Is the Macdonald Dettwiler/Alliant Space Deal Dead?

Includes: MAXR, OA
by: Mark McQueen

When Macdonald Dettwiler (MDDWF.PK) finally admitted that it wanted to sell its space and satellite systems division to Alliant Techsystems (ATK) for C$1.3 billion (having originally denied the rumour, see post “Canadarm to wind up in U.S. hands?” June 14-07), my first reaction was typically nationalist: “Would the Americans let their key military or space supplier be sold to anyone, even a NATO ally?” Of course not.

So why would we? Have we not learned the industrial policy lesson of the Avro Arrow?

Although I was tempted to blog about it, and there were days that I was even short material (who knew?), I didn’t think that it would be all that appropriate for a federal board appointee to be calling out a very talented Minister of the Crown on one of the most difficult decisions he’ll ever make at Industry Canada.

With the cat out of the bag, I can say that I’m delighted to see that Minister Prentice wound up at the right place on the issue. Canada was to gain nothing from the proposed deal, other than a modest lift for MDA shareholders. Turning the topic on its head, what’s the commercial argument to approve it?

The politics of it are quite straightforward if you believe there is still a populist strain (think Reform Party) in the Conservative Party of Canada. Having watched Inco, Falconbridge, Dofasco, et al slip away (see prior post “Schwartz prescription won’t cure patient” May 15-07) on their watch, the current federal government’s reputation as a laisse-faire, free market crew was well burnished. But if you are at all a grassroots politician with a feel for the mood of the Nation, as Minister Prentice certainly is, you understand that there is something discomforting about selling a key element of your space industry to foreigners, even if those foreigners have most of the space contracts to let.

The former Industry Minister, Maxine Bernier, appeared to be about as “free market” as they come - one wonders if he would have given the PMO the same advice. And had Minister Bernier been in favor of the deal, the argument would have been pretty clear: Spar Aeropace already sold the Canadarm to an American firm (Orbital Sciences) once in the late 1990s. MDA just wound up with it thereafter. If a Liberal Government didn’t reject the Orbital/Canadarm deal, why would a Conservative one refuse to pull the trigger this time?

I think it all comes down to a pattern. After a raft of hallmark transactions (mining, steel, etc.) it was time to draw the line.

I don’t doubt that there’s no net benefit to Canada from the Alliant proposal. MDA’s space group has lived off federal contracts grants for the longest time, but its shareholders will still complain that the feds are interfering in a commercial transaction…not that they minded a bit when the federal government interfered at MDA with large projects at great gross margins.

As for MDA management, they’ve got themselves in a pretzel-like position. When the space sale rumour hit the Wall Street Journal last summer, MDA executives spent many months explaining to institutional investors why they weren’t going to sell the division: the spin involved “research synergies” between the software group and the brilliant propeller heads on the space team. Not that anyone on Bay Street actually believes there to be synergies between the two, but that was the story.

Fast forward a few months, and voila. The very same deal is finally announced. Once shareholders get over bitching about a protectionist government (remember the income trust announcement?, they’ll say) MDA management will be left to work with Alliant to cook up a new proposal.

One should not assume that this deal is dead, of course. Just as Boeing (NYSE:BA) had to find attractive projects for Canadian aircraft and technology suppliers to engage on in exchange for the multi-billion dollar C-5 Galaxy military cargo contract, Alliant can follow those same breadcrumbs if it wants to pull this one out of the fire.

If not, MDA’s broken deal will be the first scalp to adorn Minister Prentice’s office wall. And that’s a good thing for our children and the Canadian research community as a whole.

If he were alive today, the Rt. Hon. John Diefenbaker would be the first to pat Minister Prentice on the back for his courage and foresight. You’ve learned the lesson of the Avro Arrow he’d say.