Paradis may still block Telus’ deal for Mobilicity, observers say

Industry Minister Christian Paradis' policy aim for four competing wireless carriers in each region of the country is not yet dead as the minister may block Telus Corp.'s deal to purchase new entrant Mobilicity, analysts and observers said. Telus' $380-million deal for Mobilicity, operated by Dave Wireless Inc., is “unlikely to be approved,” Macquarie Capital analyst Greg MacDonald said in a research note May 17, adding that the government will be looking at competition and public opinion as it evaluates the proposed purchase. MacDonald said in the note he expects the Industry Department to issue a final decision on new spectrum transfer rules “in the next few weeks, which will essentially kill this deal or put it in serious question.” Industry Minister Christian Paradis must approve Telus' deal for Mobilicity, announced last week, as well as Rogers Communications Inc.'s proposed purchase of unused spectrum from Shaw Communications Inc. for $325 to $350 million. New entrants Mobilicity, VimpelCom Ltd.'s Wind Mobile, and Public Mobile Inc. are taking offers, and their purchase by incumbents Rogers, Telus or BCE Inc. would pose a problem for Paradis' wireless policy objective of ensuring four competing carriers in every region of Canada. Shaw’s and Mobilicity’s spectrum assets are licensed as "set aside" spectrum reserved for new entrant carriers in Industry Canada’s 2008 AWS wireless auction. Incumbent carriers Telus, Bell and Rogers are prohibited from acquiring the new entrant spectrum for five years from the day it was licensed, which was February 2009 in Mobilicity’s case and September 2009 in Shaw’s. Telus' announcement last week, in which the incumbent would take on Mobilicity's 250,000 subscribers and the spectrum licences it purchased in 2008 for $243.2 million, is a test of whether Paradis is serious about his policy, said John Lawford, executive director of the Public Interest Advocacy Centre (PIAC). Lawford, whose public interest advocacy group is urging the minister to block the deal, said Paradis could deny it and win favour with voters if he explains that the decision is in consumers' interest. “Go back to the wording that they used in the 2008 auction, and say, 'We are favouring competition in the cellphone market for Canadian consumers and families ... We're going to do what it takes to make sure that one more alternative survives,'” Lawford said. Still, Lawford said the government has waited too long to implement stronger policies to encourage the growth of new entrants and that the government now has “little room to manoeuvre.” He said he doesn't know which way the government will fall as it considers the deal. Lawford estimated there is a 10 per cent chance the government will block the deal and a 90 per cent chance it will approve it with a “soft pedal approach” that includes weaker, additional rules. Industry Canada is expected to release new rules for spectrum transfers, possibly at the start of June, that could restrict further purchases of spectrum by the incumbents. At the same time, analysts are also speculating on further policy changes that could improve the competitive environment for new entrants, which have struggled to win market share from the incumbents' more-than 90 per cent share. Veritas Investment Research said in a note last week that it expects Paradis to introduce “regulatory relief” for new entrants within the next few weeks, including the ability to purchase spectrum licences through installments over time—as proposed by Mobilicity—and more favourable roaming and tower sharing rules. RBC Capital Markets analyst Drew McReynolds said in a May 17 research note that potential new government regulations to strengthen its four-carrier policy could include mandatory roaming and tower sharing “at specified rates and terms,” and mandated “soft handoffs,” which allow customers to roam from one network to another without dropped calls. Other potential policies, he said, could include new “set asides” for the upcoming 700 MHz auction in November and the 2500 MHz auction next year, as well as future auctions; flexibility for spectrum licence financing; tax breaks or subsidies; and new spectrum transfer rules that favour the new entrants. McReynolds categorized those potential policy moves as “too little, too late” measures. He said other possible measures, which he categorized as “effective but too disruptive,” would inlcude eliminating the foreign ownership rules; mandated wholesale network and roaming access on favourable terms for new entrants; abolishing three-year wireless service contracts; and rules to prevent the incumbents from acquiring set aside spectrum from new entrants at any time, even after the five-year moratorium expires on transferring that spectrum. Paradis said in April that the Industry Department never intended for incumbent telecom carriers to have access to the wireless spectrum set aside for new entrants in the 2008 auction, and reiterated his four-carrier policy objective. The incumbents are in talks for new entrants, though Accelero Capital, a Paris-based investment firm owned by former Wind Mobile investor Naguib Sawiris, in a partnership with outgoing Wind CEO Anthony Lacavera, is also looking at a possible purchase of Wind Mobile, The Wire Report reported in April. Toronto private equity firm Catalyst Capital Group Inc. has also expressed interest in getting into the wireless market. MacDonald said in his May 17 note that Telus made a “pre-emptive” move for Mobilicity, and that, if the deal is blocked, it would force Industry Canada’s hand to deny the Rogers-Shaw agreement. Fighting court challenges over such decisions may be worth it to the government, he wrote. “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,” MacDonald said. He added that Mobilicity would likely merge with Wind Mobile if Telus' proposed purchase is blocked, another possible transaction for which “Industry Canada may delay the spectrum auction dates to facilitate such a deal.” Telus and Mobilicity said they informed the government of the deal before it was announced, and said last week they are confident it will be approved. Telus argues that Mobilicity was likely headed for bankruptcy and that the incumbent's ownership of the new entrant would save 150 jobs and ensure continued service for the carrier's 250,000 customers. If the deal is denied, Telus faces no break fee and Mobilicity says it would proceed with a recapitalization plan. Maher Yaghi, an analyst with Desjardins Securities, said in a phone interview that Paradis would need an alternative scenario for Mobilicity if he decided to block Telus' offer. “Then you have a problem, because if the company runs out of cash, and it has to shut down, you have all these people, 250,000 people that paid for phones and now don't have service,” Yaghi said. Mark Goldberg, a consultant at Mark H. Goldberg and Associates, wrote on his blog Tuesday that Mobilicity does not operate in any markets that do not currently have five or more other facilities-based wireless providers, and that a rejection of the deal would send a bad signal to foreign investors. One person familiar with talks between government and industry said possible solutions being proposed to government include more favourable conditions to support mobile virtual network operator (MVNO) services, where wireless providers would lease access to another carrier's network infrastructure to provide services. The access terms would involve the "indefeasible right to use" the network and spectrum, the person said. Macquarie Capital Markets said in a research note on April 3 that it had held two meetings with Industry Canada deputy minister Iain Stewart and senior director Chris Johnstone and concluded that “Industry Canada will do all it can to ensure sustainability of a 4th facilities-based carrier in each market.” “Our discussions with Industry Canada highlight the importance of consumer choice, price and existence of different business models (i.e., unbundled device plans or MVNO models),” said the note by MacDonald. “e believe the conclusion of the consultation on spectrum transfers will be that new entrants cannot be acquired by incumbents,” the note said. The firm said if Industry Canada's policies do not ensure a fourth carrier in each region, the department could consider wireless wholesale access provisions, such as mandated tariffs for roaming or tower sharing outside urban areas. Macquarie Capital said it expects the CRTC to be more proactive in its enforcement of Industry Canada's new tower sharing and roaming rules announced earlier this year, and that the “government may look to intervene with the CRTC if it does not see fit to mandate soft handoffs.” Companies participating in Industry Canada's 700 MHz spectrum auction, scheduled for November, have until June 11 to submit initial applications and deposits and, according to the auction rules, bidders are not permitted to consolidate with one another. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and copy editing by Nicholas Kyonka at nkyonka@thewirereport.ca

Paradis may still block Telus’ deal for Mobilicity, observers say

News | May 21, 2013

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