Allstream no longer for sale as Accelero deal the first blocked for national security

Manitoba Telecom Services Inc. is removing the “for sale” sign from its Allstream division following the Conservative government's decision to block its sale to Accelero Capital Holdings, said Chris Peirce, the company’s chief corporate officer. “We think Allstream is in the right place in terms of our market niche,” Peirce said in a telephone interview Wednesday. “We’re going to focus on building the Allstream business.” Industry Canada said Monday it denied Paris- and Cairo-based Accelero’s $520-million deal for Allstream, which was reviewed under the Investment Canada Act. The decision marked the first time the government cited national security concerns to block a foreign takeover. Allstream, MTS' business services unit, provides IP services to governments and companies across the country using a 30,000-kilometre fibre-optic backbone network for IP connectivity, digital switching, Ethernet, and security services. MTS launched a strategic review of its Allstream division in September 2012 with the hope of attracting a foreign buyer after the federal government eased foreign ownership restrictions for telecom services earlier in the year. Peirce said MTS will now focus on expanding Allstream’s network and services, after going through a “disruptive” sale process for about a year. “We’ve been adding about 300 buildings a year to our fibre footprint over the last couple of years, and we will continue to do that,” he said, referring to Allstream's business customers. “That fits our strategy of offering a really collaborative suite of services to mid- and large-sized businesses across the country that have multiple locations and sophisticated needs to deal with their data,” he said. Industry Minister James Moore said in a statement Monday that Allstream operates a “national fibre optic network that provides critical telecommunications services to business and governments, including the Government of Canada,” and that the transaction was reviewed “under the national security provisions of the Investment Canada Act.” Peirce said MTS, since the announcement, has asked the government for further clarification on its concerns about the deal, the first proposed foreign takeover of a telecom asset to go through a complete review under the Investment Canada Act. The government’s response, Peirce said, was “very general” and gave the company no indication as to what specific aspects of the deal raised concerns. “There were no specific issues raised other than that general issue of providing security and integrity around traffic,” he said of the company's conversations with the government during the review process. Leslie Walsh, a consultant with Fleishman speaking for Accelero, added in an emailed statement that, "In the absence of a more detailed response from government it is impossible to speculate further on what could have caused this decision.” Allstream won a $55-million, three-year contract in 2012 to provide data transport and other services to the federal government through the Department of Shared Services. The contract made the company the government’s “largest data provider,” Peirce said, though he declined to comment on the specific government departments and agencies receiving Allstream's services. Peirce said Accelero was “prepared to take mitigating steps around those contracts” if necessary. It's unclear whether Accelero offered to cancel the contract. Peirce said he has trouble believing the government blocked the deal based on that service contract alone. “We are open for business. We are a pro-business, pro-investment government,” Jason Kenney, Canada's minister of employment and social development, said in an interview this week on BNN, after the government denied the Allstream transaction. “When we have very substantial and well-founded concerns, especially in a very sensitive area like telecom, that a foreign company with problematic connections could take over a very sensitive Canadian telecom network like this, we have to listen to the advice we get from our intelligence and police agencies, and our security agencies. That's what we're doing,” Kenney said. Former Wind Mobile investor and Egyptian billionaire Naguib Sawiris is one of Accelero's four managing partners, all of whom previously served in executive positions with international mobile providers Orascom Telecom Holdings S.A.E., based in Cairo, or VimpelCom Ltd., based in Amsterdam. VimpelCom acquired Orascom and affiliated company Wind Telecom S.p.A. in 2011 for $6.6 billion US. Accelero's managing partners also include Ossama Bessada, former CEO of Wind Italy and head of VimpelCom's Europe and North America operations; Aldo Mareuse, former group chief financial officer of Orascom and Wind Telecom, where he served from 2002 to 2011; and Khaled Bichara, former group president and chief operating officer of VimpelCom and former group executive chairman of Orascom. According to Accelero's website, Bichara played a key role in the 2011 merger of VimpelCom and Wind Telecom S.p.A. Court documents also show that Bichara, in 2005, pled guilty for submitting false information to the United States Agency for International Development. The guilty plea, heard in a Manhattan court, was related to $2.1 million in financing for Bichara's Cairo-based company, LINKdotNET. Bichara later paid a fine and returned the loan to USAID. Peirce rejected the idea that the deal may have been blocked due to the charges against Bichara. “I can’t imagine that being a basis for a national security concern,” he said. Sawiris also owns a 75 per cent stake in Koryolink, North Korea's only wireless provider, after partnering with a North Korean government ministry to launch the company and its wireless network in 2008. Sawiris maintained a personal stake in Koryolink after he sold his stake in Orascom in 2011. Prime Minister Stephen Harper's government has blocked two other proposed deals under the Investment Canada Act, though in those cases it cited the act's requirement for a “net benefit” to Canada, as opposed to national security concerns. In 2008, the government rejected a proposed acquisition of the space and satellite unit of Macdonald, Dettwiler and Associates Ltd. (MDA) by U.S. company Alliant Techsystems Inc., and in 2011 the government indicated that Australian-based mining company BHP Billiton Ltd.'s $38-billion deal for Potash Corp. would not be a net benefit to Canada. The government's 2008 rejection of the sale of MDA's space unit was the first time the federal government blocked a foreign takeover under the Investment Canada Act. The federal government has said Chinese telco Huawei Technologies Co. Ltd. is not permitted to bid for government telecommunications contracts, though last year, the Harper government approved Chinese state-owned firm CNOOC Ltd.'s deal for Canadian oil and gas company Nexen Inc. “This one really was a surprise,” Anthony Lacavera, chief executive of Canadian new entrant Wind Mobile, said in a televised interview on BNN Tuesday, speaking about the government's Accelero decision. “This raises a lot of concerns with respect to the clarity of the investment rules in Canada.” Lacavera acknowledged in the interview that he hoped to see Accelero gain ownership of Allstream because the fibre network could have provided backhaul support for a wireless network. Accelero, earlier this year, had partnered with Lacavera on an offer to purchase Wind Mobile from VimpelCom, the new entrant's majority, non-controlling, shareholder. Lacavera said the Conservative government had previously approved Sawiris' financial backing of Wind Mobile through Orascom when Wind entered Industry Canada's 2008 wireless auction. After years of looking for more foreign investment and pushing for changes to the investment rules, the Allstream decision sends the wrong message to the industry and investors, Lacavera said. “Investors need clarity,” he said. “How are these rules going to be applied? We changed the law permitting foreign ownership of a carrier like Allstream, and then we reject the first application to acquire that from a party we previously approved.” Lacavera said cyber security is critical, though any current security risks to the Allstream network would not have changed with a new owner, adding that Accelero planned to invest in Allstream's aging fibre network. “If anything, the Accelero position was, we're going to invest $300 million to upgrade the network, to strengthen the security of the network, to improve the network,” Lacavera said. “The position that somehow a change of ownership could introduce a new security issue, to me, is confusing.” Walsh, speaking for Accelero, said the investment firm has successfully met national security requirements "in every international market where it does business," and that its approach in Canada was no different. "Level 3 and Global Crossing guidelines were the very baseline of Accelero's security undertakings. Accelero even offered to enhance current Allstream security protocols," Walsh said. The national security reasoning for the decision is also raising questions about whether the government would permit a foreign takeover of Waterloo, Ont.-based BlackBerry Ltd., which is taking offers after Toronto investment firm FairFax Financial Holdings Ltd. tentatively bid $4.7 billion US for the smartphone maker. “What we want is obviously a stable environment,” Treasury Board President Tony Clement told reporters at the GTEC technology conference in Ottawa on Tuesday, after being asked about BlackBerry's future. “I think that we’ll let the marketplace respond. We have a role to play obviously, which involves national security and making sure that what occurs is in the public interest and we take that responsibility seriously,” he said. “We’ll let it play out in the marketplace and if and when the government has to respond, we certainly will.” MTS does not publicly report whether Allstream is a profitable division on its own, though MTS' earnings statements have shown low margins and declines in revenues for the division. Macquarie Capital analyst Greg MacDonald said in a research note Tuesday that MTS will post higher earnings and more free cash flow in 2013 with Allstream than without it. MacDonald estimated the company’s free cash flow to hit $168 million in 2013 with Allstream, up from $156 million without the division. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and Simon Doyle at sdoyle@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca --- CORRECTION: An earlier version of this story incorrectly stated the value of VimpelCom's $6.6-billion US deal for Orascom and Wind Telecom.

Allstream no longer for sale as Accelero deal the first blocked for national security

News | October 9, 2013

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Allstream no longer for sale as Accelero deal the first blocked for national security

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