TORONTO Oct 9 When Canada blocked the sale of a
fiber optic network to a company backed by an Egyptian telecom
tycoon this week, it telegraphed its resolve to make national
security paramount when considering whether to allow a foreign
firm to acquire what it considers a strategic asset.
That warning may effectively limit the pool of would-be
buyers of BlackBerry Ltd or foreigners
interested in Canada's telecom industry, and it could rule out
all but a few well-established players based in North America,
industry executives, lawyers and analysts say.
The government's ruling, announced on Monday, was a blow to
Manitoba Telecom Services, which wanted to sell its
Allstream fiber optic network to Accelero Capital Holdings,
controlled by Egyptian businessman Naguib Sawiris. MTS shares
dropped 8.6 percent on Tuesday.
But for BlackBerry, the embattled smartphone maker, Ottawa's
decision may not make much difference as primarily North
American companies appear to be interested in acquiring the
parts of the company that would raise security concerns.
BlackBerry declined to comment. The government declined to
elaborate on its reasons for blocking the Allstream bid.
For Canadian telecoms, however, the ruling may severely
restrict the list of potential parties that may be allowed to
invest in the sector at a time when U.S. telecoms have shown
little interest in making investments in Canada.
"Canada is definitely open for business, but it may not be
open to be given away to the first person who comes in the door
with a bit of money," said Ross Healy, a portfolio manager with
MacNicol & Associates, whose clients own BlackBerry shares.
BlackBerry's most sensitive asset - a secure network that
handles millions of confidential corporate and government emails
every day - is most likely to get shopped to North American
entities, Healy said.
Sources close to the matter have told Reuters that
BlackBerry is in talks with Cisco Systems Inc, Google
Inc and Germany's SAP AG among others, about
selling them all, or parts of itself. The
potential buyers have declined to comment.
Such a deal would be an alternative to a preliminary, $9-a-
share offer by a group led by BlackBerry's biggest shareholder,
Canada's Fairfax Financial Holdings Ltd.
BlackBerry put itself up for sale in August
after lackluster sales for its new devices.
BlackBerry shares closed slightly higher on Tuesday, the day
after Ottawa's announcement, a sign that investors were not
concerned that the ruling on Allstream would hamper any deal
making for the smartphone maker.
The sources close to the matter have told Reuters that
BlackBerry is also seeking preliminary expressions of interest
from other strategic buyers, including Asian technology giants
such as LG, Samsung and U.S.-based Intel
Analysts say BlackBerry could sell its handset business and
operating system to an Asian phone maker, while selling its more
sensitive enterprise business and network assets to the likes of
a Cisco, IBM Corp, or Hewlett-Packard Co.
NATIONAL SECURITY HURDLE
Under the Investment Canada Act, the federal government has
wide ranging powers to veto any foreign takeover of a Canadian
asset or company, if it deems that such a deal would not bring a
"net benefit" to the country, or if it believes that such a deal
may pose a threat to national security.
Even so, Canada has rarely used its veto powers. In 2010, it
blocked a $39 billion bid by BHP Billiton, the
Anglo-Australian mining giant, to buy Potash Corp, on
the grounds of the "net benefit" test. Two years earlier, it
blocked MacDonald Dettwiler and Associates Ltd's
attempt to sell its satellite division to Alliant Techsystems
Inc, due to national security concerns.
This week the government offered little detail on the reason
behind its rejection of the Allstream deal. But it did offer one
tantalizing clue, noting that Allstream runs a network that
provides critical telecommunications services to clients that
include the government of Canada.
"The situation with BlackBerry will be the same or more so,"
said Tony Baldanza, who heads Fasken Martineau's antitrust and
competition law group, noting that much of the government's
email traffic goes through BlackBerry's secure servers.
"We have to assume that these national security provisions
will be carefully considered and applied as necessary, so
BlackBerry will have to be selective about who it considers to
be real prospective purchasers," he said. "That does not exclude
all buyers, but it does limit the market to which BlackBerry can
DIVERGENT TELECOM POLICY
The rejection also signals that the government is going to
be picky about who it allows to invest in the domestic telecom
sector, despite its stated goal of attracting foreign investment
to boost competition and lower prices for consumers.
The government laid out the red carpet this summer when it
appeared that U.S.-based Verizon Communications Inc was
keen to enter Canada by acquiring start-up Wind Mobile.
Canada's top telecom carriers - BCE Inc, Telus Corp
and Rogers Communications Inc - accused Ottawa
of creating rules that favor foreign companies with preferential
access to spectrum in an upcoming auction. The three also
complained that the rules gave foreign companies more leeway in
buying Canadian telecom start-ups, while they are essentially
prohibited from striking such deals.
After the rejection of the Allstream deal, MTS's chief
executive said the decisions to sell the network and to choose
Naguib Sawiris' Accelero as the buyer were influenced by
Ottawa's earlier efforts to encourage foreign investment.
"We thought we were right in line with the government desire
to bring more investment from foreign countries into Canada and
into telecom," Chief Executive Officer Pierre Blouin said in a
Sawiris was in charge of Egypt's Orascom Telecom when it
provided most of the initial financial backing for startup Wind
Mobile, following a spectrum auction in 2008.
Canada's Conservative government fought a court battle
against the country's own telecom regulator and rival operators
to ensure Wind could operate. It later loosened the rules so
foreigners could fully own telecom companies, such as Wind, that
had less than 10 percent market share.
Even so, Ottawa dragged its feet on approving a change of
control for Wind, after Sawiris's Orascom Telecom was sold to
Vimpelcom, whose top shareholder is Moscow-based Altimo,
controlled by billionaire Mikhail Fridman. Norwegian operator
Telenor ASA has a large minority stake.
Although Wind has grown into the fourth-largest player in
Canada and succeeded in lowering wireless prices in Canada, the
carrier built its network on equipment from China's Huawei
Technologies Co Ltd, a decision that has displeased
Ottawa, according to industry sources. The sources asked not to
be identified because of the sensitivity of the subject.
Wind Mobile declined to comment. A spokeswoman for Minister
of Industry James Moore was not immediately available to comment
on possible government concerns about Wind's relationship with
Australia has banned Huawei, the world's No. 2 telecom
equipment maker, from helping build its broadband network, over
Wind and other startups have struggled to turn a profit.
While the startups appear keen to sell out to larger players
with the scale needed to succeed in the business, the
government's latest ruling makes it unclear who could buy them.
Blouin, the CEO of Manitoba Telecom Services, said that
unless the government clarifies the situation or the rules, it
will be challenging to invite foreign investment into Canada's
"It's going to put a lot of doubt in a lot of people outside
the country about an ability to invest in, or acquire telecom
providers, whatever size they are," Blouin said.
(Additional reporting by Michael Erman; Editing by Jeffrey
Hodgson, Frank McGurty and Grant McCool)