Canada Halt of China's $1B Buy of Contractor Aecon Creates New Limbo
Canada's rejection of a Chinese takeover bid for Aecon Group Inc. has thrust one of the country's top infrastructure firms into limbo.
Citing national security concerns, the Trudeau government has given the thumbs down on well-advanced plans by CCCC International Holding Ltd., a Chinese state-owned enterprise, to buy Aecon, one of Canada’s largest publicly traded construction and engineering firms.
The scuttling of the nearly $1-billion deal, in play for months and approved by Aecon’s board, has left the construction giant with no new suitor in sight and with an outgoing CEO.
Noting "disapointment" at the decision, CEO John Beck said that "through our proposed transaction with CCCI we had outlined a vision in which Aecon would be better able to compete with the many large global construction companies actively working in Canada."
He added that "while we have been prevented from pursuing the transaction, we are moving forward from a position of strength. Over the past several months Aecon has secured numerous large-scale projects, has a record backlog, and a significant pipeline of opportunities ahead of it.”
According to a Bloomberg report, Premier Justin Trudeau said unidentified Australian "colleagues” told government officials about the challenges of allowing the China-backed firms to buy overseas construction sector companies before the decision to halt the deal. Bloomberg said he was referring to the recent Chinese purchase of Australia contractor John Holland Pty. Ltd.
Chris Murray, an analyst at AltaCorp Capital, notes that Aecon’s long-term future still looks solid, citing “substantial backlogs, solid balance sheet and expected earnings profile.” The firm is forecasting revenue growth and improved profit margins in 2018, with $698.5 million in new contracts booked in the first quarter, bringing the company’s backlog to $3.5 billion.
But the turbulence is expected to have a bigger impact shorter-term, with Aecon’s stock price down from $17.64 to $14.67 after the May 23 announcement by Minister of Innovation, Science and Economic Developmen Navdeep Bains, that the government would veto the deal over unspecified national security concerns.
“We believe the disruption and dislocation of the shareholder base coupled with uncertainty around the Company’s future strategic direction, particularly with a CEO search underway is likely to weigh on share prices substantially,” Murray writes.
In response to the decision, Aecon announced it will resume a hunt for a new CEO to succeed the retiring Beck, who had agreed to stay on the new choice is made.
The company also announced it is no longer seeking a buyer and is disbanding a special board of directors committee to advise on potential deals.
Moves by China’s Communist party to exert more influence on the operations of state-owned enterprises like CCCC International had troubled Canadian officials, notes Chris Hersh, partner in the competition, antitrust and foreign investment group at Cassels Brock & Blackwell LLP in Toronto.
There was also a well-organized lobbying campaign against the deal by some segments of the Canadian construction sector. Potential competitors were concerned over the prospect of competing against Aecon if backed by the Chinese government and with access to cheap financing.
The campaign against the deal also made a strong case on national security grounds, with Ward Elcock, a former director of the Canadian Security Intelligence Service, warning strongly against it.
“There is an increasing concern over Chinese state entities owning Canadian businesses,” Hersh said.
The government’s move will also likely discourage any similar forays into the Canadian construction business by Chinese state-owned enterprises, observers speculated.
For its part, Aecon is likely to have to face the future on its own, with a recent survey by RBC Dominion Securities finding “little demand” for construction assets by “12 of the largest E&C firms in North America,” said firm analyst Derek Spronck.
“We believe other buyers are unlikely in the near term, and as such, we see Aecon moving forward as a stand-alone company at this point,” he said.
Some see a buying opportunity, with a rising backlog of work at Aecon offering upside for investors. Maxim Sytchev, an analyst with the National Bank of Canada, has put a rating of “outperform” on Aecon stock.
“Blocked acquisition opens a buying opportunity,” read a headline in Sytchev’s report on the deal’s collapse.