Who will step in to bid on a fourth prime block in Ontario, Alberta, or B.C.?

It’s been described as the most valuable wireless spectrum the federal government has ever auctioned off, yet few—if any—bidders are expected to try to acquire those airwaves in three of Canada’s most lucrative wireless markets. With Industry Canada’s auction of 700 MHz spectrum now less than three months away, industry analysts are pondering who will step up to bid on a fourth available block of prime airwaves in Ontario, British Columbia or Alberta, which together accounted for about two-thirds of carriers’ combined $20.4 billion in wireless revenues in 2012, according to The Wire Report’s analysis. Companies that want the spectrum may either be not permitted to bid on it or may not have the capital to bid, while others with sufficient cash may decide they don’t have a reason to do so. “Apart from the national and regional incumbents ... we really wonder who will buy significant 700 MHz spectrum positions,” Canaccord Genuity analyst Dvai Ghose said in a research note Tuesday. “We are also left wondering who will buy the 4th prime block of 700 MHz spectrum in Ontario, British Columbia and Alberta.” Under the auction rules, incumbent providers BCE Inc., Rogers Communications Inc. and Telus Corp. are each restricted to acquiring no more than one of the four prime blocks of spectrum available in each region of the country, leaving at least one block per region available for a smaller competitor. Provincial incumbents Manitoba Telecom Services Inc. (MTS) and SaskTel are expected to bid on spectrum in Manitoba and Saskatchewan, while regional players Eastlink (owned by Bragg Communications Inc.) and Videotron Ltd. (owned by Quebecor Media Inc.) are expected to bid for prime spectrum in the Atlantic provinces and Quebec, respectively. A lack of a clear regional or provincial provider in Ontario, British Columbia or Alberta could open the door for Wind Mobile to acquire prime spectrum in those three provinces—the only three it currently operates in—if it has the financing to do so. Wind, which is operated by Globalive Wireless Management Corp., is funded by Anthony Lacavera’s AAL Corp. and by Amsterdam-based VimpelCom Ltd., which has a 65 per cent equity stake in the Canadian business. Jo Lunder, VimpelCom’s chief executive, said at a broker conference in London this June that he was seeking a “clean exit” from Canada, and the company has been searching for potential buyers this year, leaving some questions about whether the European-based carrier is prepared to back Wind's auction bids. Ghose said he believes VimpelCom would only invest the money to acquire 700 MHz spectrum in Canada if it “enhances the value” of Wind in advance of a potential sale of the company. That’s assuming VimpelCom can find a willing buyer who can acquire Wind, given the federal government’s desire to prevent the most likely buyers—the Canadian incumbents—from acquiring the new entrant competitor. “If you can’t sell it to an incumbent, as this government seems adamant, then who the heck are you going to sell it to?” Ghose said in a telephone interview last week. “I don’t think Vimpel wants to buy to keep it." The signs now indicate that the government's hopes for a fourth competitor may be dwindling, unless American giant Verizon Communications Inc.—which said in September that it has no plans, for now, to enter the Canadian market—decided to change that position. Verizon did not, nor any other major foreign company, register for the 700 MHz auction in September. Toronto-based private equity firm Catalyst Capital Group Inc. and Feenix Wireless Inc. are two other potential bidders in the three lucrative provinces. Catalyst is a major debtholder of struggling new entrant carrier Mobilicity, which did not apply to take part in the auction, while Mobilicity’s executive chairman, John Bitove, owns Feenix Wireless. Both companies’ intentions for the auction are currently unknown, as is their available financing, though it seems unlikely that Bitove would invest heavily in more wireless spectrum in light of Mobilicity’s financial and operational struggles since its launch in 2010. Industry analysts have speculated that Catalyst may attempt to acquire a national block of 700 MHz spectrum as a prelude to buying Wind, with a plan to sell the company later, after increasing its value. Macquarie Capital analyst Greg MacDonald said in a research note this week that he believes Catalyst is likely to acquire spectrum, particularly now that fellow private equity firm Birch Hill Equity Partners Management Inc. has withdrawn its application to take part in the auction. “In our view, the spectrum outcome boils down to funding,” MacDonald said. “If Catalyst has access to deep pools of capital (quite a reasonable assumption), it would be the favourite to win the last premium block and consequently strike a deal to acquire Wind from Vimpelcom.” Iain Grant, a telecom analyst with research firm the SeaBoard Group, said he believes Catalyst will be scared away from bidding following Industry Canada’s decision last week to block, on national security grounds, Paris- and Cairo-based Accelero Capital Holdings’ bid to acquire Allstream Inc. from MTS. Uncertainty about the government’s handling of foreign ownership bids for Canadian telecom services, coupled with the government’s desire to prevent the incumbents from acquiring the new entrant carriers, means if Catalyst buys Wind, it could get stuck with it, Grant said. “Too much uncertainty now created by the ‘national security’ gauntlet for risk capital to take the risk that its exit strategy would be blocked,” Grant said in an emailed statement last week. “We think that old fashioned bandwidth users will drive auction dynamics this time, rather than strategic investors or hoarders.” In addition to current wireless providers, three smaller telecom companies that have applied to take part in the auction. Rural Internet provider Corridor Communications Inc. is based in Alberta and could bid for spectrum there, while Vecima Network Inc. and Novus Entertainment Inc. are both based out of British Columbia and could bid in both Western Canadian provinces. What’s unclear is whether any of those smaller companies could afford to bid on prime spectrum in any of the three provinces. Opening bids for a prime block start at $11.9 million in Alberta, at $14.4 million in British Columbia, and at $69.3 million in Southern Ontario, and could sell for much more. A final possibility is that one of the regional players, such as Eastlink or Videotron, will try to acquire a national spectrum block to ensure they gain spectrum in their operating territories, and then sublicense spectrum in other parts of the country. Under the “combinatorial clock auction” format rules, bids for national blocks are prioritized over regional bids, a twist that could result in regional players being shut out of their operating territories even if they aren’t outbid in those regions. Ghose said he would be surprised if Quebecor attempted to bid on a national block, noting that the company has not yet used Toronto-area airwaves it acquired in Industry Canada’s 2008 spectrum auction, and that it has reached a deal to potentially sell that spectrum to Rogers early next year. "What they're trying to do with their Southern Ontario spectrum says it all to me," Ghose said. "They're not interested in outside Quebec." Eastlink, Grant said, is “an interesting case” because it has cable properties in Northern Ontario and in parts of Western Canada. Grant said Eastlink could try to acquire spectrum in Atlantic Canada, primarily in Nova Scotia and Prince Edward Island, as well as Newfoundland and Labrador, and “to see if it can get” spectrum in Northern Ontario and Alberta, and potentially Manitoba and British Columbia. “The ability of Eastlink to leverage its cable subscriber base with a wireless adjunct is a key motivation,” he said in an email. The Wire Report reported in April that maintaining wireless competition in Ontario, Alberta and British Columbia will be key to the success of the federal government’s objective to see a fourth wireless carrier in each region of the country. Six months later, that appears to be just as true. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Who will step in to bid on a fourth prime block in Ontario, Alberta, or B.C.?

News | October 18, 2013

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