Federal government blocks sale of MDA space division

In an unprecedented move, the federal governmenthas blocked the $1.3-billion sale of the space technology division of Vancouver-based MacDonald, Dettwiler and Associates to a U.S. firm.

In a letter this week to Alliant Techsystems Inc. (ATK), Industry Minister Jim Prenticesaid he is "not satisfied" the sale will be a net benefit for Canada.

Alliant has been given 30 days to state its case to win approval for the sale.

After question period Thursday, Prentice told reporters he was "very confident" of his decision.

"It's a very significant step under the Investment Canada regime of saying we don't see net benefits to Canada in this transaction."

Neither of the companies involved in the deal appeared ready to concede the deal was dead.

Company continues discussions

Alliant spokesperson Brian Cullin said the company was continuing its discussions with the government, while MDA issued a short release on Thursday acknowledging that ATK had received the letter but saying it would make a public release only when they had learned of a "material development."

Industry obervers were also curious to see what the final outcome of the deal would be.

Iain Christie, the president of Ottawa-based Neptec, the company that builds the remote sensor NASA's space shuttles use to check for exterior damage, said he was surprised when he heard of the government 's decision but cautioned against reading too much into it.

"What it means is ATK has 30 days to decide what to do," he said. "I think what this letter does is crystalize the government's unhappiness with the sale as it's currently proposed."

Liberal MP Scott Brison said he thought it was unlikely the government would change its mind after having reviewed the details of the sale for months.

"It would be very difficult for the government to flip-flop on this issue," he said after Thursday's House of Commons session.

MDA wanted to sell its space division, which includes Canadarm, Dextreand the Radarsat-2 satellite, to Minneapolis-based Alliant, a major U.S. defence contractor.

Critics of the sale, including former Canadian Space Agency head Marc Garneau, had called on Prentice to block the deal, sayingit handed over taxpayer-funded technology and, in the case of Radarsat-2, gave away technology designed to protect Canada's sovereignty.

Alliant had said that if the deal went through, it would honour all of MDA's existing contracts with the Canadian government, including "access protocols" to Radarsat-2 in the event of a national emergency.

The letter Prentice sent to Alliant did not spell outreasons for the rejection. But in his news conference, the minister confirmed thatsovereignty questions over the transfer ofRadarsat-2 technology were factors.

"The jurisdictional aspect in relation to the satellite is a relevant consideration and specifically, where jurisdictional law would sit for the satellite, post transaction, is a relevant consideration," he said.

Government crows

The minority Conservatives targets offrequent criticism that they allowedmany of Canada's business icons to bebought by foreign interests were quick to trumpet their MDA decision.

"The party opposite in 13 years never turned down a single foreign takeover in this country," Prime Minister Stephen Harper said during question period.

"No one should doubt the determination of this minister or this government to protect this country's interests."

The government's formal blocking of the deal is extraordinary. In the 23-year history of the Investment Canada Act, the federal government has never blocked a foreign takeoverbecause of a failure ofthe "net benefit" test.

In that time, Ottawa has reviewed and approved 1,587 foreign takeovers, according to figures from Industry Canada. Another 11,214 foreign acquisitions required notification under the Act, but not a formal review.

Prentice had until April 19 to issue a ruling on Alliant's bid for the space business. He was originally due to make a ruling by March 22, but delayed his decision by several weeks. On Tuesday, the House of Commons foreign affairs committee agreed to hold hearings on the proposed sale.

Shares fall

MDA shares tumblednine per centon the TSX down $4 to a close of $42.85. That wasaboutwhat MDA shares were trading for just before the sale ofthe spaceunitwas announced in January.

One analyst put the chance of the sale going through at one-in-three.

"We are assuming a 33 per cent likelihood that the deal goes through," GMP Securities analyst Marko Pencak wrote."We expect that if deal is ultimately approved, it will be on amended terms which will reduce the initially proposed transaction price."

Radarsat-2 was launched in December and hailed by government, space and military officials as a tool to protect Canada's sovereignty over the Arctic. The satellite is capable of peering through cloud cover and darkness to detect objects at resolutions of up to three metres.

The federal government contributed $430 million to the Radarsat-2 project through the Canadian Space Agency. While MDA owns the satellite and can generate revenues from commercial contracts with other nations, the federal governmentcan access information from the satellite at no cost.

But some fear that agreement could be overridden by U.S. regulations if the MDA units were sold to an American firm, Canadian Auto Workers legal counsel Steven Shrybman and International Space University faculty member Lucy Stojak told the parliamentary committee on industry, science and technology last week.

MDA president and chief executive officer Daniel Friedmann and ATK vice-president Steve Cortese both told the committee they believed the Canadian deal would still take precedence. Members of the committee were left with questions about who would have final control of the satellite had the agreement been approved.

Neptec's Christie said regardless of the final outcome, the proposed sale and subsequent backlash has put a light on an industry the government has been quick to praise but slow to support.

"I think this has led to a recognition that Canada's role as a space leader is a fragile thing," he said. "If the government is concerned about securing our strategic assests, there is a price to pay."