Wind-Mobilicity merger increasingly likely as debtholder vote postponed

A merger of Mobilicity and Wind Mobile looks more likely as news reports said Mobilicity delayed a debtholder vote on its recapitalization plan due to acquisition talks with Verizon Communications Inc. “Verizon is probably one of the negotiating parties,” Macquarie Capital analyst Greg MacDonald said in an interview on BNN Wednesday, after the business news channel reported that Mobilicity, operated by Dave Wireless Inc., delayed its vote due to talks with Verizon. “It's the most likely to be the winner of this asset and it's probably looking to do a deal with Mobilicity to bring Wind back to the table, maybe at a price that's more acceptable by both parties,” MacDonald said. Mobilicity said in a release Wednesday that it put off its debtholder vote on a recapitalization plan for a third time, adding that it is “in discussions with multiple parties in connection with an acquisition plan of arrangement.” "We are working diligently to reach an acquisition agreement and thank our customers, dealers, employees and partners for their continued support as we see this process through to its completion,” Stewart Lyons, Mobilicity's president and chief operating officer, said in a statement. Consolidation in the wireless sector is expected this summer, with deals probably announced this month. They must happen well in advance of a Sept. 17 deadline for applications to participate in Industry Canada's 700 MHz spectrum auction. Following that date, companies registered to participate in the auction cannot merge or engage in acquisition talks, according to the auction rules. Analysts expect consolidation among new wireless entrants Wind Mobile, Mobilicity and possibly Public Mobile Inc., now owned by private equity firms Thomvest Seed Capital Inc. and Cartesian Capital Group LLC, which bought the company last month. Verizon has made an initial offer of $700 million for Wind Mobile, operated by Globalive Wireless Management Corp., The Globe and Mail reported last month. (Cairo-based Orascom Telecom Holding S.A.E. has a non-controlling, 65 per cent stake in Wind.) “My approach to this is, you have to have a consolidation of the three independent new entrants for it to make any economic sense,” MacDonald told BNN, adding that competition among the three new entrants has increased their churn rates, or the rate at which customers leave. “You do have to see a consolidation among them to actually make the economics work.” In a brief phone interview Wednesday, MacDonald said he estimates a purchase price of about $1 billion for Wind, Mobilicity and Public combined, and that there is an assumption that $700 million is the minimum price for Wind. If Wind and Mobilicity go to the same buyer, it's unclear whether their new owner would also take Public Mobile. Public has fewer licences, which operate in a different frequency range called the G-block, and that spectrum is less attractive than Wind's and Mobilicity's AWS spectrum frequencies, due in part to the devices that can operate on them. Public Mobile spent a total of $52.4 million on its G-block spectrum in Industry Canada's 2008 wireless auction, while Mobilicity spent $243.2 million and Wind Mobile $442.1 million. Analysts estimate the three new entrants' total debt exceeds $1 billion, meaning that the companies may be looking at overall losses if they sell. In an analysis of Canada's new entrants and regional wireless players released last month, BMO Capital Markets estimated that Public Mobile has about 250,000 subscribers, about 150 employees, and that it has made total capital investments of about $400 million. BMO estimated that Mobilicity has about 250,000 subscribers, about 150 employees, and about $450 million in debt, with Catalyst Capital Group Inc. as the largest debtholder. Wind has debt of about $770 million and about 602,000 subscribers, BMO said in the research note. Industry sources said in background interviews that, if Wind and Mobilicity consolidate under a new buyer, keeping them independent from the incumbents, Industry Canada may permit Public Mobile to sell to an incumbent. Public Mobile's G-block spectrum licences do not have any licence conditions that restrict their transfer to an incumbent, whereas Wind's and Mobilicity's licences do. Those licences, set aside for new entrants, cannot be transferred to an incumbent until after a five-year moratorium expires. Dvai Ghose, an analyst with Canaccord Genuity, said in a phone interview that Public Mobile's sale to an incumbent—BCE Inc., Telus Corp., or Rogers Communications Inc.—remains a possibility, and that selling to one of those three players would fetch its owners a better price. “I think there's a reason why the speculation to date has been primarily Wind followed by Mobilicity,” Ghose said, adding that Verizon would not be interested in purchasing Mobilicity without Wind. This spring Telus Corp. offered $380 million for Mobilicity, a bid the government rejected due to its spectrum transfer rules. One person with knowledge of the three new entrants said in a background interview that they estimate Mobilicity's average revenue per user (ARPU) to be $27.60, the same as Wind Mobile's, and Public Mobile's to be $26. Ghose said Verizon, if it enters Canada, could spend up to $2 billion in the 700 MHz auction as incumbents Bell, Rogers and Telus bid competitively to ensure they each get one of the four available “prime” spectrum blocks. The auction rules cap each incumbent to one “prime” spectrum block per region, he pointed out, while Verizon, as a new entrant, could purchase two. “With Verizon bidding against the three incumbents, and in some cases regional players, the cost of a national prime block could be as high as $1 billion,” Ghose said. “It's a scarcity issue. There's only four blocks. There's three incumbents, and Verizon, unlike the incumbents, is allowed to buy two.” Mobilicity and Wind operate as discount providers, an approach Verizon could continue, though Ghose said that would sully the Verizon brand, which is strong in the United States. “They don't even have a discount brand in the U.S., as our guys do in Canada,” Ghose said. Another potential buyer for Wind and Mobilicity is Accelero Capital Holdings, a private equity firm owned by former Orascom chief executive Naguib Sawiris, who earlier this year partnered with Wind CEO Anthony Lacavera on an offer for the new entrant. Lacavera said last month that Mobilicity would be a good fit for Wind to purchase. In May, Accelero announced a purchase of business services unit Allstream from Manitoba Telecom Services Inc., which would give the company a cross-country fibre network for backhaul support of mobile wireless services. Ghose said he doesn't expect Accelero to offer more for Wind than Verizon. He said stock prices suggest Verizon's entry is “a foregone conclusion and that they're going to do untold damage, which I find a little bit difficult to believe.” —With reporting by Simon Doyle at sdoyle@thewirereport.ca and editing by AnjaKaradeglija at akarad@thewirereport.ca.

Wind-Mobilicity merger increasingly likely as debtholder vote postponed

News | July 10, 2013

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