The backers of financially troubled startup carrier Mobilicity have been unable to strike a deal with its creditors.

The company said late Monday that its parent company, Data & Audio Visual Enterprise Holdings Inc., has been given protection from creditors under the federal Companies Creditors Arrangement Act to give it time to restructure as it faced an operating loss of $74 million last year and total long term debt of $364 million.

At the same time a company spokesman said Mobilicity  has also asked Industry Canada for permission to complete “going concern” transaction to see the carrier continue as part of another business. According to the National Post, this refers to a possible new buyer.

The paper quoted president Stewart Lyons saying that if the transaction is approved there will be a seamless transition to the new owner.

The court did give the carrier, which has about 250,000 subscribers, access to up to $30 million in support from existing holders of its notes.

It’s business as usual for subscribers, Mobilicity stressed in a press release. There are no changes to the carrier’s network and it continues to honour prepayment plans.

However, this is the second time it has turned to the courts for protection, which won’t reassure subscribers. In the spring it asked for protection after one creditor with a significant number of its bonds, the Catalyst Capital Group, started a court application objecting to Mobilicity’s plan to issue up to $43.25 million in second lien notes in three tranches, or groups.

Mobilicity hoped the first protection order would give it time to either be bought by Telus Corp. for $380 million or to restructure. However, over the summer the federal government quashed that deal because it violated Mobilicity’s licence rules that forbid the transferring of its spectrum to an incumbent before next February 2014.

Today’s second protection order suggests Mobilicity has been unable to find a savior since then.

In theory, the government might have a change of heart when the licence transfer expires. However, the government now says it has the right to review any spectrum transfers, leading to speculation that to protect small new carriers (like Mobilicity, Wind Mobile and Public Mobile) it will refuse to allow incumbents to buy them out.

In a research note issued Monday, Dvai Ghose, director of research at Canaccord Genuity, said the real question now is whether any incumbent can save the carrier.

Given the Government’s commitment to having four wireless carriers in every market, Ghose assumes the answer is no. The government could throw Mobilicity a lifeline by extending the ban, he said. But that could lead to legal action from Mobilicity’s bond holders against Ottawa.

Meanwhile, there is uncertainty over whether Wind Mobile can find a financier to take over the share of its major investor, VimpelCom Ltd. of Amsterdam. “While a private equity firm or consortium could acquire Mobilicity and Wind, we wonder if private equity really wants to finance 700 MHz spectrum purchases, network expansion and LTE upgrades given WIND and Mobilicity’s challenges to date …

“In our view, Mobilicity and Wind’s spectrum will probably end up in the hands of the incumbents over time.

If so it would end the Harper government’s 2007 plan to inject competition into the cellular industry. Ghose has already come to that conclusion.

The fact that no foreign carriers have put down deposits for the 700 MHz auction “suggests to us that government’s wireless policy has failed,” he wrote.

There is the possibility Ottawa will more tightly regulate the wireless industry by setting monthly subscriber rates, Ghose notes that to do so it would take time to set the rules.

While in recent newspaper ads Ottawa says Canadians pay “some of the highest wireless rates in the developed world,” Ghose says a recent CRTC report says the rates aren’t particularly high.

The Canadian behind Mobilicity is Toronto entrepreneur John Bitove, a founder of the Toronto Raptors basketball team. After one season his partner bought he and his family out. After that he bought the Canadian franchises for a number of fast food outlets including Kentucky Fried Chicken, Taco Bell and Pizza Hut.

Bitove partnered with two U.S.-based venture capital companies with experience in telecom startups to get into the wireless business in 2008, spending $243 million for AWS spectrum covering urban areas of the country.

Using a network built and managed by Ericsson Canada, Mobilicity started service in May, 2010 in Toronto which spread to Calgary, Edmonton, Victoria, Vancouver and Ottawa.

But, as Wind Mobile and Public Mobile have found, building a cellular network from scratch, facing determined competitors in Bell, Rogers and Telus and having to find money to participate in the 700 MHz auction barely five years after spending hundreds of millions in the last one isn’t easy.

With Mobilicity in financial trouble, it was no surprise the company didn’t put down a five per cent deposit earlier in September for the 700 MHz auction.  However, Bitove is there through a company called Feenix Wireless Inc. He has until Oct. 29 to come up with the other 95 per cent of the deposit to officially be in the auction.

If Mobilicity can straighten out its finances, it could obtain 700 MHz spectrum through Feenix.

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