CRTC hearing may delay cellular startup debut

How much control does Egyptian-based conglomerate Orascom Telecom have over one of Canada’s soon-to-start national cellular companies?

That’s the key question the Canadian Radio-television and Telecommunications Commission (CRTC) will be asked when a two-day public hearing starts Wednesday in Gatineau, Que. into the ownership and control of Toronto-based Globalive Wireless Management Corp.

Although Industry Canada has approved Globalive Wireless’ ownership structure, the CRTC has a say as the telecom regulator and may impose conditions that will delay the company’s scheduled debut later this year. Its decision will go a long way to determining when or whether the three incumbent wireless companies – Bell Canada, Rogers Communications and Telus Corp. – will see significant competition after eight new entrants spent more than $2 billion buying spectrum in an auction last year.

Four of the new licence holders are now preparing to launch initial service in a few months, including Globalive Wireless Management Corp., which will go to market under the Wind Mobile brand, licenced from Orascom.

Headed by CEO Naguib Sawiris, Orascom has advanced $508 million to Globalive Wireless to pay for its $442 million in licences plus $66 million in startup costs – virtually its entire budget. It also has struck a technical services contract to advise Globalive on network build and suppliers, and gained board representation on a number of Globalive-releated companies.

All of which has led the incumbents to claim Orascom is pulling the strings of Globalive in violation of the foreign ownership requirements in the Telecommunications Act. Industry Canada did its review behind closed doors, but the CRTC forced Globalive to publicly reveal all of the agreements between it and its partners – which amounts to over 1,000 pages – although.for competitive reasons certain numbers have been blanked out.

For the incumbents, the documents were enlightening.

“I don’t know how the commission could possibly approve that deal now with that kind of capital structure,” Michael Hennessy, Telus’ senior vice-president of regulatory and government affairs said in an interview. “It would be unprecedented.”

Rogers could have gone along with the Industry Canada ruling, said Ken Engelhart, the company’s vice-president of regulatory affairs, “but when we read the documents we were just amazed. There has never been an approval like this before. The rules have always been [a telecom company] could have a major foreign shareholder, a major foreign debt holder, a major foreign strategic partner. But you could never have the same person being all three. Orascom has 65 per cent of the equity, 100 per cent of the debt and they provide the brand and all the strategic and technical skills.”

“If this is OK there’s no point having any more hearings. They should all get rubber-stamped because if this is Canadian owned and controlled, what isn’t?”
In its written pre-hearing statement to the commission, Bell says things are so bad the commission can’t merely modify Globalive’s structure as it did in 2008 when dealing with the proposed privatization of BCE. [Ultimately BCE abandoned the privatization.]

These allegations are vehemently denied by Anthony Lacavera, whose company won the licences and who is now co-chairman of the holding company that oversees Globalive Wireless. “I don’t want to get into speculating about why the incumbents have been so vocal,” he said in an interview, “but I would say we are going to be their first real competition in over a decade.”

“The incumbents have legitimate concerns with the amount of capital that’s been raised,” he acknowledged. “However all of those incumbents have had varying degrees of foreign debt and equity in their capital structures over the past three to five years.”

“We have to be given the latitude to raise financing through the lifecycle of our business on commercial terms. We cannot have restrictions placed on our capital structure which may inhibit our ability to compete in the market. The incumbents don’t have such restrictions.”

He added that Globalive Wireless also has to be able to leverage the buying power of Orascom, which directly or through affiliates has 100 million subscribers in Italy, Greece, Algeria, Namibia, Burundi, Egypt, Bangladesh, Pakistan, Central African Republic, Tunisia, Zimbabwe and North Korea.

The hearing will take place over two days. Wednesday, and possibly part of Thursday, will be open with Globalive and the incumbents making presentaions. Then the commission will go behind closed doors with Globalive for a look at confidential documents.

The arguments that both sides will make has already been outlined in written submissions to the commission, which are public.

At the heart of the hearing is Globalive Wireless’ ownership structure, which Lacavera admits is “not plain vanilla.” The wireless company is held by Globalive Canada Holdings Corp.(GCHC), of which Orascom Telecom Holding Canada Ltd., an Ontario unit of Orascom, has a 33 per cent voting share. It also has a 32 per cent share of GCHC’s parent, Globalive Investment Holdings Corp.

The other two thirds of Globalive Investments and GCHC is controlled by Lacavera through his AAL Telecom Holdings.

The construction of the boards of the two holding companies has Bell, Rogers and Telus suspicious. The Telecommunications Act says not less than eighty per cent of the members of the board of directors of telecom corporations have to be individual Canadians; that Canadians have to beneficially own, directly or indirectly not less than eighty per cent of the corporation’s voting shares issued and outstanding; and that the corporation is not controlled by persons that are not Canadians.

Aside from the deep debt, which the incumbents allege puts Globalive Wireless’ under Orascom’s thumb, they also note that Orascom has the right to veto any capital spending over $5 million. In addition, they note that GCHC has seven directors, its parent, Globalive Investments has only five – two chosen by Orascom, two by AAL and an independent chair who can have two votes. “Never seen that before,” says Rogers’ Engelhart.

Orascom Telecom Holding Canada also has 47 per cent of Globalive Investment’s equity. This has lead to some interesting arguments. Rogers and Bell, for example, calculate that Orascom indirectly holds a 54.68 per cent interest in the voting shares of Globalive Wireless by combining its interests in the two parent companies.

“These arguments make no sense from a corporate law, control, or mathematical Perspectives,” retorts Globalive Wireless in its pre-hearing rebuttal. “It is not possible to ‘cumulate’ minority voting interests in two different companies.”

While Lacavera has been Globalive Wireless spokesman since last summer’s auction, he has become the company’s chairman, with Ken Campbell taking over as company president. The Globalive documents show that Lacavera can’t be an employee of Globalive Wireless because he has a management contract to provide services to Wind Mobile.

The documents also show that GCHC separately holds 100 per cent of Globalive’s other assets – its Yak Communications long distance business, Internet business and other telecom companies – that Lacavera has been running for 10 years. These are bundled into a company called Globalive Telecom Holdings Corp., on whose board sits one Orascom executive.

Why the hullabaloo over something Industry Canada has already blessed? There’s a lot at stake in the billion-dollar Canadian wireless industry. According to a report this month from Convergence Consulting of Toronto, the new wireless entrants are going to cut into the incumbents’ profits. “Without aggressive pricing new entrants, especially non-cable, will have a difficult time gaining traction,” the report says in part.

Today the incumbents have the entire market. Five year from now, the report predicts, the new entrants’ will have 24 per cent of Canadian wireless subscribers, or about 7.8 million people.

The incumbents may have other reasons for being aggressive at the hearings. For example, Telus’ Hennessy said one reason the telco didn’t go along with Industry Canada is that “we’ve been put through the wringer several times on foreign ownership issues.” Early in the decade, when it took almost two years for Telus to get spectrum licences from an early auction because in part because its chairman at the time lived in Washington State and in part because BCTel, the company’s forerunner, was 50.1 per cent owned by GTE Corp. of the U.S.

To make sure it gets its points across Telus is flying in Michael Ryan, an acknowledged expert on regulatory law, who heads the telecommunications practice of a British law firm. Ryan is author of a Canadian law text on telecom law.

For its part, Rogers has gone so far as to demand the CRTC hold hearings into the ownership and control of DAVE Wireless, the other new potential national wireless operator, and new regional operator Public Mobile, which has licences for Ontario and Quebec. [This month the commission replied that its policy to have a flexible approach.]

However the fireworks look, Mark Goldberg, a Thornhill, Ont., -based consultant to telecom operators, doubts the incumbents are trying to subvert Wind Mobile’s launch. What they really want, he said, is assurance that the same financial rules that govern Globalive Wireless are available for them. “The main reason the whole thing is public was to ensure that all industry know which corporate structures are acceptable to provide certainty to the financial and legal communities,” he said.

For if the rules are changed then international wireless carriers who have invested in companies in other countries but avoided Canada – think of Germany’s Deutsche Telecom or Britain’s Vodafone – may be lured here to partner with the incumbents.

To try and not hold up Globalive’s launch, the CRTC has promised a ruling within 30 days.