05/16/2013 10:21 EDT | Updated 07/16/2013 05:12 EDT

Telus agrees to take over Mobilicity for $380M

Telus has agreed to purchase wireless upstart and rival Mobilicity for $380 million.

"Mobilicity approached Telus, and the two options they were evaluating here were either a purchase by Telus or an impending failure," Dave Fuller, chief marketing officer for Telus, told CBC News. "This result is in the best interest of their customers.

"Telus can now offer those customers service continuity and access to an extensive network that offers a world-class 4G network to 99 per cent of Canadians. It also removes the risk and uncertainty that a bankruptcy would pose to those customers and also to the 150 employees that Mobilicity has that now will be integrated into the Telus employee base overall."

Mobilicity launched in 2009 as an alternative to incumbent telecom players following a government auction of new spectrum and had grown to more than 250,000 customers.

Wireless spectrum is the specific band of electromagnetic space that allows devices to transmit signals. It is the network over which cellphones and other wireless devices are able to communicate.

Another round of spectrum is set to be auctioned off, and new entrants such as Mobilicity have expressed concern about their ability to finance themselves to properly compete with their much larger rivals and buy a slice of the upcoming 700 Mhz spectrum.

Formerly known as Data & Audio-Visual Enterprises Wireless Inc., Mobilicity offers wireless services in Toronto, Ottawa, Calgary, Edmonton and Vancouver.

Acquisition 'best alternative'

Several weeks ago, Mobilicity and Telus entered into high-level acquisition discussions.

"Mobilicity has been losing a significant amount of money every month," Mobilicity's chief restructuring officer, William Aziz, said in a press release Thursday. "The financial strength of Telus will allow the business to be continued in a way that will benefit customers and employees. An acquisition by Telus is the best alternative for Mobilicity."

The agreement has numerous hurdles to overcome. It needs regulatory approval from the Competition Bureau and Industry Canada and must also be OK'd by Mobilicity's debt holders and the court from which Mobilicity obtained permision to pursue options to avoid bankruptcy, including a possible sale.

Telus and Mobilicity say the entire purchase price will be used to satisfy Mobilicity's secured and unsecured debt.

No price hikes in immediate future: Telus

Telus's Fuller said Thursday that if the transaction goes through, it will be "business as usual" for Mobilicity customers in the initial months but that he could not say whether prices would change in the future.

"This is an incredibly competitive environment, and mobility space pricing is changing on a regular basis," Fuller said, although he stressed that wireless prices have been moving down, not up.

But Steve Anderson, who heads the group, which advocates for more choice in the telecommunications industry, says it was a lack of competition that pushed Mobilicity out of the mobile space in the first place.

"There's three companies that control upwards of 94 per cent of the market; that's an uphill battle for any new entrant," he said, referring to Telus, Bell and Rogers, the country's three dominant telecommunications companies.

Level the playing field, urge advocates

Anderson said Canadians want to see a more level playing field in the wireless industry that would ensure that small independents can stay independent. He urged the government to be vigilant in overseeing the transfer of Mobilicty's assets to Telus.

"The assets Mobilicity is using were specifically set aside and provided at a premium to Mobilicity to set up a new independent offering, and those assets shouldn't be transferred to one of the incumbents," he said.

Telus has more than 7.7 million wireless customers across Canada, far in excess of Mobilicity's 250,000.

Dvai Ghose, managing director of Canaccord Genuity, says the deal could be very positive for Telus, if it can manoeuvre past the many hurdles.

Mobilicity paid $243 million for its current wireless spectrum, and Ghose estimates that the company has about $100 million worth of taxes write-offs that could be useful to Telus, making a $350-million price tag quite fair, even discounting the advantages of adding a quarter of a million new customers.

Customers could face phone disruption

The greater question is whether government policymakers, who have repeatedly expressed a strong interest in seeing increased competition in Canada's wireless industry, will allow an incumbent to swallow a smaller alternative.

"If it is not allowed to be sold, 250,000 customers could face service disruption, and employees could lose their jobs," Ghose said in a note to clients Thursday.

"If the government blocks the sale, we will be left asking who will finance these independent new entrants, especially if they can never be sold to the incumbents who are the only obvious buyers."

Industry Canada has said that spectrum set aside for small operators cannot be sold to established carriers for five years.

That's why telecom analyst Iain Grant says he believes Mobilicity's spectrum licence, which does not expire until next year, would be revoked if the deal is approved.

Public, Wind, could be next to go

Other wireless upstarts are also on the block.

Public Mobile is believed to be seeking a buyer or financial partner, and Wind Mobile's Dutch owner, Vimpelcom, has also suggested it would be interested in selling its stake in Wind to another buyer.

"Sadly, the wheels are coming off the industry minister's four-competitor model," said John Lawford, executive director and general counsel for the Public Interest Advocacy Centre, in a press release.

He was referring to Christian Paradis's attempts to revise the rules governing the wireless industry to ensure that there were at least four competing cellphone carriers in each region of the country.

Paradis made changes intended to force carriers to share cellphone towers and allow roaming on each other's networks and is in the process of tightening the restrictions on the transfer of wireless licences.

"Losing Mobilicity to Telus means we are that much closer to the big three being the only three wireless companies in Canada," Lawford said. "Consumers will face noticeably higher prices and less choice if only three major players control the market."