MTS, Sawiris in search of answers after shock Allstream decision

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Egyptian telecom investor Naguib Sawiris offered to give up federal contracts if he bought MTS Allstream Inc., but could not allay the national security concerns of a Conservative government that has now blocked three high-profile foreign takeovers.

Mr. Sawiris and his company, Accelero Capital Inc., struck a deal in May to acquire the division from Manitoba Telecom Services Inc. for $520-million. But when the transaction was held up in Ottawa's approval process, the companies made a series of concessions to try to convince the government to bless the deal. They said Allstream would agree to stop carrying sensitive government data and that it would refrain from using telecom equipment from Chinese gear maker Huawei Technologies Co. Ltd. on the Allstream network, according to sources familiar with the discussions.

But the government rejected the deal late Monday, a move that came as a shock to Mr. Sawiris as well as to Manitoba Telecom, which had chosen him as a buyer in part because of his track record in Canada: he had already been deemed acceptable by the government as an investor when he helped start Wind Mobile.

However, Allstream's network, which carries voice and data for governments and business, is thought to be more strategic than Wind's cellphone business.

When examining the deal, federal officials raised questions about Mr. Sawiris's previous investments in North Korea, sources said, specifically in the Koryolink cellular network which launched service in 2008. But Industry Minister James Moore has declined to explain exactly what the government's specific concerns were. His office cited the Investment Canada Act, which it noted has "strict confidentiality provisions that prevent further comment on the proposal."

The government highlighted the Egyptian nationality of Mr. Sawiris in a memo sent to Conservative members of Parliament as part of its decision. "We are open to foreign investment in all sectors, but not at the expense of our national security," says the talking points e-mailed to the Tory caucus Tuesday morning.

"Accelero Capital's non-executive chairman is the Egyptian Naguib Sawiris," the memo says, before going on to list other Accelero players for MPs. "Its managing partners are Ossama Bessada, Khaled Bichara, and Aldo Mareuse."

The Harper government is bracing for criticism that the Allstream decision will hurt the climate for outside investment in Canada. The Conservatives are arming MPs and their staff with statistics that indicate foreign investment in Canada is up this year, the same talking-points memo shows.

Both MTS and Accelero say they remain in the dark about the government's concerns. During the 136-day review period, the companies answered a slew of questions from government officials but were never given any indication there were potential deal breakers.

Among the issues raised were queries about network security and the ability to safeguard government data if Allstream's fibre network was controlled by foreigners. As part of that dialogue, the companies offered to make concessions, including to give up government business.

Although MTS Allstream CEO Pierre Blouin declined to comment on the substance on the companies' talks with Ottawa, he stressed that "no specific information" about material issues with the transaction were raised.

"Through all these discussions – and you have to assume over five months there have been lots of discussions – I would say nothing was identified to us that was a major concern," Mr. Blouin said in an interview on Tuesday.

"At the end of the day, if you place yourself in the shoes of foreign investors, they will have a strong hesitation of investing in telecom in Canada right now because I think everybody was a bit caught by surprise here." MTS shares fell more than 8 per cent to close at $29.62.

"We were open and offered a complete and thorough application to ensure national security was protected as it was a priority to preserve that as a responsible and trusted Canadian telecom operator," Accelero said in an emailed statement.

The investment firm said it put forward a "powerful" solution to address any concerns about government contracts, while offering to enhance Allstream's network security protocols. Accelero also offered Ottawa control over any future changes in equipment.

"During the investment review process, Accelero asked officials to specifically direct us to areas of concern so that we could accurately address them. We did not get that specificity from the government," the statement read. "Insofar as Mr. Sawiris is concerned, we were transparent from day one on Sawiris' investments all over the world. Accelero has a presence across several markets and respects the local requirements of each country in which it operates a commercial presence."

This is at least the fourth time since it took office that the government has thrown up obstacles to foreign takeovers.

In 2008, Ottawa surprised international investors by rejecting a bid by U.S.-based Alliant Techsystems Inc. to acquire the space division of Vancouver-based MacDonald Dettwiler and Associates Ltd. on the grounds of protecting Canadian sovereignty.

And in November, 2010, the Conservatives blocked Anglo-Australian BHP Billiton's $38.6-billion offer for fertilizer company Potash Corp., a decision the minister for Saskatchewan, Gerry Ritz, later explained was a move to protect a "strategic resource."

Finally, in late 2012, the government erected new barriers to investment by state-owned companies, fencing off the Canadian oil sands from further control by foreign governments – a decision Tory officials later explained was aimed at China.