Yesterday one of Canada’s incumbent operators, Telus, agreed to acquire one of the recent entrants to the country’s wireless market in a deal which will cause a headache for the government.
Mobilicity came into existence after acquiring set-aside…
Yesterday one of Canada’s incumbent operators, Telus, agreed to acquire one of the recent entrants to the country’s wireless market in a deal which will cause a headache for the government.
Mobilicity came into existence after acquiring set-aside spectrum in the 2008 AWS auction for C$243m (US$236m). Since then it has only managed to acquire 250,000 subscribers and the challenger is being taken through the courts by debt holders.
Canada’s government has said it wants four players in every region of the country, and Mobilicity has been talked about as part of a hypothetical consolidated fourth player alongside fellow challengers Wind Mobile and Public Mobile.
Telus’ C$380m (US$374m) proposal is subject to approval from the Competition Bureau and Industry Canada, the government’s business ministry.
Under the terms of the 2008 spectrum auction Mobilicity is blocked from selling its spectrum to incumbents until February 2014.
It is also banned from entering into a prior arrangement relating to the transfer of those licences to an incumbent, or else it would be considered an associated entity. An executive at a competitor suggested that Mobilicity’s agreement with Telus could fall into this category.
The parties are asking the government to waive these rules and said they anticipate an “expeditious” regulatory review due to Mobilicity’s financial difficulties.
In a note Macquarie analyst Greg MacDonald is sceptical that they will achieve this: “Spectrum transfers will not likely be allowed between incumbents and new entrants.”
“Final comments for the consultation on spectrum transfer were recently received and we expect a decision in the next few weeks, which will essentially kill this deal or put it in serious question.
“We do not deny that Industry Canada has reason to consider approving this deal given the risk of litigation, we just think the government cares more about future competition and votes and views settling any litigation as an acceptable cost.”
The industry source said that if Telus is successful in acquiring Mobilicity’s spectrum then it isn’t being put to competitive use.
“They can’t close the transaction without the government saying that the set-aside spectrum was an illusion,” the person said.
RBC Capital Markets analyst Drew McReynolds said that Telus’ bid for Mobilicity could risk creating stricter legislation on mobile operators.
“While the alternative for Mobilicity to finding a buyer like Telus would appear to be less favourable for the government (i.e. liquidation), the timing of this transaction in advance of the spectrum transfer review and five-year moratorium risks cornering the government into instituting more aggressive wireless regulation,” he wrote in a research report.
Canaccord Genuity analyst Dvai Ghose does not believe Industry Canada will allow new entrant to die and therefore it may block the deal.
“We assume that the government would rather have a non-incumbent third party acquire Mobilicity and so may ask Mobilicity to show through bankruptcy whether it can attract an independent buyer before begrudgingly allowing its sale to an incumbent,” he said in a memo.
“Perhaps the free market focused Conservative Government will eventually come to the conclusion that the market could not support a fourth player in every region and so it should concentrate on managing the incumbents rather than artificially forcing competition.”
