection came due to the proposed plant’s proximity to the Canadian Space Agency headquarters.

Keeping things under control

So what exactly made the Aecon deal a bad fit for Canada? Control, or rather the lack of it. Aecon is one of Canada’s largest construction companies, and therefore has a big hand in the growth and maintenance of the country’s infrastructure. Handing that influence over to an entity whose interests are not Canada’s could be seen as undoing any potential net benefit the deal could have had.

In a comment to the Globe and Mail, former CSIS director Ward Elcock said “a state-owned company will always do the bidding of China. At the end of the day, China is not an ally of Canada. It is a trading partner….”

After embracing a much more open approach with China, the decision came as a surprise to some, but Prime Minister Trudeau reiterated that Canada is committed to strengthening economic ties with China, just not at the expense of security.

“One can easily look at the example from similar investments in Australia where the Australians suddenly realized they had a significant portion of their energy grid … owned and controlled by a government that is not their own,” he told reporters on Thursday. “There are always going to be concerns about the ability of a country to continue to protect and deliver essential services to its citizens in a way that enhances and maintains their own sovereignty.”

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