Telus received federal approval late Wednesday to buy Public Mobile, primarily a talk-and-text service with 280,000 customers in Ontario and Quebec.
Federal Industry Minister James Moore approved the transfer of Public Mobile's spectrum licence to Vancouver-based Telus, saying the transaction doesn't affect competition in the wireless industry.
Canaccord Genuity analyst Dvai Ghose called the deal a "surprise move," saying it eliminates a small competitor for Telus, Rogers and Bell, as well as for Wind Mobile, Mobilicity and Quebecor's Videotron.
"It also highlights that the new entrants have, by and large, failed," Ghose said in a research note.
Industry Canada said Public Mobile's spectrum — radio waves needed to operate cellphone networks — isn't used for the latest smartphones and data plans. However, Telus says such spectrum can now be deployed for next generation networks.
Public Mobile bought its spectrum in 2008 and was never under any restrictions that would have prevented it from being sold.
Wind Mobile and Mobilicity bought a different kind of spectrum that the government does not appear to want sold to Rogers (TSX:RCI.B), Bell (TSX:BCE) or Telus (TSX:T) when their spectrum licences expire next year.
"We will not approve any spectrum transfer request that decreases competition in our wireless sector to the detriment of consumers," Moore said in a statement.
All three startups launched in recent years have made only a dent in attracting consumers away from the big three carriers, who have about 26 million customers between them.
Telus tried to buy struggling Mobilicity last spring, but the $380-million deal was rejected by Industry Canada. Both Mobilicity and Wind Mobile are still seeking buyers.
Financial terms of the Public Mobile deal were not disclosed.
Public Mobile's customers will be migrated to Telus's fast network that uses Long-Term Evolution (LTE) technology.
Telus said Public Mobile's G-block spectrum can be used for LTE networks and for some smartphones, such as the new iPhone 5s and 5c.
"We look forward to the successful completion of this transaction, and migrating Public Mobile's customers onto Telus' world-class 4G LTE network while putting their spectrum to good use for millions of customers across Canada," Eros Spadotto, executive vice-president of technology strategy and operations, said in a statement.
Canaccord Genuity's Ghose said if the transaction is approved by the Competition Bureau there will still be four wireless competitors in Quebec — Bell, Rogers, Telus and Quebecor's Videotron and five players in the Ontario market — the Big Three plus Wind Mobile and Mobilicity.
The federal government said its goal is to have four wireless competitors in every region of the country to encourage more competition and better prices for consumers.
Telus said proceeds from the deal will be used to pay Public Mobile's debt and equity investors and its employees will have the possibility of working at Telus.
Public Mobile CEO Alek Krstajic said the decision was the right one, following a strategic review.
"This transaction is the best option to guarantee continued quality service for our customers and to maximize the opportunity for our employees and investors," Krstajic said in a statement.
"Given that Public Mobile only paid $52 million for this spectrum and has tax losses, we believe that this is a small and low-risk investment for Telus," Ghose said.
Last June, Public Mobile got financial backing from Toronto's Thomvest Seed Capital Inc., owned by Peter Thomson, who is a co-chairman of Woodbridge Co. Ltd., the Thomson family's investment company which has controlling stakes in Thomson Reuters and The Globe and Mail.
The Thomson family, headed by Peter's older brother David, is Canada's wealthiest family.
Public Mobile also received backing at the time from New York private equity firm, Cartesian Capital. Both private equity firms have been invested in Public Mobile since 2009.
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