05/16/2013 09:16 EDT | Updated 07/16/2013 05:12 EDT

Telus Mobilicity Buyout: $380 Million Deal Faces Regulatory Scrutiny


Telus says it has a $380-million deal to buy Mobilicity after it was approached by the indebted small telecom player looking for relief from its financial struggles.

But it remains unclear whether the government, which has sought to foster more competition in the wireless sector, will allow the sale to go ahead, given that it will mean one less option for consumers.

The companies say the deal is necessary to ensure that Mobilicity's 250,000 customers would continue to get service without disruption and that its employees will keep their jobs.

"The status quo isn't an option," said Telus spokesman Shawn Hall.

"This will ensure service is maintained for their customers, and preserve the jobs of their 150 employees."

Mobilicity was part of a wave of small wireless companies launched after the last wireless spectrum auction in Canada.The company had been losing money and launched a restructuring plan last month. The companies say the entire purchase price will be used to satisfy Mobilicity's secured and unsecured debt.

"Mobilicity has been losing a significant amount of money every month. 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," said William Aziz, Mobilicity's chief restructuring officer.

Mobilicity, along with other smaller wireless players like Wind Mobile and Public Mobile, has been struggling to gain market share against behemoths Bell, Telus and Rogers ever since the upstart companies entered the market nearly five years ago, offering Canadians looser contracts and discounted plans.

At this point, it's unclear whether the Competition Bureau and Industry Canada would block the sale, but both organizations said Thursday they will review it.

Industry Minister Christian Paradis suggested Thursday that the deal will be closely scrutinized due to its potential effects on competition in the sector.

"The agreement between Telus and Mobilicity is subject to regulatory approvals. The government will take the time required to review the proposal carefully," he said in a statement.

"Our government has taken significant action to promote competition in the wireless sector."

The companies had been keeping the government briefed on Mobilicity's financial hardships and their agreement "as things developed, said Telus' Chief Marketing Officer David Fuller.

"We believe the government has all the information necessary to make a considered decision in favour of this transaction," he told HuffPost in an email.

He dismissed criticism that Canada's wireless market is not competitive and said consumers will continue to have choice.

"In such a capital intensive industry having three large national players and more than a dozen smaller providers makes Canada one of the most competitive wireless industries in the developed world."

But consumer advocacy group said it is dismayed and believes the sale will diminish the check on the big three that other players provided.

"We think losing one of the our largest independent cell phone providers to the big three will lead to less choice and competition and likely raise Canada's already sky high cell phone prices," it said in an email.

"This takeover moves us in the wrong direction and we're hoping the government will stand up for Canadians and ensure we have independent affordable telecom options."

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The deal comes as no surprise to observers, as hints of takeover talks had recently emerged in media reports. But the real question is whether Canadian regulators will allow one of the new players to be bought up by an incumbent, said Dvai Ghose, a telecom analyst at Canaccord Genuity.

"On the one hand, we believe that the government does not want to see the death of new entrants and so may well block the deal," he said.

On the other hand, he notes that Mobilicity has tried and failed, and if it's not allowed to be sold, its 250,000 customers would lose service and its employees could lose their jobs.

"That being said, we assume that the government would rather have a non-incumbent third party acquire Mobilicity and so may ask Mobillcity to show through bankruptcy [proceedings] whether it can attract an independent buyer before begrudgingly allowing its sale to an incumbent."

The deal follows reports that fellow new entrant Wind Mobile had also put itself on the auction block.

Despite the government's best efforts to boost competition, market forces seem to be working against the new challengers,whose limited cash flow and the expensive infrastructure required to succeed have prevented them from expanding.

Wind Mobile CEO Anthony Lacavera has suggested a merger of the smaller three players would help them to survive. But with both Wind, the biggest of the three new entrants, and Public Mobile also reportedly on the auction block, it appears it is too late for such a move to create a viable fourth player.

Any potential buyer for small players – whether it be a domestic or foreign company – will have to face the glaring question of whether there is enough room in the Canadian market for four major wireless companies, which has not been possible even in the much larger U.S. market.

If the Mobilicity deal is allowed to go ahead, it could be very positive for the big three incumbent players, but if it is blocked by government, Canadians will be left wondering who will finance new entrants, if not the big three players, Ghose said.

"Perhaps the free market focused Conservative government will eventually come to the conclusion that the market could not support a fourth player in every region and so it should concentrate on managing the incumbents rather than artificially forcing competition," he wrote in a note.

"Given regulatory uncertainty, we wonder if this announcement will have much impact on incumbent wireless driven equities today. However, we do not see this as in any way negative for the incumbents, in particular Telus who may be allowed to buy Mobilicity just for its spectrum and tax loss value."

Telus is offering "a reasonable price" that really only includes value for Mobilicity's spectrum and tax losses, with no value placed on its network or customer base, Ghose said. He estimates that Mobilicity paid some $243 million for its advanced wireless services spectrum, a specific amount of band set aside for that carrier, and has more than $100 million in tax losses.

Telus, whose presence is most robust in Western Canada, requires more spectrum to better compete against its peers in central and eastern parts of the country. Acquiring Mobilicity's spectrum would help it do that, especially given that the government has said it will limit the amount major incumbents can purchase to one of four blocks of the most valuable spectrum.

The deal would give Telus more scarce AWS spectrum, the radio waves that facilitate cell service, which is controlled by the government. In 2008, Industry Canada cracked down on the amount available to incumbent players in order to encourage start-up carriers to enter the market and help open up competition.

It instituted a rule disallowing license transfer from the small telcos to the bigger ones illegal until 2014.

That hasn't stopped other attempts from the incumbents to garner more of that valuable spectrum to position them for the future, when more consumers are expected to use their mobile phones for more activities and demanding more broadband and higher speeds.

Rogers Communications Inc. announced earlier this year it has an option deal to buy Shaw's unused spectrum in 2014, but it's still unclear whether that deal will get the government green light.