Cabinet steps up security review of proposed Chinese takeover of Aecon Group

Innovation, Science and Economic Development Minister Navdeep Singh Bains takes part in a technology event in Ottawa on Monday, May 8, 2017. (Sean Kilpatrick/The Canadian Press)

MONTREAL -- Canadian security agencies are voicing their concern about the proposed takeover of Aecon Group Inc. by a Chinese state-owned business, prompting Ottawa to order a full national security review of the deal.

"Based upon the advice we have received from national security agencies we believe that there is a potential of injury to national security," Karl Sasseville, a spokesman for Economic Development Minister Navdeep Bains, said in an interview.

He said the cabinet order is the next step in the "rigorous" review process but declined to specify what prompted security agencies to make this recommendation.

Toronto-based Aecon said Bains informed the company that cabinet has ordered a further investigation of the deal under the Investment Canada Act, which will take more time.

Concerns have been raised about the murky holdings of Chinese state-owned CCCC International Holding Ltd. (CCCI), the potential involvement of the Communist Party in decision-making and alleged corruption.

CCCI's proposed $1.5-billion takeover of the Canadian construction company has come under intense domestic criticism from its rivals in the construction industry and Conservative member of Parliament Tony Clement, a former industry minister.

"About time!" Clement tweeted about the full national security review.

Governments in Europe and the United States have expressed concerns about these kind of investments from China, said Mark Warner, an international trade and investment lawyer.

He said the decision may give the government some wiggle room in this politically difficult issue.

"It certainly gives them an excuse to get out of it if they want to," he said from Toronto.

"But I think it's probably too early to say that this is an indication that it won't be approved."

Yuri Lynk of Canaccord Genuity said the cabinet order is not a surprise and he doubts it will result in the deal not closing.

He said the review is similar to what took place in Australia with a Chinese acquisition that added two months to the process.

"Why wouldn't the government cover their behind and do that," Lynk said of Canada's deeper security review.

Warner said the deeper security review is important to ensure public confidence and keep faith with those foreign governments.

"It is very hard for me to see how Canada could stand outside of that," he said from Toronto. "If the public position isn't enough I would have thought that privately Canada has heard something from our trading partners."

Chris Murray of AltaCorp Capital Inc. said he believes the government's primary concern may be Aecon's telecom infrastructure group, which builds significant core communications networks for several major Canadian carriers.

"While we remain positive about the closure of the transaction, we are cognizant that at this juncture, this is now a political process, which adds layers of complexity and uncertainty," he wrote in a report.

Murray added that he believes the transaction may be a "bargaining chip in Canada-China" trade discussions.

A spokesman for International Trade Minister Francois-Philippe Champagne said the two processes are unrelated.

The lengthened review will not please the Chinese government but won't sour a potential free trade deal between Canada and China, said Paul Evans, a professor of international relations at the School of Public Policy and Global Affairs at the University of British Columbia.

He said the fact that the full security review is coming later in the decision making process indicates there was a lot of internal debate in Ottawa about whether it is necessary.

Evans called this case a "watershed moment" about how Canada is going to deal with Chinese investment in a variety of sectors.

"We're now going to have to be getting into some new terrain in our judgments about what constitutes a national security risk," he said from Vancouver.

The government's approval is the last major hurdle that Aecon must clear to close the deal.

It has already received approval from the Competition Bureau, Aecon shareholders and the Chinese government.

Aecon fired back at its critics last week, saying on Friday that it feared the federal security review would be tainted by false or misleading claims.

On Monday, Aecon said CCCI has agreed to extend the deadline for closing the deal to March 30 -- five weeks later than the previous deadline of Feb. 23.

The transaction is expected to close before July 13.