Even rising interest rates can’t stop traditional retail REITs from cashing in on shift to residential

Retail REITs are poised to reap tremendous benefits from a number of tailwinds over the next couple of years, despite rising interest rates and the growth of e-commerce, as they pivot to mixed-use and residential development, analysts say.

Apartment and retail REITs have been moving in opposite directions over the past year, with residential generally outperforming as retail lagged due to Amazon-fuelled fears of the demise of bricks and mortar.

No surprise, then, that a number of the retail REITS — RioCan, SmartCentres and Choice Properties, to name a few — have announced the move into residential and mixed-use development.

But now, as the Bank of Canada signals more aggressive rate hikes — boosting mortgage costs and pulling capital away from income stocks — the question is whether the retail REITs have missed their opportunity.

Absolutely not, says Mark Rothschild, an analyst at Canaccord Genuity. While the threat of higher interest rates is generally bad news for real estate, Rothschild says the tight urban housing market in Canada acts as a kind of hedge.

“If they raise rates, what happens is, it becomes more difficult to buy single-family homes or to buy condos,” he said. “So raising rates actually helps the rental apartment market and makes the business case to build rentals even more compelling.”

The only thing that could derail the momentum for residential development, Rothschild says, would be if the urbanization movement were to suddenly reverse itself, and young people decided to move en masse to the suburbs.

“If you think population growth in Toronto is going to drop off, well then yeah, (the REITs) are probably late and maybe this may not turn out to be as successful an investment as many of us think it will be,” he said.

That’s an unlikely scenario, if the figures around population growth are any indication. Over the past decade, the number of residents in the Greater Toronto Area is up nearly 15 per cent, to 6.3 million people, and the CMHC expects population to rise to 6.6 million next year, as Ottawa follows through on its promise to raise immigration targets by 50 per cent.

Most of these immigrants — 450,000 per year by 2020 — will settle in urban centres, pushing down rental vacancy rates even further. This year, Toronto’s vacancy rate is sitting at a 16-year low of just 1 per cent, according to the CMHC, and rents are rising 5 per cent a year.

If that weren’t enough, Michael Smith at RBC Capital Markets points to tougher mortgage rules imposed by the federal government, including a stress test that requires mortgage applicants to prove they can make payments even if rates go up by two percentage points.

“So it’s harder to qualify for a mortgage, it’s harder to buy a condo, it’s harder to buy a house because of that qualification,” said Smith, “and that pushes people to rent.”

But the retail REITS aren’t just moving into residential because they see a better business model. As Smith explains, they’re being pushed into residential by cities that have themselves shifted from rigid zoning — residential, commercial, industrial — to a much more flexible strategy.

“The city is saying, we don’t want you to put all retail there,” said Smith. “But if you do mixed-use, you do some office, you do some retail, some rental, some condos, you’re more likely to get approval for your higher levels of density.”

That’s like “hitting the jackpot” for retail REITs, Smith explains, because they’re sitting on dozens of underused properties — typically one- or two-storey commercial buildings surrounded by expansive parking lots.

For many locations, developers have the opportunity to increase density ten-fold by stacking condos on top of retail and office complexes and moving parking underground.

REITs most likely to take advantage of the trend to residential and mixed-use development, according to Smith, include RioCan REIT (which closed Wednesday at $23.93 and has $26.50 price target at RBC Capital Markets), SmartCentres REIT (closed at $30.29; $36 PT) and First Capital Realty Inc. (closed at $21.06; $23 PT).

Tim Hortons sees smoother ties with franchisees amid restaurant upgrades, menu changes

TORONTO — After weathering a precipitous drop in its reputation with customers and engaging in a prolonged spat with a dissident group of franchisees, the new president of Tim Hortons says the company is making strides in working more collaboratively with the coffee chain’s Canadian restaurant owners.

Alex Macedo, who took over the pivotal leadership role at in December after helping to smooth over franchisee tensions as president of Burger King’s North American division for four years, said Hortons executives have been working more closely with members of the chain’s elected franchisee board to communicate better with its network of 1,100 restaurant owners across the country.

It follows more than a year of turmoil at Canada’s largest quick-serve restaurant chain amid lacklustre sales and an ugly public battle with a splinter group of franchisees suing parent company Restaurant Brands International Inc.

“We are not going to agree on everything,” Macedo said in an interview after the company’s sparsely attended annual general meeting of shareholders in Oakville, Ont. on Thursday. “That’s the nature of the franchise business. If we can work together with them and communicate better, when we have a plan they understand where we are going and can support us and guide us in that direction.”

After posting the sixth quarter in a row of disappointing same-store sales in April, Restaurant Brands chief executive Daniel Schwartz told analysts on a first-quarter conference call that Tim Hortons would work to improve its marketing and media relations in an effort to repair its tattered image and revive its Canadian sales.

Discontent has been brewing among some franchisees since Brazil-based hedge fund 3G Capital merged Tim Hortons and Burger King to form RBI in 2014, and together formed the Great White North Franchisee Association, a group that says more than 60 per cent of Canadian franchisees are members.

The association is suing its head office, claiming a number of management practices have hurt their profitability. The group also complained to federal innovation minister Navdeep Bains about RBI earlier this year, saying the conglomerate has fallen short of promises it made under the Investment Canada Act at the time of the acquisition. GWNFA had no comment after Thursday’s meeting.

Consumer surveys appear to have illustrated the impact of the rift this year, with the Tim Hortons brand scoring lower on a series of national brand reputation rankings, including a Leger poll in April that saw the chain plunge to 50th from a fourth-place ranking a year ago.

Schwartz told shareholders Thursday that average revenue and profitability for Tim Hortons restaurant owners in Canada had increased since the 2014 acquisition, with franchisee profitability increasing an average of 12 per cent to $320,000 per restaurant.

Macedo said the elected franchisee board at Tim Hortons has formed new subcommittees focused on goals such as increasing franchisee sales and profitability, improving operations and restaurant development, and is meeting more frequently with the board than standard monthly gatherings.

The effort ties into Horton’s “Winning Together” program to improve the brand, which includes a marketing push, menu innovation and a restaurant renovation program expected to roll out to at least 50 per cent of the company’s 4,000 Canadian locations by 2021.

The presence of Duncan Fulton at RBI’s annual meeting on Thursday also suggests that Tim Hortons is taking its homegrown struggles more seriously than it did in the past. Fulton, a long-time Canadian Tire executive who resigned in February as president of its FGL Sports division, is consulting with Tim Hortons on its business strategy, franchisee relations, brand building and communications initiatives.

In the meantime, McDonald’s Canada has been on the offensive, more than doubling its market share in brewed coffee sold at restaurants in Canada since it reformulated its house blend in 2009, according to market research firm NPD.

Tim Hortons, with a share in the mid-70s, is aiming to take some of that back by expanding its breakfast business, the fastest-growing category in Canadian foodservice. The brand said last month that it will pilot all-day breakfast in a dozen Ontario locations beginning this summer. At the end of this month Tim Hortons will also begin a market test of self-order kiosks, which began rolling out at McDonald’s Canada in 2015, and Macedo said Tim Hortons plans to expand an ongoing Ontario test pilot of home delivery in July.

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HBC to close some Lord & Taylor stores and sell Gilt.com amid disappointing results

TORONTO — The new chief executive officer of Hudson’s Bay Co. vowed to turn around the lagging parts of the retailer’s business Tuesday after announcing the sale of its deals site Gilt.com and the pending closure of up to 10 struggling Lord & Taylor stores.

And Helena Foulkes, who took the helm in February, didn’t mince words when it came to her assessment of how the department store retailer had conducted business under its erstwhile management team.

“Across all of our businesses, I have found that we tend to make decisions without involving one of our key stakeholders: the customer,” Foulkes told industry analysts on a conference call Tuesday after HBC posted disappointing first-quarter results, including a wider than expected loss and declining sales performance in its European and off-price divisions. Foulkes said she will work with HBC’s slate of newly minted executives in technology, marketing and at Lord & Taylor and act quickly to improve results.

The company’s shares, down 12 per cent this year, were down 1.6 per cent in afternoon trading Tuesday.

Amid disappointing returns and a flurry of management-level exits in the last year, HBC has been under pressure from activist investor Jonathan Litt of Land & Buildings Investment Management to privatize the business or sell off more of its real estate portfolio. HBC said Tuesday that it is continuing ongoing discussions for the sale and leaseback of its Vancouver store, and the retail operator struck a $1 billion deal last fall in a joint venture that included WeWork Cos. for its Lord & Taylor flagship location in New York to house the company’s headquarters and shared office spaces.

The deal also freed up higher department store floors for WeWork’s shared office work spaces in Toronto, Vancouver and Germany and had an option to lease back the 104-year old New York flagship, though HBC said Tuesday that it will not reopen the store. HBC did not say which of the existing 48 Lord & Taylor stores will close, as it is still negotiating with landlords.

“What’s hard on the outside is to know how much of this is about submitting to (Litt’s demands), or agreeing with him,” said David Gray, principal at retail consultancy DIG 360 in Vancouver.

Retailers in the public markets are facing pressure amid fears about the future of retail and mall-based department stores. “That’s why the Nordstroms were trying to go private,” Greay added. “With the chaos going on, (HBC’s moves) can seem very reactionary.”

HBC’s full-line department stores in Canada grew same-store sales for the 31st consecutive quarter, and Saks’ sales climbed six per cent by the same measure, but the company’s other divisions have been struggling.

Excising Gilt.com, a “flash-deal” merchant and a retail investment that has failed to pay off since HBC bought it in early 2016 for US$250 million, is part an effort to fix HBC’s struggling off-price business, which includes Saks Off Fifth and competes with TJX Cos., the operator of Winners and HomeSense in Canada.

While HBC did not disclose a purchase price Tuesday, the Wall Street Journal reported that rival Rue La La paid less than US$100 million for Gilt, citing people familiar with the deal.

Same-store sales in HBC’s off-price business fell an average of 6.1 per cent in fiscal 2017 after declining an average of 7.4 per cent in 2016. The company excluded Gilt from its off-price segment results in the quarterly numbers released Wednesday, but the category’s performance was still poor without it: same-store sales at Saks Off Fifth fell 3.5 per cent in the quarter.

Weakness also plagued HBC Europe, where same-store sales fell 6.6 per cent in the first quarter after declining throughout 2017. Results in the Netherlands, where HBC began opening stores in September and has opened 13 Hudson’s Bay locations to date, have not met initial expectations, Foulkes admitted Tuesday.

The entire European division, including stores in Germany and Belgium, needs to reduce inventory and expenses and improve its marketing and merchandise assortment to be more in tune with local customers, she said.

In February, HBC rejected a reported offer of 3 billion euros for its German department stores and real estate assets from Signa Holding GmbH, saying the unsolicited bid had undervalued the business and had uncertain financing.

“We’re constantly evaluating our store portfolio and we’re excited about the real estate we own in Europe and its potential,” Foulkes told analysts. “But as I said before, everything’s on the table in terms of focusing on driving improved profitability for the business.”

Bruce Winder, partner at Toronto-based Retail Advisors Network, anticipates HBC will sell off additional parts of its business, including all or part of the European division.

“HBC’s real estate decisions have made sense, but they have had an unfocused strategy on the retail side, and hopefully that will get sorted out with (Helena Foulkes) on board,” he said. “These guys have way too much on their plate, and they have overextended themselves, from my perspective.”

HBC’s net loss in the period ended May 5 was $314 million compared to a net loss of $214 million in the first quarter a year ago.

The adjusted loss excluding one-time items was $286 million, or $1.22 per share, far below analyst expectations of 76 cents, according to Thomson Reuters.

Revenue rose 1 per cent to $3.08 billion, and overall same-store sales fell 0.7 per cent.

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‘The opportunity is massive’: Canada Goose to open two retail stores in China

TORONTO — Canada Goose is setting up shop in China.

The upscale outerwear brand, which began opening retail stores in 2016 after operating for decades as a successful manufacturer, announced Thursday that it will open two locations this fall in the world’s most populous country: a Hong Kong flagship outlet in October, followed by a store in Beijing the following month.

The luxury parka maker began selling its coats and outdoor apparel in China five years ago at retailers such as department store Lane Crawford, and chief executive Dani Reiss sees potential to scale up the business significantly in a market where the brand has strong consumer awareness.

“The opportunity is massive,” Reiss said in an interview. “We have been working with Chinese consumers for the last two years at our own stores and seen the demand. On our websites, we can see where the orders are coming from, and the volume of traffic we get from China.”

One meeting in particular crystallized just how much the brand was resonating with customers, Reiss said: a gentleman flew from China to Toronto expressly to attend the 2016 opening of Canada Goose’s flagship Canadian store at Yorkdale Shopping Centre.

“He said he loved Canada Goose and wanted to buy a jacket for himself and his wife. It was amazing to me. Anecdotes like that speak to the awareness and the demand.”

Many veteran brick-and-mortar chains have scaled back and invested heavily in their digital operations in recent years amid fears about the changing retail marketplace. At the same time, a number of online retailers and wholesale brands have opened up standalone boutiques to showcase their wares, from Hunter Boot to Warby Parker.

Canada Goose is opening a regional head office in Shanghai and has named Scott Cameron, former head of strategy and direct-to-consumer at Canada Goose as the brand’s president for the region. The company has selected ImagineX Group as its store operating partner in the region, and the brand will also begin selling online this the fall on e-commerce giant Alibaba’s T-Mall luxury pavilion.

Amid robust financial performance the company’s shares have more than doubled in the last year. In third quarter ended Dec. 31, revenue at Canada Goose rose 27 per cent to $265.8 million and net earnings surged 60 per cent.

“What excites me about China is the opportunity to speak to the Chinese consumers through our own platform,” Reiss said.

As it expands beyond wholesaling, Canada Goose now has proprietary websites in 11 countries and operates six bricks-and-mortar retail stores in North America and Europe, while a seventh store is run with a partner in Tokyo. Online and store-based operations have grown to $197 million in revenue in less than four years, and those channels now account for 38 per cent of the company’s annual sales.

Canada Goose’s move comes after a decade of European and North American retailers testing their mettle in China as the nation’s economy evolves from an export-based growth model to one fuelled by consumer consumption.

It’s a fast-growing market, with retail sales averaging growth of 12.52 per cent per annum between 2010 and 2018, according to global data firm Trading Economics. But the path to success in China hasn’t been smooth for all of them.

Walmart, now well-established, struggled for years in the nation as it tried to adapt the business to the needs of local consumers. Ikea has fared very well, but Home Depot exited the country in 2011 after failing to gain traction. Fast-fashion retailers H&M and Zara, meanwhile, have opened hundreds of stores in mainland China.

At the same time, sales of high-end cars and luxury consumer goods have resonated strongly with the Chinese and led to strong sales of brands such as Louis Vuitton, Chanel and Gucci.

The number of Chinese with more than US$1 million in assets hit 1.6 million in 2016, according to a 2017 report from Bain Consulting and China Merchants Bank, and the wealthy have been known to travel far afield for tony shopping trips.

Bain noted that 8 per cent of luxury goods worldwide are bought within China, but Chinese shoppers also make about three-quarters of their luxury purchases overseas. That trend could be shifting: luxury spending spiked in the latter half of 2016 and had robust growth of 20 per cent last year, and recent government policies have persuaded more Chinese consumers to spend money at home.

George Minakakis, principal at Toronto-based retail consulting firm Inception Retail Group Inc., said Chinese consumers prefer shopping at standalone stores for luxury goods such as Versace or Prada to ensure they are getting genuine merchandise as opposed to counterfeit goods.

“You are painting an image for a brand, and the details are important,” said Minakakis. “But it is a very difficult market to expand in and real estate is a challenge …it is smart for Canada Goose to take a conservative approach when it comes to opening flagship stores.”

Charles de Brabant, executive director at McGill University’s Bensadoun School of Retailing, said Canada Goose achieved awareness in China initially due to widespread counterfeiting. The sought-after coats “were copied early on,” he recalled. “That can be stamped out, but up to that point it functions as a great advertising platform.” De Brabant said the most successful foreign brands in China have opened physical retail stores. “Generally the ones that have been successful have had control over their distribution there.”

Reiss says Canada Goose remains on track to open up to 20 retail stores globally by 2020.

“What’s important to us is that we don’t open too many stores,” he said. “It’s important to us that they are all strategic, that they are all in the right place, and they are all well positioned to be profitable.”

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Goldman, Morgan Stanley at odds over loonie’s outlook before Bank of Canada decision

Two of Wall Street’s biggest banks predict dramatically different paths for Canada’s currency over the coming months.

Strategists at Goldman Sachs Group Inc. are telling clients the loonie will strengthen to $1.18 against the dollar over the next year as Canadian inflation firms and the greenback’s rally fades. Just two weeks ago in its mid-year outlook, Morgan Stanley took the other side of the trade, saying that a reliance on foreign funding to finance the nation’s current account deficit and a dovish central bank should see the pair return to $1.34 in a year.

The standoff comes as Bank of Canada policy makers meet seeking to balance concerns over household indebtedness and the future of the North American Free Trade Agreement with signs of a strengthening economy. Markets don’t expect officials to raise rates at Wednesday’s announcement. But traders are looking for indications that Governor Stephen Poloz is ready to resume tightening in the coming months, and are trying to gauge whether he’s inclined to match the Federal Reserve’s trajectory on rates.

“Fading growth headwinds, limited spare capacity and on-target inflation, a sharp improvement in Canada’s terms of trade, and the currency is undervalued and investors are generally positioned short” — all suggest the Canadian dollar will outperform, Goldman’s Zach Pandl and Karen Reichgott wrote in a May 25 note.

The loonie traded at $1.3010 per dollar as of about 9:15 a.m. in Toronto. It was the worst-performing Group-of-10 currency in the first quarter. Yet it’s benefited from surging crude prices in recent months to hold firm against the greenback even as its G10 peers have slumped.

Duelling Views

Goldman expects that stronger-than-forecast first quarter growth and rising inflationary pressures will spur the BoC to resume hiking, after policy makers tapped the brakes following three rate increases in five meetings through January. The next hike will come at the bank’s July meeting, Goldman predicts. Traders are pricing in about a 55 per cent chance of a hike by then, according to overnight index swap pricing.

Morgan Stanley, meanwhile, expects Poloz to keep policy dovish and allow Canada’s economy to “run hot” to boost growth and inflation. The nation’s sensitivity to declining global liquidity and risk sentiment because of dependence on portfolio inflows to fund its current account deficit will also undermine the loonie, strategists led by Hans Redeker wrote in the firm’s global FX mid-year outlook this month.

“The BoC is hoping to boost nominal incomes faster than debt-service costs, enabling households to eat away at their debt burdens without the painful process of consumer retrenchment,” the strategists wrote. “These policies also have a negative impact for the currency, though.”


It feels like 2012 all over again as European markets shudder over possible Italy eurozone exit

It looks like the debt crisis days of 2012 all over again for investors, as Italian, Portuguese and Greek bond yields surged and billionaire George Soros warned of an “existential threat” to the European Union.

The trigger was the prospect of anti-EU, nationalist parties in Italy turning a repeat election into a de facto referendum on Italy’s membership of the euro. Italian assets sank across the board Tuesday, with the risk premium on 10-year bonds over German benchmarks rising to the biggest in almost five years.

“Italy is now facing elections in the midst of political chaos,” Soros said at a speech in Paris, warning that failed economic and immigration policies mean that “it is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality.”

For all the talk of an economic recovery and a return to stability, recent days have shown how quickly sentiment can get upended on a continent where disillusionment and division are still rife, especially in the south. It may not be anywhere like as bad as a few years ago, but there’s little prospect of a let up in political risk over the coming weeks and months.

The euro slipped to a 10-month low of US$1.151 against the dollar before paring losses, while the Japanese yen led gains in the Group-of-10 currencies as people sought to avoid risk.

Uncertainty over Italy, as well the prospect of political turmoil in Spain as the prime minister faces a no-confidence vote, contaminated European periphery markets such as Portugal and Greece. Yields on 10-year Greek government bonds surged close to 5 per cent, complicating the country’s plans for a clean exit from its bailout program in August.

Greek Echoes

It was elections in Greece in 2012 that put the euro region on tenterhooks before the European Central Bank declared it would do anything it takes to support the currency union.

In Italy, it’s a face-off between the establishment and two parties who ran on anti-EU platforms of deficit spending and reduced immigration. It now has investors recalculating the risks of the eurozone’s third-biggest economy exiting the currency bloc.

Italy’s Democratic Party charged its rivals, the League and the Five Star Movement, with having prepared a plan to pull the country out of the euro. That evoked memories of 2015, when Greece’s opposition accused the government of Alexis Tsipras of staging a clash with creditors over austerity as a pretense to leave the currency bloc.

Italy is always just a few steps away from the “very serious risk of losing the irreplaceable asset of trust,” Bank of Italy Governor Ignazio Visco said.

Fear, Not Reality

Panic spread to equity markets, with banks hit the most amid fears about their exposure to Italy. A capitalization-weighted index of euro area banks fell as much as 5.2 per cent to its lowest since December 2016, while Deutsche Bank AG dropped by 3.3 per cent to the lowest since September 2016.

UniCredit SpA Chief Executive Officer Jean Pierre Mustier said the decline in Italian bank stocks was driven by fears rather than reality based on the performance of the Italian economy or the lenders themselves.

Indeed, the euro region’s economy grew at the fastest pace in a decade last year and unemployment has declined to the lowest since the financial crisis.

“This contagion is the effect of the fear of a potential explosion of the eurozone,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 150 million euros (US$173 million) in assets. He said, though, that “the probability of this is still weak.”


‘We like democracy’: Prem Watsa shuns China as Fairfax looks for investments in India, U.S.

Prem Watsa, the billionaire head of Fairfax Financial Holdings Ltd., sees plenty of opportunities for investment in the U.S. and his native India. He’s less interested in the other Asian powerhouse.

“In China, we are less invested,” Watsa said in an interview with BNN Bloomberg Television Friday. “We like democracy. We like business-friendly policies.”

Watsa, who emigrated from India 46 years ago, is most excited about the opportunities being created there due to the policies implemented by Prime Minister Narendra Modi.

“He’s very business friendly and he’s got a great track record,” he said.

Fairfax has launched a public company, Fairfax India Holdings Corp., and invested about $5 billion (US$3.9 billion). Watsa said there’s room to expand Fairfax’s footprint there.

In the U.S., after eight years of poor economic growth of 2 per cent or less, there’s a lot of pent-up demand in several sectors that’s creating investment opportunities as well.

“Housing starts have been very minimal for a long period of time,” he said. “So what that means is that in the next four or five years you have to make up for that. Then you have new households being formed,” he added. “You do that for housing. You do that for automobiles. You do that for infrastructure. We think there might be a pretty long runway.”

Trump Taxes

He said that pent-up demand is also being supported by the Trump administration and the changes they have made to roll back corporate taxes and decrease regulations.

“We see all of that being positive for business and ultimately business drives the economy,” he said.

Watsa said last month his Toronto-based insurance and investment company was stockpiling cash as he looks for cheap stocks. The chief executive officer said at the time about 50 per cent of Fairfax’s portfolio was in cash, up from 39 per cent the previous year. He also joined a chorus of investors and analysts in saying that Canada is facing a harder time competing with the U.S. given higher corporate taxes and delays in getting projects like pipelines built.

He reiterated that Friday, saying that while Canada will benefit from more business-friendly measures being implemented in the U.S., there are downsides to that.

“We have to be careful because we have the United States as our partners next to us and when they get very business-friendly policies then by comparison ours are less friendly,” he said. “If you’re attracting investment, then of course investment could go to the United States as opposed to Canada.”


Aecon’s strong backlog to cushion Ottawa’s major blow, but stock may take a beating in the short term

Ottawa’s decision to block Aecon Group Inc.’s takeover by a Chinese state-backed buyer is a blow to the company in the short term as it seeks a new direction and searches for a new chief executive officer, analysts say.

Aecon shares plummeted more than 15 per cent on Thursday following Ottawa’s decision, ending the day at $14.67 at close on Thursday, below the $16.60 average over the four months before the deal was first announced last year. China Communications Construction Co. Ltd. (CCCC) had offered $20.37 per share to buy Aecon, worth roughly $1.5 billion when the proposal was announced.

The decision to block the deal comes after months of intense opposition due to national security and competitive concerns.
Canada has not been clear on its approach to accepting Chinese capital, causing uncertainty for companies looking to secure foreign support, according a security expert.

“We haven’t exactly zig-zagged but we have not exactly had a clear position,” said Ward Elcock, the former director of the Canadian Security Intelligence Service.

But he also cautioned against being too transparent about national security decisions, saying “if you have to draw too many lines in the sand you could wind up damaging the relationship more.”

Meanwhile, domestic construction firms argued that the transaction could make them less competitive against a deep-pocketed state-owned company with access to an immense pool of capital that could outbid them on future projects.

Mary Van Buren, the president of the Canadian Construction Association, applauded the decision, saying she was satisfied that “the government recognizes the fact that government-owned or controlled entities have no place to compete against private and publicly-traded companies in the Canadian construction industry.”

Van Buren told the Financial Post in an earlier interview that the acquisition threatened to “fundamentally change the landscape” of how companies bid for projects. Aecon is a member of the CCA.

Canadian companies including PCL Constructors Canada Inc., Graham Construction and Ledcor Group of Companies were in Ottawa last week meeting with several Liberal Members of Parliament in a last-ditch effort to sway the government against the bid. The three companies are represented by Ottawa-based lobby firm Prospectus Associates.

Despite the setback, Aecon remains on firm footing after securing several major project bids in recent months, according to analysts.

“Takeout or not, we argue the construction giant is a stronger company now than it was prior to the transaction announcement, and will eventually be valued as such,” Raymond James analyst Frederic Bastien said in a note Thursday. It left its target price at $20.37.

The Canadian Imperial Bank of Commerce analysts also said Thursday that the company’s outlook “has improved substantially” since the deal was announced.

Aecon recently secured a $1.2-billion contract for the Réseau express métropolitain (REM) light rail project in Montreal, and a $400-million order for Toronto’s Finch West light rail expansion project. The company is bidding on other light rail projects in Ottawa and Hamilton. It pulled out of its bid to construct the Gordie Howe bridge earlier this month, amid speculation that the company could be restricted from building the project under Chinese ownership.

Bastien said Aecon’s backlog is now the largest in the company’s history, despite its oil and gas and mining divisions performing below potential.

Altacorp Capital, which predicted ‘a very low probability’ of the deal being approved, expects Aecon shares to suffer in the interim after the failed process.

“In the current scenario, we believe shares could trade as low as 3.75x forward EBITDA, implying a fair value of $13.00,” Chris Murray, managing director at AltaCorp said in a note to clients.

The company also has to contend with the departure of CEO John Beck, who founded the company. Aecon said it was looking for a new chief executive officer and Beck will remain until a successor is selected.

“Aecon most likely has to resume new CEO search, despite strong “stewardship” provided by Beck,” said Maxim Sytchev of National Bank, noting that investors shouldn’t expect another bidder emerging shortly, as it’s unlikely another entity would be willing to pay the same premium for Aecon’s assets as CCCI’s proposal.

CIBC also noted that while there were other bidders as part of the sale, an immediate bid appears unlikely.

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