Why Selling Aecon to China Is a Bad Deal for Canada

By Rahul Vaidyanath
Rahul Vaidyanath
Rahul Vaidyanath
Rahul Vaidyanath is a journalist with The Epoch Times in Canada. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.
November 1, 2017 Updated: November 10, 2017

TORONTO—China is at it again, trying to take over a large Canadian company.

Earlier this year, China said it wanted “unfettered access” to Canada’s economy in a prelude to potential free trade talks. Now, it’s up to the Trudeau government to determine if Chinese state-owned enterprise (SOE) CCCI’s purchase of construction giant Aecon is of net benefit to Canada. Needless to say, the decision will be a critical determinant of Canada’s economic relationship with China going forward.

For more than a century, Aecon has helped build many of Canada’s most famous infrastructure landmarks including the CN Tower and St. Lawrence Seaway. On Oct. 26, it announced it had received an all-cash bid of $20.37 a share, putting a $1.51 billion price tag on the company—a 42 percent premium.

Approval for the deal falls under the jurisdiction of Navdeep Bains, minister of industry, science and economic development.

“We will do our homework, we will do our due diligence,” Bains told reporters after his interview at the Toronto Global Forum on Oct. 30. “We will make sure it’s in the economic benefit of Canadians.”

CCCI, the overseas investment and financing subsidiary of China Communications Construction Company (CCCC) Ltd., says Aecon’s Canadian employees will be retained as will Canadian management; it will adhere to Canadian standards of corporate governance.

The recent example of another Chinese SOE CNOOC’s purchase of Canadian oilsands company Nexen provides a counterexample with senior management being replaced and employees fired.

“Frankly, I don’t think there’s ever any guarantees,” said Jack Mintz, President’s Fellow of The School of Public Policy at the University of Calgary, in a phone interview.

Bad Deal

As part of the government’s review process, special considerations are needed as the buyer is an SOE.

Mintz points out that SOEs in China are barely profitable since what matters to them most is gaining market share, not the bottom line.

Worse still, the presence of SOEs creates a unlevel playing field as they can squeeze out more efficient and better-performing private companies that can’t compete with a company getting subsidies from a foreign government.

The example of Petro China Co.’s US$800 billion loss in the last 10 years—the biggest-ever destruction of shareholder wealth, according to Bloomberg—is a shocking reminder of how poorly a Chinese SOE can perform. Even after this decline, the state-owned energy producer still remains more expensive (as measured by forward price-to-earnings ratio) than its peers.

It’s hard to imagine a totally private (i.e. not state-owned) management team keeping its job after generating such wretched returns for such a long time.

“We didn’t spend a generation undoing and getting the government out of business in order to see another government get into the business of business in Canada,” said Tom Kmiec, Conservative member of Parliament and deputy shadow minister for finance on Parliament Hill.

Canada has had success privatizing Crown corporations such as Air Canada and Petro-Canada with Suncor, so a departure from this tack seems counterintuitive.

The Liberal government is on the right track seeking foreign investors to aid with Canada’s large infrastructure projects. Foreign private firms can bring new technologies and talent in management, and create greater wealth; however, SOEs may not be primarily motivated by profit and could have other state objectives in mind.

“Today, we should be wary of state-owned enterprises making big purchases in Canada, especially from non-democratic governments like China,” Kmiec wrote in a Facebook post.

Another important consideration in the Canada–China relationship is reciprocity—or lack thereof—with foreign direct investment. China is very protective of its key companies, which it hopes to develop into global champions.

“It’s not easy for foreigners to operate in China without agreeing to a whole bunch of rules,” Mintz said.

The Chinese government looks to exert control over foreign companies by having them establish branches of the Communist Party within their organizations.

Questionable Partner

China is very actively developing relations around the world through massive infrastructure projects like the Belt and Road Initiative.

While taking over a construction company may not immediately raise the red flags of a threat to national security or theft of intellectual property, the motivation is more subtle.

“There’s also foreign policy influence they [China] would be looking to achieve,” Mintz said. In 2015, CCCI purchased John Holland, one of Australia’s largest construction firms.

Free trade talks with China hang in the balance, but Mintz said those wouldn’t supplant trade and the ties with the United States as NAFTA renegotiations grow murkier.

“I think we should be very careful with free trade with China because we’re not talking about a market economy,” Mintz said. “We’re talking about more of a socialist economy that’s going to be actually increasing in control over time.”

Internationally, CCCC has a spotty reputation. The World Bank debarred it in 2011 for fraudulent practices relating to a roads improvement project in the Philippines. CCCC was ineligible for participating in any bridge and road projects financed by the World Bank for eight years as a result.

“This is not a good partner on the specifics and I think it would be very strange for Canada to let one of its most important infrastructure companies become owned by a foreign SOE that has actually shown bad corporate behaviour,” Mintz said.

Limin Zhou contributed to this report

Follow Rahul on Twitter @RV_ETBiz

Rahul Vaidyanath
Rahul Vaidyanath is a journalist with The Epoch Times in Canada. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.