MTS Allstream deal block shows Ottawa wants it both ways

The federal government’s decision to reject a proposed deal that would have seen Manitoba Telecom Services (MTS) sell its Allstream subsidiary to the Egyptian investment group, Accelero Capital Inc., due to “unspecified national security concerns” sends confusing messages regarding just how welcome Canada wants to be to foreign investors in the tech sector.

Industry Minister James Moore said the proposed $520 million U.S. deal to sell Allstream, which MTS purchased in 2004, had been disallowed under the national security provisions of the Investment Canada Act. No further details were provided, leaving MTS standing, confused, at the altar.

“MTS Allstream is extremely surprised and disappointed by this decision,” the company said in a statement, adding despite MTS Allstream’s and Accelero’s attempts to give the government everything it asked for since the deal was announced in May, Ottawa “has nevertheless now made the determination to reject the transaction due to unspecified national security concerns, and has rejected an offer from MTS and Accelero to take whatever actions are necessary to address the government's concerns.”

Unfortunate timing

The scuttling comes at a difficult time for the government as it pushes hard to open up foreign investment and drive increased competition in the Canadian telecom space. As it lays the groundwork for the 700 MHz spectrum auction, which kicks off in January, Industry Canada has repeatedly voiced its desire to encourage foreign investment and ultimately create a fourth national wireless carrier to compete against the incumbents, Rogers, Bell, and Telus. The Harper government in March 2012 eased foreign ownership restrictions on entering the Canadian market – allowing them to buy into companies with less than 10 per cent market share, and reaffirmed its commitment to a more open market this summer amid speculation that American telecom giant Verizon was considering a move north.

Although Verizon ultimately begged off, the government’s MTS deal shutdown runs counter to its very philosophy. In the absence of a detailed explanation for the refusal, it's difficult to assess further, but clearly even the foreign investment-friendly government, which uses MTS Allstream’s national backbone for some of its networking needs, has limits to how far it’s willing to go in opening up Canada’s telecom market to foreign investors.

The turndown is especially puzzling given who’s involved. Accelero is owned by Egyptian telecom magnate Naguib Sawiris, whose Orascom Holdings backstopped Globalive’s entry into the Canadian wireless market in the 2008 AWS spectrum auction. Globalive, which operates Wind Mobile, was initially rejected by the CRTC over alleged foreign ownership rule violations. The decision was overturned in 2009 by then-Industry Minister Tony Clement, but Sawiris has since criticized Canada as being unfriendly to foreign investment.

Significant fallout

The government’s decision could leave other stakeholders wondering what the specific criteria for similar deals in future might be. The move also leaves a number of unanswered questions around the future regulatory landscape in the Canadian telecom sector. With MTS hitting another wall in its plan to unload the Allstream unit, an estimated 2,000 jobs now hang in the balance, as well as pension obligations to 10,000 current and former employees. Allstream is also in a state of limbo, with investment in next-generation services likely to take a hit as MTS continues to look for a way out.

As uncertainty continues to build, the government needs to reaffirm its foreign investment commitment - and the rules for same. Without decisive action, Canada risks becoming a no-fly zone for foreign investors if they see the process as complex, expensive and ultimately futile. The government apparently wants it both ways, but that may not be feasible in today's global telecom and business climate.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca