WINNIPEG – Manitoba Telecom Services (TSX:MTS) says the federal government has rejected a deal for it to sell its business unit Allstream to Egyptian investment group Accelero Capital due to “unspecified national security concerns.”

The Winnipeg company said late Monday it is “extremely surprised and disappointed” by the decision to not approve the deal, which was announced last May. At the time, the company valued the sale at $520 million.

“MTS Allstream and Accelero continue to believe this transaction is to Canada’s net benefit and to the best of our knowledge would not be injurious to national security,” MTS said in a statement.

The company said it and Accelero, which is owned by Egyptian telecom magnate Naguib Sawiris, have offered to “take whatever actions are necessary” to address Industry Canada’s concerns, but have been rejected.

Sawiris is an original investor in small wireless company Wind Mobile, which operates in Canada.

In a statement, Industry Minister James Moore confirmed the proposed acquisition was rejected under the national security provisions of the Investment Canada Act.

“The result of this review is that the transaction will not proceed,” he said in an emailed statement.

The minister did not specify what the security concerns may be, but said: “MTS Allstream operates a national fibre optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada.”

MTS said the decision comes after it had agreed to commit to invest $300 million over three years to “pursue Allstream’s capital plans.”

“We pursued this transaction, with Accelero as our partner, in direct response to the federal government’s stated policy objectives of increasing foreign investment and driving greater competition in Canada’s telecommunications sector, so this result is very difficult to understand or accept,” said MTS Allstream CEO Pierre Blouin in a statement.

Both companies will continue to review their options.

Allstream, created after AT&T Canada restructured, competes in the business telecom market against Bell Canada, Telus and the other large Canadian telecommunications carriers. MTS bought the company in 2004 in a bid to gain a national presence in certain types of telecom services, mainly geared to large corporations and institutions. When the sale was announced, the company employed about 2,000 people and served about 50,000 businesses.

MTS operates Manitoba’s largest telecommunications business.

— By Linda Nguyen in Toronto