Telus-Mobilicity deal to test government powers: expert

The $350-million bid by Telus Corp. for Mobilicity could set up a test of Industry Canada’s regulatory power over the sale of wireless spectrum and competition within the wireless industry, according to one expert. The deal, announced late Thursday night, is the third attempt by Telus to buy the new entrant carrier, which entered bankruptcy protection in September. Two previous attempts have been stymied by Industry Canada, which blocked the deals citing spectrum-transfer rules that prevented Mobilicity from giving up its AWS spectrum to one of the big three incumbent carriers. The spectrum-transfer moratorium expired in February, though Industry Canada has maintained its authority to approve or veto all transfers of wireless-spectrum licences. In January, Ontario Superior Court Justice Frank Newbould laid out a formal process for the sale of the carrier, which included a 14-day notice period for Industry Canada with regard to any potential deal and another 10 days for Industry Canada and other parties to comment. Jean-Francois Mezei, a Montreal-area telecom consultant with Vaxination Informatique, said in a phone interview Tuesday that the legal process laid out by the court seems to give the judge, rather than Industry Canada, final say on any sale. “ not invited to decide, it’s invited to comment,” said Mezei. “If the court decides that it has the power, it’s a given that it will give to Telus.” Mezei said that bankruptcy rules give judges broad discretion in determining such sales. He added that, in the Mobilicity case, it appears Industry Canada, which has jurisdiction over wireless communications and spectrum via the Telecommunications Act and the Radiocommunication Act, will be treated as one party in a complicated transaction. The $350-million deal is less than the $380-million price agreed on by the companies last year before that deal was blocked by the federal government in June. Mobilicity, which had 250,000 subscribers at the time the first deal with Telus was announced in May 2013, has around 165,000 wireless subscribers now, according the news release that announced the deal last Thursday. In thwarting the first takeover and another attempt in October, Industry Canada cited the spectrum-transfer rules that prevented Mobilicity’s AWS spectrum from being transferred to an incumbent player for five years after its purchase. Mobilicity spent $243.2 million in the 2008 Industry Canada auction for AWS licences, picking up spectrum in southern and eastern Ontario as well as cities such as Edmonton, Calgary and Vancouver. Licences for that spectrum were issued in February 2009, which set the expiry for the moratorium to Feb. 10 this year. "We will not approve spectrum-transfer requests that decrease competition in our wireless sector," said Jake Enwright, Industry Minister James Moore’s press secretary, in an email on Tuesday morning. Industry Canada said in a January court filing that it had never told incumbent carriers they would be able to obtain the spectrum even after the expiration of moratoriums. The department was responding to an application filed in July 2013 by Telus seeking a judicial review of spectrum-transfer regulations following the collapse of the first deal with Mobilicity. This latest attempt by Telus to purchase the carrier is “dead on arrival,” said Scotiabank analyst Jeff Fan. In a Monday research note, Fan said Industry Canada “would not budge” on the spectrum-transfer rules, preferring instead to see a non-incumbent step up. “We believe TELUS is hoping that the bankruptcy court will overrule Industry Canada,” he said. “We believe Industry Canada is determined to push the value of Wind and Mobilicity down to a point that a will step forward and consolidate the licenses and assets.” Barclay’s analyst Philip Huang said in a Sunday research note that the “regulatory hurdle remains very high” for a Telus buyout of Mobilicity. “The government remains very committed to carving out resources to support a fourth wireless player,” he wrote. A successful deal would give Telus valuable AWS spectrum, Huang wrote, and the company has “little to lose” from another attempt. Canaccord Genuity analyst Dvai Ghose said in a Sunday research note that Industry Canada approval for the deal could open the floodgates to a number of spectrum transfers to which the government has signalled its opposition. “It could set a precedent whereby WIND could also sell to an incumbent; Shaw could sell its AWS spectrum in the West to Rogers as proposed; Videotron could sell its AWS spectrum in Toronto to Rogers as has also been proposed; and perhaps Videotron could sell its 700 MHz spectrum to an incumbent,” he said. “Consequently, we expect Industry Canada to reject this proposal.” Canaccord Genuity acted as a financial adviser to the sale, according to court documents. Telus would not comment on the proposed sale, referring all questions to Mobilicity. William Aziz, Mobilicity's chief restructuring officer, did not respond to requests for comment on Tuesday. In the Thursday night release, Aziz said the potential sale “is a good outcome from Mobilicity's restructuring efforts and extensive sales process.” “I am confident the transaction will serve the best interests of Mobilicity's customers and employees," he added. According to new legal documents related to Mobilicity’s court-monitored restructuring, bankruptcy monitor Ernst & Young, considers a sale to Telus “the only alternative likely to provide them any meaningful recovery.” Mezei pointed out the bankruptcy court’s mandate is to provide the greatest return to stakeholders. “There’s no logical reason to reject Telus’ offer and go with a lower-priced one,” he said. Mezei said the announced price, which is $30 million less than the first proposal despite a major fall in subscribers, reflects Telus’ interest in acquiring the Mobilicity spectrum and preventing Videotron from gaining a foothold in the Canadian wireless market outside of Quebec. “I don’t think Telus is interested in the subscriber base,” Mezei said. “The reason Telus is overpaying for this is to make it harder for Videotron to come in. It’s an advantage for Telus to get because it prevents the entry of a real competitor, if they fear Videotron.” In the recent 700 MHz auction, Videotron picked up LTE-ready spectrum channels across the country. The technology for the 700 MHz spectrum remains data-only for now, leaving the carrier at a disadvantage if it hopes to build a national wireless customer base, Mezei said. “If Videotron hadn’t gone to the rest of Canada, Telus wouldn’t have been so interested in Mobilicity,” he said. Telus received approval for four AWS spectrum licence transfers following its purchase of Public Mobile in November 2013. Public Mobile customers were told in March that they would need to buy new phones as Telus shuts down the smaller carrier’s network. “Whether they honour and grandfather the plans, that remains to be seen,” Mezei said. Mobilicity said in the press release announcing the deal that being purchased by Telus would not affect competition in the Canadian wireless industry. It said an acquisition by Telus would allow most of its subscribers to migrate seamlessly to Telus’ advanced HSPA network, would not affect its staffing levels for the foreseeable future and would provide continuity for other companies with which it does business. The company said it would ask for court approval Wednesday to hold a meeting of unsecured creditors to seek approval of the transaction the following Wednesday, April 30, as well as ask for another extension of its creditor protection until June 30. Mobilicity said in the release that five companies submitted acquisition bids by the deadline of Dec. 16 that were accepted. In January, a Globe and Mail report pointed to Telus and Quebecor as the leading bidders for the bankrupt carrier, with Wind — the only company to publicly disclose it was a bidder — and Cogeco Cable Inc. submitting bids that were “not considered to be serious.” The January article said that Telus’ bid was worth $350 million, while Quebecor was offering about $200 million. Mezei said Mobilicity has few choices, with the most likely being the Telus sale or liquidation. “The outcome of this is Mobilicity shuts down,” he said. “Whatever comes out of it, Mobilicity shuts down.” — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Telus-Mobilicity deal to test government powers: expert

News | April 22, 2014

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