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Globe and Mail (Small Business) - April 11, 2008
by Wendy Stueck

Veto leaves MDA stuck with unwanted division

(Original news clip can be found at
http://www.theglobeandmail.com/servlet/story/RTGAM.20080411.wrMDAmain11/
BNStory/Business/)

VANCOUVER — With Ottawa shooting down its planned $1.3-billion deal with a U.S. company, MacDonald Dettwiler and Associates Ltd. is now saddled with a space division it no longer wants.

Now, with no Canadian buyer on the horizon, the Richmond, B.C.-based builder of the Canadarm company has to hatch a new plan to best deploy its unwieldy mix of assets, which includes the sky-roving Radarsat 2.

The sale of the space division would have fuelled acquisitions in the faster-growing land-title business.

But with that deal knee-capped, “the growth prospects are still there – but they're a lot less rosy,” said Fraser Mackenzie analyst Paul Bradley.

MacDonald Dettwiler could try to strengthen its space division on its own, or it could seek an American partner to gain access to U.S. defence work.

The company had said that the sale to Alliant Techsystems Inc. would put the space division under the umbrella of an American company and would therefore enable it to land lucrative U.S. defence contracts that a Canadian company couldn't get.

The company could also court other potential purchasers for some of its assets, analysts said yesterday.

Federal Industry Minister Jim Prentice said in a April 8 letter to Alliant that he was not satisfied that the deal would be of net benefit to Canada.

Alliant has 30 days to persuade the government to change its mind.

Ottawa's move angered some MDA shareholders, who last month voted overwhelmingly in favour of the deal and Thursday saw the company's shares tumble by almost 11 per cent.

“It looks to us like its got politics written all over it,” said Fred Pynn, president of Bissett Investment Management in Calgary, which holds what he called “a reasonable position” in the company on its clients' behalf.

“What was the net benefit to Canada when these guys let Alcan and Inco and Falconbridge and Dofasco and Ipsco get sold?,” Mr. Pynn said in a telephone interview, referring to some of the largest foreign takeovers that have taken place in the past two years. “These were much bigger deals involving a lot more people. It seems funny that they would draw the line on this one.”

MDA's biggest shareholder is the powerful Ontario Teachers' Pension Plan Board, which holds a 15-per-cent stake in the company. The pension fund would not comment on Ottawa's action because “the review process isn't complete,” spokeswoman Deborah Allen said.

The company, founded in 1969, has in recent years increased its focus on real-estate information such as land titles, mortgages and insurance.

Objections to the Alliant deal centred on Radarsat 2, which can see through clouds and nighttime cover and spot any vessel larger than three metres in length. Critics argued the sale could result in Canada losing control over the satellite's use and images – something MDA maintained wouldn't happen because Radarsat 2 is a Canadian satellite operating under a Canadian licence.

Since announcing the deal with Alliant, MDA has emphasized it needs to crack the U.S. defence market to grow.

But the company has been consistently profitable as it is currently structured and benefits from government contracts, analysts said yesterday.

MDA has long been the largest beneficiary of Ottawa's funding largesse. Two-thirds of the Canadian Space Agency's annual budget is contracted out and, in the past five years, more than half of the CSA's $430-million contracts have gone to the B.C. firm.

In testimony before a Commons committee earlier this month, MDA chief executive officer Dan Friedmann insisted his company couldn't survive on that alone.

“There is not enough business in Canada under any government or any budget or any plan to support a company of our size. It's just not possible,” he said. “We have to export and we have to export to the United States.”

The company declined to comment yesterday, saying that discussions “between the parties” are continuing and the process is confidential. A spokesman for Alliant said that the company is still in talks with Ottawa.

Blocking the sale of MDA will do nothing to revitalize the Canadian space sector unless there is a clear government commitment on space programs, said Andrew Eddy, a former CSA manager who now heads the space consultancy Athena Global.

If it stays in the space business, MDA would have its work cut out. Canada's leadership in earth-sensing satellites has shrivelled, with Italy and Germany launching their own missions.

MDA executives have argued repeatedly – to shareholders and a parliamentary committee – that the takeover is essential to winning lucrative U.S. defence work, which are subject to strict government export controls.

But experts say the buyout alone wouldn't change how the Canadian company is treated under U.S. law. “A takeover, in and of itself, might not make a lot of difference,” said consultant Judy Bradt of Summit Insight in Arlington, Va., an expert on U.S. export controls and contracting.

Under a U.S. State Department regime, known as the International Traffic in Arms Regulations, strict rules govern access to sensitive military technology. The rules, for example, prohibit nationals of 17 listed countries, including China, Cuba and Iran, from working on projects covered by the export controls. And that applies even if an individual is also a Canadian citizen, working in Canada for a well-known U.S. or Canadian company.

With files from reporters Barrie McKenna in Washington and Tu Thanh Ha in Montreal

(Original news clip can be found at
http://www.theglobeandmail.com/servlet/story/RTGAM.20080411.wrMDAmain11/
BNStory/Business/)