Aecon Group Inc. (ARE.TO) plunged the most in 18 months after the Canadian government blocked a proposed $1.2 billion takeover of the construction firm by a unit of China Communications Construction Co.

Prime Minister Justin Trudeau’s government said the sale was quashed “in order to protect national security,” without providing more details, according to a statement late Wednesday from Innovation Minister Navdeep Bains.

The rejection dropped Aecon’s shares 14 per cent to $14.88 at 10:24 a.m. in Toronto, its biggest decline since November 2016. A unit of China Communications had offered to buy the company for $20.37 a share in October.

Aecon said it was “disappointed” with the government’s decision, and said it planned to remain a Toronto Stock Exchange-listed company and would rekindle its search for a new chief executive officer. While there were other interested parties prior to the CCCC unit deal, the company said it would no longer actively pursue a sale.

Jacob Bout, a Toronto-based analyst with Canadian Imperial Bank of Commerce, said in a note to clients Thursday that another immediate bid for the company is “unlikely.”

The fact that the federal government blocked the deal on national securities grounds is "unreasonable," said Frederic Bastien, a Vancouver-based analyst with Raymond James. But he said the company is in better shape than it was last year.

Stronger Company

“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," he said in a note to clients. He has a “market perform” rating on the stock and a $20.37 a share price target.

Bastien said some recent contract wins, including the Montreal REM light rail project and the Finch West Light Rail project in Toronto, are contributing to the largest backlog in the company’s history despite weakness in both the energy and mining sector. He said he sees significant upside when these two sectors start to see increased activity. He also noted the firm has been driving up margins by pursuing more complex infrastructure.

“That’s why we have long viewed Aecon as the Canadian contractor to own," he said.

The block sent a shock wave across Toronto’s Bay Street, which largely viewed the national security review as unnecessary given Aecon’s limited exposure to hot button sectors like telecommunications and nuclear power.

Third Rejection

Nevertheless, it is the third foreign transaction the Canadian government has blocked on national security grounds, and the first by the Trudeau government. The other blocked deals included the proposed sale of MTS Allstream to Accelero Capital Holdings Sarl Group. Other blocked bids, such as the sale of MacDonald Dettwiler & Associates, failed a net benefit test.

“While the Aecon decision is a significant development and will be closely scrutinized given its high profile, no indication has been given that this decision signals a change in Canada’s overall approach to foreign investment, including foreign investment from China," Michelle Lally, a partner in competition law and foreign investment at Osler, Hoskin & Harcourt, said in a note by the Toronto law firm that was authored with colleagues.

To date, she noted the Trudeau government has exercised its national security review powers judiciously. It has reviewed and approved transactions including Hytera Communications Corp. Ltd.’s acquisition of Norsat International Inc. and Anbang Insurance Group Co. Ltd’s takeover of Retirement Concepts Seniors Services Ltd. last year. It also reversed the previous Conservative government’s decision to reject Hong Kong-based O-Net Technologies Group Ltd.’s takeover of ITF Technologies Inc. last year.

--With assistance from Aoyon Ashraf, Josh Wingrove and Michael Bellusci