Enter the Dragon: inside the acquisition of Aecon by CCCI
The acquisition of Aecon by China Communications Construction Company International may come as a shock to some Bermudians, after the recent approval of the Airport Redevelopment Project this year and the controversy surrounding it. CCCI has agreed to buy Canada’s Aecon Construction Company for $1.18 billion (about C$1.51 billion), including the company’s debt (Reuters, 2017).
But why is this important? For the future of Bermuda’s youth, this is a matter of serious importance and one to be looked at objectively.
Bermuda is a strategic point in the Atlantic in this situation, among other things, although to understand why Bermuda is strategic in this context, you have to first learn and understand the groundwork laid out below.
Aecon has its hands involved in other contracts outside of the Bermuda airport redevelopment one, which is of small size in comparison. So why is the acquisition of the company itself important to Bermuda and its citizens? Why is this important to pay attention to and understand?
One with a simple, uncomplicated line of logic might argue that the contract surrounding the Bermuda airport redevelopment was carefully looked over, and since being signed is fixed and stable, meaning nothing to be concerned about.
Yet there are a few other factors floating around that are absolutely imperative to bear in mind — Aecon’s value taking a big hit from a decrease in mining and energy projects (Hodges, 2017); China’s global ambitions including the Belt and Road Initiative (J.P., 2017); and the Bermuda Government now wanting to review the contract initially agreed upon with the Airport Redevelopment Project (Ministry of Transport and Regulatory Affairs, 2017).
The factor that sticks out like a sore thumb here is China’s BRI, of which China Communications Construction Company is a major player, and largely involved in (Zhen, 2017). Also note that CCCI is a subsidiary, or more specifically the overseas financing and investment arm of CCCC (Reuters, 2017).
So let’s look at China’s present and longstanding global ambitions. China has made some serious progress in financial and investment expansion over the past couple of decades. With the creation of the Shanghai Co-operation Organisation in 2001¹, the Belt and Road Initiative² development strategy proposal by President Xi Jinping and its unveiling in 2013, and the founding of the Asian Infrastructure Investment Bank³ in 2016, it is safe to say China is establishing itself firmly as the world’s second-largest economy, losing no time in expanding itself globally.
If you are not familiar with these organisations, institutions and development strategies, now would be a very good time to get acquainted, especially when taking into consideration the recent acquisition of Aecon by CCCI.
In layman’s terms, China is in the business of global development: infrastructure, finance, trade, construction, politics, economy, education, transportation — the list goes on and on, and is far from exhaustive.
When analysing the numerous factors involved in global development, Aecon is a piece of the larger puzzle in China’s international investment and expansion plan. Therefore, if people are under the impression that Aecon is a large company — and rightfully so, considering its 140-year history — and Bermuda is only a small piece of Aecon’s portfolio, bear in mind that it is this small piece of Aecon’s portfolio that can theoretically, and quite possibly single-handedly, pay for CCCI’s acquisition of Aecon.
How? There are primarily two kinds of businessmen: one that thinks short term and the other long term. The whales, or big businessmen, of today’s time think long term. A basic business rule to remember is that residual income pays for future investments.
The patient businessman does not mind having a part of his money invested in something, so long as that something is bringing him cashflow and is part of a wider strategic portfolio.
So when we look at the maths of the sale of Aecon to CCCI, it rings in at a tune of $1.18 billion, while Bermuda is required to pay upwards of $2 billion over the next 30 years in revenue to Aecon (Ministry of Transport and Regulatory Affairs, 2017).
While Aecon may have other contracts in its portfolio that can give constant income like the Bermuda Airport Redevelopment Project, let’s think hypothetically for a minute here. The sum of $1.18 billion is 59 per cent of what Bermuda has to pay out over the next 30 years. CCCI acquired Aecon at a 42 per cent premium to Aecon’s unaffected August 24 share price of C$14.34 (PR Newswire, 2017). Meaning CCCI was willing to pay 42 per cent more than the share value, so C$20.37 per share through cash trading — meaning no need to rely on borrowed capital or margin.
Put simply, cash offers make a sale more attractive mainly by offering a premium price higher than what a company’s shares are trading at, so you can see where Aecon considered this a lucrative opportunity.
Where Aecon would have had to wait for about 30 years for $2 billion in revenue from Bermuda, it is instead getting an immediate $1.18 billion from CCCI — 59 per cent up front rather than 100 per cent long-term.
For CCCI because the shares were bought in cash and not on margin, this was also attractive, as it means saving money on interest that would usually come with purchasing shares on margin.
Let’s loop back around to the hypothetical scenario.
So Aecon was acquired for $1.18 billion, which is 59 per cent of the $2 billion that Bermuda is obligated to pay out in revenue to Aecon over the next 30 years to pay off its debt. Two billion dollars over 30 years is roughly $66.6 million per annum.
In theory, the annual revenue of $66.6 million that Bermuda will pay out to Aecon could literally cover the cash amount that CCCI paid for the acquisition of Aecon with ease, over the 30-year stretch — if, hypothetically, CCCI wanted to take its cash investment back out of the revenue that Bermuda would pay every year — meaning $39.3 million could come out of the $66.6 million in annual revenue, still leaving $27.3 million left over for Aecon.
But again, this is in theory, if that were CCCI’s desired course of action; if everything were to go perfectly; if there were a 150 per cent guarantee that Bermuda would hit that exact annual amount alone — aka, the bottom line in revenue that Bermuda would have to make to repay its debt — in addition to any additional revenue made every year.
While everything is not as cut and dry as that, you can see where the contract between the Bermuda Government, Bermuda’s people, and Aecon holds its weight financially in the sense that Bermuda over the next 30 years is paying almost double what it cost for CCCI to acquire Aecon.
This is only a small part of a larger picture that CCCI, and more importantly China, may have in mind. You also have to turn your attention to China’s long-term plans. As mentioned earlier, there are two types of businessmen: one thinks long term, the other thinks short term. One is the whale, the other is the krill.
China is one of the whales of today, as reluctant as some in the West are to admit it. The acquisition of Aecon is an example of this, and CCCI is interested in the objectives of its parent company, which in turn is interested in China’s long-term objectives.
There is a very large possibility that Bermuda aligns with those objectives, especially when considering the timing of the Airport Redevelopment Project negotiations and the acquisition of Aecon were so close.
Anyone who paid attention in history class knows Bermuda does and always has held a strategic position in the Atlantic. When taking this into consideration, and analysing China’s strategic movements with its Belt and Road Initiative, a picture has the potential to be painted.
China right now is undertaking one of the biggest global infrastructure projects to date, with the objective to connect Asia, Europe and Africa, expanding trade and increasing co-operation between countries throughout the continents.
However, this can open up for more opportunities than just trade for China. We will get to that in a minute.
One should also be aware that this is not the first time something such as this has been done or attempted. It is equivalent to 19th-century British imperialism, the difference being the British focused mainly on maritime domination. The United States also tried something similar to the BRI, the postwar Marshall Plan (History, 2009) — this is 12 times bigger than that.
History has shown fights for land and sea dominance, both being key to ease of access to trade and rapid accumulation of profits. Look back in history and you will see the British, Dutch, French, Spanish, Portuguese, nearly all of Europe scrambling at some point in time for the acquisition of strategic ports serving as economic routes.
Civilisation has advanced, but the time-tested tactics remain the same, although less brutal and barbaric, and more subtle and diplomatic. Bermuda has played and continues to play its role in being a strategic position in the Atlantic.
Dating back to the reprehensible era of colonialism as a link to the New World, coursing through the placement of an American military base, and arriving to the financial and international business hub it is today, Bermuda has always caught the eyes of history’s superpowers when interests align with Bermuda’s strategic location. China should be viewed no differently when considering the sheer amount of ports it has been buying over the years (Shepard, 2017).
While the acquisition of Aecon may not have any immediate relation to Bermuda, when considering China’s Belt and Road Initiative, and its international investment strategy, Bermuda is quite literally in a position where China can expand even further past Europe, knocking on America’s door.
Where superpowers such as the US, and in the past, the British Empire strategically placed themselves around countries of interest and enemies to gain a critical advantage, China from a trade perspective now has the potential and capability to do the same — using Bermuda in its strategic plan, just as the US and what was once Great Britain did in the past, albeit with a much more sophisticated approach.
Strategically, though, China would gain more than just trade advantages. If China were to ever take an interest in Bermuda’s ports, port ownership allows for the opportunity of non-commercial activities.
From a political point of view, this can include collecting intelligence, hosting military forces and engaging in other minor politics (Kynge, 2017a; 2017b) — the same things Bermuda was once used for before.
With the acquisition of Aecon, Bermuda possessing key ports and CCCI being a subsidiary of CCCC, a major player in China’s BRI, it is advisable that Bermudians and the Bermuda Government do not take lightly the recent news of CCCI agreeing to acquire Aecon, but instead consider the possibility that Bermuda may get caught in the sights of China in future.
Contracts may be agreed upon, but acquisitions can be game changers ... and naivety is not a character trait to flaunt in today’s fierce business waters of whales and sharks.
• Sol Rego is a Bermudian intercultural consultant whose work centres around international relations and business. He has a background in international business and trade, and holds a master’s degree in intercultural business communication and a bachelor’s in Asia Pacific studies and Japanese. He can be contacted at SRIIC.BDA@gmail.com
¹ SCO - eng.sectsco.org/
² BRI - english.gov.cn/beltAndRoad/
³ AIIB - www.aiib.org/en/index.html
History. 2009. Marshall Plan — World War II — HISTORYCOM. [Online]. [October 26, 2017]. Available from: http://www.history.com/topics/world-war-ii/marshall-plan
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Zhen, S. 2017. China Communication Construction eyes rail projects in Asean countries. [Online]. [October 26, 2017]. Available from: http://www.scmp.com/business/investor-relations/stock-quoteprofile/article/2110724/china-communication-construction
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