Industry Canada blocks Accelero purchase of Allstream

Industry Canada denied Accelero Capital Holding’s proposed purchase of the Allstream business unit from Manitoba Telecom Services Inc., citing national security concerns. “The Government of Canada has concluded its review of Accelero Capital Holdings’ proposed acquisition of the Allstream division of Manitoba Telecom Services Inc. (MTS) under the national security provisions of the Investment Canada Act. The result of this review is that the transaction will not proceed,” Industry Minister James Moore said in a statement Monday evening. Moore said in a brief Industry Canada release that MTS’ national fibre optic network “provides critical telecommunications services to businesses and governments, including the Government of Canada.” Accelero, based in Paris and Cairo, is co-founded by Egyptian billionaire Naguib Sawiris, and earlier this year had made an offer to partner with outgoing Wind Mobile CEO Anthony Lacavera to take ownership of Wind through a purchase of a stake from Amsterdam-based VimpelCom Ltd. Sawiris announced the $520-million deal for MTS’ Allstream unit in May, saying he was making a “long-term commitment” to the Canadian market. The purchase would have given the company a cross-country fibre network with backhaul support for mobile wireless services, as well as bundled Internet, voice and mobile wireless contracts in Canada’s business market. Sawiris is Accelero's non-executive chairman and co-founder, and former owner of Cairo-based Orascom Telecom Holdings S.A.E., which originally backed Wind Mobile's entry into Canada through lending and a non-controlling stake. VimpelCom purchased Orascom in 2011. "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," Sawiris said in a statement Monday evening. "We are disappointed by the Government of Canada's unfounded and unexpected decision. Accelero has an impressive track record of successful investments in many of the countries with whom Canada enjoys global strategic partnerships. Accelero founders have previously led the investment of approximately $1 billion in Canada's telecommunications sector," he said. Along with Sawiris, Ossama Bessada is a managing partner and co-founder of Accelero. Bessada formerly served as CEO of Wind Italy and head of VimpelCom's Europe and North America operations. In a research note released Tuesday, RBC analyst Drew McReynolds said the government’s decision to reject the Allstream sale could sour Sawiris’ desire to re-enter the Canadian market. The company had previously held talks in March to potentially acquire the new entrant carrier. Accelero did not register for Canada’s 700 MHz spectrum auction, scheduled to start in January. “From a wireless perspective, one has to now question Accelero’s commitment to Canada and whether Accelero is a realistic potential acquirer of Wind Mobile,” he said. Canaccord Genuity analyst Dvai Ghose said in a note to clients Tuesday that the Allstream decision will also likely affect the entry of other foreign competitors into Canada’s telecom market. “oreigners now seem even less likely to compete in Canadian telecom, even though foreign ownership rules were relaxed in June 2012 and the Government has tried to entice foreign carriers to become wireless new entrants,” he said. “This would appear to benefit wireless incumbents.” Ghose said an immediate sale of Allstream now seems unlikely as there are currently no other bidders willing to pay “anywhere near” the $520 million Accelero would have paid under the rejected deal. McReynolds said he would “not be surprised” to see MTS put off a sale of its Allstream division until its “operational performance recovers” and until it has a better understanding of the government’s decision to block the deal with Accelero. MTS said in a release Monday evening that it was “extremely surprised” and disappointed by the government’s decision. “MTS Allstream and Accelero have responded openly and constructively to Industry Canada's requests for information in the 136 days since the transaction was announced, and Accelero has proposed far-reaching, comprehensive and binding undertakings to the Canadian government, including a commitment to invest $300 million over three years to pursue Allstream's capital plans. The government 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,” the release said. Allstream, MTS' business services division, provides IP services to large, medium and small companies across Canada. It has a 30,000-kilometre fibre-optic backbone network for IP connectivity, digital switching, Ethernet, and security services. MTS and Accelero said in the release they believe the transaction is still a “net benefit” to Canada, as required for foreign takeovers under the Investment Canada Act, and that “to the best of our knowledge would not be injurious to national security." The deal would have provided MTS with the capital necessary to increase its investment in Manitoba's telecom infrastructure, such as fibre-to-the-home in rural areas, MTS said. It also would have meant $165 million in funding for MTS' pension, serving more than 10,000 pension plan members, the release said. MTS said at the time the deal was announced that the $520 million value included debt payments and pension liabilities, with MTS receiving net proceeds of about $405 million from the sale. MTS said it decided to proceed with the transaction based on the knowledge that Accelero's principals “are a well-known and experienced group of telecom executives who have previously been permitted to invest in and operate telecom assets in a number of countries around the world, including Canada.” It added: “the same group of principals led the investment of approximately $1 billion in Canada's telecommunications sector, beginning with the 2008 AWS spectrum auction. The Federal government's past active support of Accelero's principals played a significant role in MTS Allstream's decision to sell to Accelero following the Company's strategic review process.” MTS said its decision was also “entirely consistent” with the Conservative government’s changes to the Telecommunications Act that allowed foreign direct investment in Canada's telecom sector. "We pursued this transaction, with Accelero as our partner, in direct response to the Federal Government's stated policy objectives of increasing foreign investment and driving greater competition in Canada's telecommunications sector, so this result is very difficult to understand or accept," Pierre Blouin, MTS’ chief executive, said in a statement. MTS and Accelero said they are now reviewing their options in consultation with their legal and financial advisers. MTS said its Allstream division will once again be reported as part of MTS Allstream's consolidated results, which will take about a $35-million writedown to transaction-related expenses and planned restructuring costs. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and editing by Nicholas Kyonka at nkyonka@thewirereport.ca

Industry Canada blocks Accelero purchase of Allstream

News | 10/07/2013 11:37 pm EDT

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