Industry and equity analysts struggled to come up with adjectives to describe their surprise at Industry Canada's rejection of the sale of Allstream to the Egyptian company Accelero on national security grounds.
Industry officials -- let alone executives of the two companies involved -- had no answers at to why, after a five-month Industry Canada review, the much-anticipated sale of MTS's Allstream division was squelched.
But what was well understood is the decision puts MTS's medium-term fortunes in a great deal of uncertainty.
Analysts sent out a parade of reports Monday night and Tuesday morning downgrading their target price on MTS shares and investors clambered to sell, driving the price down 8.5 per cent to close Tuesday at $29.62 on trading volumes more than 10 times normal.
'... We believe the story lacks a near-term catalyst and we see better risk-adjusted returns elsewhere in the sector'
When the deal was originally announced in May, it was widely heralded as perfectly suited to new Industry Canada regulations that came into effect last year, making it possible for telco players like Allstream -- that have 10 per cent or less market share in Canada's telecommunications market -- to have increased foreign investment.
MTS chief executive officer Pierre Blouin had no inkling rejection would be the outcome of a process he had orchestrated and hoped would be a significant milestone event in the history of the company.
"We kept the government informed all along," he said. "When we selected Accelero after a long process of looking for investors for Allstream all over the world, we determined they were the best fit based on the new rules, also based on the fact their principals had already been approved by the federal government when they launched another transaction (Wind Mobile) in Canada a few years ago."
Accelero Capital Holdings, a private equity firm based in Cairo and Paris whose principals had funded the launch of Wind Mobile in Canada, had agreed to pay $405 million for Allstream, MTS's Toronto-based national business fibre-optics business, as well as assume $115 million of its liabilities. In its proposal, it had also stated it would invest an additional $300 million into the business.
Winnipeg-based MTS was going to use the proceeds of the sale to beef up its balance sheet and put much-needed cash toward a growing and worrisome pension solvency deficiency.
'They have industry confused, they have investors confused and it will hurt investors and consumers, especially those in Manitoba' -- Sudbury MP Glenn Thibeault
But late Monday afternoon federal Industry Minister James Moore said upon review under national security provisions of the Investment Canada Act the deal will not proceed.
In the only explanation so far, Moore said, "MTS Allstream operates a national fibre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada."
Iain Grant, a well-connected industry consultant and principal of the Seaboard Group, said, "The deal just seemed to be such a good idea. It strikes me as a very odd decision. Are we worried about Egyptians -- are they the enemy? It's a shock. It will give pause to those coming to Canada thinking it is open to investment."
The decision is even more surprising since the federal government had been mounting a high-profile campaign encouraging more foreign investment in the wireless field, something the big three Canada telcos -- Bell, Telus and Rogers -- had been opposing in an even more elaborate way, buying hundreds of thousands of dollars of advertising warning Canadians about the evils of new foreign entrants getting an unfair advantage in Canada.
Sudbury MP Glenn Thibeault, the NDP's critic for small business said, "I think this shows increasingly that for investors looking to invest in Canada, they are left rolling the dice and crossing their fingers trying to figure out how to make things work and how to invest in Canada. That's unfortunate because in my opinion, and in my party's opinion, this is no way to run a G8 country."
'When you peel back the onion it becomes even more mystifying'
He said there is an ongoing issue about consistency when it comes to Industry Canada's review of foreign investments -- required with any investment of more than $344 million-- and the net benefit to Canada from that investment.
"What we see from this decision from the Conservatives is opaque criteria on what is a net benefit to Canada," Thibeault said. "They have industry confused, they have investors confused and it will hurt investors and consumers, especially those in Manitoba."
Despite the fact MTS is such an important corporate icon in Manitoba, the provincial government was not going anywhere near the matter. A cabinet official said, "Essentially it is federal jurisdiction. We had no input at any stage. At this point, we have not decided on any further action."
In what may have been an attempt at an ironic explanation for what the national security concerns might be, Dvai Ghose, a telecommunications analyst with Canaccord Genuity, noted an Accelero partner, Khaled Bichara, has been fined $250 by the U.S. government for making false statements to secure a $2-million loan from a U.S. agency. But he continued to act in senior management positions with global public companies that trade on the New York and London Stock exchanges.
Grant wondered if Ottawa was worried about the fact the Government of Canada was such a large customer of Allstream maybe that business could be moved to Bell's network to make the deal with the Egyptian company work.
But in another twist, he said Bell, Telus and Rogers all use a lot of Huawei equipment, the Chinese manufacturer that has been probed in the U.S. for security and espionage risk. Allstream uses little-to-no Huawei equipment.
"When you peel back the onion it becomes even more mystifying," Grant said.