The sale of MTS's Allstream national business telecommunications division to Egyptian-based Accelero Capital Holdings has been rejected by Industry Canada because of unspecified national security concerns.
The sale announced in May had valued the Allstream division at $520 million.
MTS CEO Pierre Blouin said the news late Monday afternoon came as a complete surprise to the company.
Blouin said, "We have been collaborating with the government for 136 days. I am sure the review is not about MTS and Allstream and more about Accelero. We have been very open with the government."
Accelero's principal, Naguib Sawiris, has already been active in Canada, investing about $1 billion in his financial backing of Wind Mobile Canada.
The original deal with Accelero was only made possible after Industry Canada loosened its foreign investment criteria for certain smaller Canadian telecommunications companies.
Blouin said it was in light of those changes MTS launched a strategic review to see if it could find a buyer for Allstream.
Although this was the first such review the government undertook under the new regulations, Blouin said it seemed to be right in line with the new government policy.
"We pursued the review in a very collaborative way and to come at the end today and be basically informed that the government was rejecting the transaction based on national security concerns without outlining what those concerns are or giving us an opportunity to correct them is quite a surprise," Blouin said.
In a statement, Industry Minister James Moore confirmed the proposed acquisition was rejected under the national security provisions of the Investment Canada Act.
"The result of this review is that the transaction will not proceed," he said in an emailed statement.
The minister did not specify what the security concerns may be, but said: "MTS Allstream operates a national fibre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada."
Accelero said in a statement late Monday it has committed to an investment of $300 million to increase Allstream's competitiveness and accelerate the introduction of innovative new products
Co-founder Sawiris said, "We are disappointed by the Government of Canada's unfounded and unexpected decision. Throughout this process, we were comforted by Industry Canada that our filings were in order, our submissions complete and constructive, and our proposed binding undertakings serious and substantive so that the transaction would meet the 'net benefit' test"
The transaction was not going to impact MTS's Manitoba operations and the rejection of the sale will also not impact the company's operations here, which Blouin said are doing well.
However, about $165 million of the proceeds from the sale had been slated to go to the company's pension fund financing obligations.
Blouin said both companies will now review their options.
But he said it is unlikely that will MTS will restart efforts to find a buyer for its national business telecommunications business.
"It would be challenging to restart a process after all this disruption, especially not knowing exactly what the rules we have to follow are," Blouin said in an interview early Monday evening. "Now the focus will be running the business, getting it back to what it was before we started the process and making it successful again."
Blouin said the May 24 announcement of the deal with Accelero did not impact the company's strategy in the upcoming wireless spectrum auction.
The Winnipeg-based company incurred about $35 million in costs since the deal was originally announced.
The company issued a revised financial outlook for 2013 on Monday with lower EBITDA (earnings before interest, taxes, depreciation and amortization), lower earnings per share and lower free cash flow guidance estimates.
Blouin admitted the transaction review process has been disruptive to Allstream, which had previously recorded 10 consecutive quarters of increased EBITDA. The company said Allstream revenues have been impacted by higher than expected legacy churn from exit activities, as well as slower than expected installation of a large contract won late in 2012.
The news came after the close of trading Monday where MTS shares finished down 15 cents to $32.36.
-- With files from the Canadian Press