Private equity firms scoop up Public Mobile, aim for more deals

Two private equity firms, including one in New York and another with ties to Canada’s wealthiest family, acquired new entrant wireless carrier Public Mobile Inc. and intend to pursue other “consolidation opportunities” before registering for Industry Canada's upcoming 700 MHz spectrum auction, Public Mobile said. Public Mobile said in a release that it was acquired by Toronto-based firm Thomvest Seed Capital Inc. and New York-based Cartesian Capital Group LLC. Thomvest, owned by Peter Thomson of Canada’s Thomson family, became the Public Mobile’s controlling shareholder through the deal, the release said. The companies did not release financial details of the deal. Thomvest aims to become “Canada’s fourth wireless player,” Stefan Clulow, managing director at the Toronto firm, said in the release. Bruce Kirby, Public Mobile’s vice-president of strategy and business development, said in an interview that Thomvest and Cartesian had shares in the company before reaching the deal, and “wanted to continue to fund and grow the business” as other investors looked to get out. He said the deal was completed Wednesday after “several months” of discussions. This week, Industry Minister Christian Paradis rejected Telus Corp.’s deal to acquire Dave Wireless, operating as Mobilicity, saying that it would break spectrum rules that prohibited incumbent carriers like Telus from acquiring Mobilicity’s “set aside” spectrum. That spectrum was reserved for new entrant players in the 2008 AWS spectrum auction, and cannot be transferred to the incumbents for a five-year period. Paradis said he would also block future deals that would result in "undue concentration" of spectrum licences in the hands of one wireless provider. The Wire Report reported in May that incumbent BCE Inc. had held talks with Public Mobile and that “everyone talking to everyone." Public Mobile is intent on further consolidation talks with other new entrant carriers Wind Mobile (owned by VimpelCom Ltd.) and Dave Wireless Inc., Kirby said, both of which are accepting offers. He said the company will also pursue deals to acquire unused AWS spectrum licecnes, such as Shaw Communications Inc.’s spectrum in Western Canada and northern Ontario. He said Public Mobile will take part in the 700 MHz auction, with initial applications due Sept. 17 and bidding scheduled to start Jan. 14, 2014, regardless of whether it can consolidate with other new entrant carriers. “By operating the way we do, there’s still a play for us to operate as a niche player in the markets we operate in and to expand with additional spectrum,” Kirby said. “The sensible longer term strategy is to have this consolidation, but we held up a plan that says we continue to grow as ourselves … Consolidation is not the only option for us, it’s the best option.” Industry analysts were skeptical Thursday of the equity firms’ intentions to invest long-term in growing the company, which has an estimated 250,000 prepaid wireless subscribers in the Toronto and Montreal markets, according to estimates by BMO Capital Markets analyst Tim Casey and RBC analyst Drew McReynolds. Casey said in a research note Thursday it would cost about $2 billion for Public Mobile's new owners to acquire Wind and Dave Wireless and build out a competitive fourth-generation LTE network after acquiring 700 MHz spectrum licences in the auction. “Investors will likely speculate that Thomvest intends to consolidate the Canadian new entrants … That seems unlikely to us,” Casey wrote. McReynolds similarly said it “remains unclear” how committed Public Mobile’s new owners will be to growing the company, including through consolidation, over the long term. Canaccord Genuity analyst Dvai Ghose also said he wondered if Thomvest and Cartesian “really want to or can spend the capital and time” needed to consolidate the three new entrant carriers and to “build a viable business.” The deal should provide Public Mobile with sufficient funds to bid in the upcoming 700 MHz auction, Troy Crandall, a telecom analyst with MacDougall, MacDougall & MacTier in Montreal, said in a note Thursday. Thomson, Thomvest’s founder and managing director, is the chair of the Thomson family’s investment company, Woodbridge Co. Ltd., which owns The Globe and Mail and Thomson Reuters Corp., which the family has owned since 2008. He is also a director on Public Mobile’s board, according to Thomvest’s website. Forbes magazine said in March that the Thomson family had a combined net worth of $20.3 billion US. Thomvest is funded through a $250 million “evergreen fund” capitalized by Thomson, the firm’s website says. Cartesian handles more than $2 billion US in capital around the world, according to its website. The two firms owned an estimated 10 per cent stake in Public Mobile prior to Thursday’s deal, Casey said. Public Mobile said in its release that the private equity firms are committed to “fully fund Public Mobile to a cash flow positive position,” and have now invested “the first tranche” of that commitment. “Despite the current uncertainty in the Canadian wireless industry, Public Mobile's strong performance and rapid growth continue to attract financial backing from blue chip investors,” Alek Krstajic, Public Mobile’s founder and CEO, said in a statement. “The support of Thomvest and Cartesian enables Public Mobile to continue the rapid expansion of our subscriber base from a strong and well-funded position," he said. Kirby said the “clear signal” from the government that it will not allow incumbent carriers to acquire set aside spectrum will encourage Mobilicity and Wind, which also owns new entrant spectrum, to reconsider consolidation with other small players. “Now that the government has taken the first step in making it plain that that’s no longer an option … they’ll realize that that is simply not a viable option for them,” he said. “The plan is to find a way for everybody to work together and figure out how to combine things in a way to create that entity that can actually be successful longer term,” Kirby said, adding that Public Mobile would be open to network sharing and other partnerships. Public Mobile, which spent $52.4 million in the 2008 auction to acquire spectrum in Ontario and Quebec, would be more capable of reaching a deal to sell out to one of the incumbents because its AWS spectrum was not part of the new entrant set aside rule. That spectrum, in a frequency range called the G block, prevents Public Mobile’s subscribers’ from using some popular wireless devices that only operate in other spectrum ranges. Paradis said this week that the government remains committed to ensuring four carriers in each region of the country, and that it will use “any and all tools available” to achieve that policy. Industry analysts have questioned whether the objective can be achieved as the new entrant carriers struggle to remain profitable and consolidation is less likely with incumbent carriers, Telus, BCE and Rogers Communications Inc. Greg MacDonald, an analyst at Macquarie Capital, said in a note Thursday that Thomvest and Cartesian’s acquisition of Public Mobile could support the government’s four-carrier policy. “In our view this is the beginning of a sustainable fourth carrier scenario as it will force Wind and Mobilicity to include Public in any merger discussions,” he wrote. Efforts by the company to transfer its spectrum to an incumbent or merge with the other new entrants would be subject to Industry Canada’s unreleased spectrum transfer rules, which are expected to restrict “undue concentration” of spectrum. Those rules will be released in mid-June, Paradis said Tuesday. Kirby said Public Mobile will maintain the company's focus on prepaid customers “over the next few years" though it will eventually target more lucrative, postpaid subscribers. “We certainly don’t see ourselves trying to get into a position where we’re competing head to head with the incumbents, not in the near term,” Kirby said. “Over time, you evolve to a point where maybe there becomes less of a distinction … I think there’s certainly value in having that prepaid piece plus a portion that targets a segment of the postpaid market that continues to be underserved by the incumbents.” —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca

Private equity firms scoop up Public Mobile, aim for more deals

News | June 6, 2013

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Private equity firms scoop up Public Mobile, aim for more deals

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