Mobilicity strikes deal to be sold to Telus

Canada’s startup wireless companies, formed to fight incumbent carriers and bring more competition for customers, continues to be shaken following news that Mobilicity has struck a deal to be bought by Telus Corp.

Telus made the announcement Thursday morning, saying that if it gets approval from the Harper government and debt holders Mobilicity will be bought for $380 million.

“A concern for our customers and employees led us to approach Telus, which has a reputation for a strong customer focus, as evidenced by their industry leading client loyalty,” said Mobilicity president Stewart Lyons. “I am confident Telus will look after our employees and our customers, mitigating any disruption to their service, while offering the best outcome for all stakeholders.”

William Aziz, Mobilicity’s chief restructuring officer said in a statement that the carrier “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.”

The entire purchase price will be used to satisfy Mobilicity’s secured and unsecured debt, the statement said.
Mobilicity faces a key vote by debt holders on May 21 on a debt restructuring.
The announcement ratchets up pressure on the Harper government to do more to help the struggling startups or risk seeing three of the new entrants that came into being in 2009 and 2010 be swallowed up by incumbents. Wind Mobile’s main financial backer, VimpleCom Ltd., is in the middle of converting its equity position into majority control and either take over the company or sell it. Public Mobile is reportedly up for sale.
Wind and Mobilicity face limitations on being sold to incumbents because of the type of spectrum they bought in 2008. Because of the value of that spectrum, Industry Canada forbids new entrants from selling AWS spectrum to incumbents until the fall of 2014. Public Mobile bought less valuable PCS spectrum that has no restrictions, so it can sell to an incumbent at any time. 
The other new entrants that seem in good shape are both owned by cable companies: Quebecor Inc.’s Videotron, which launched service with AWS spectrum in 2010, and Eastlink, which launched service this year. Wind, Mobilicity and Public Mobile are standalone carriers.
The federal government’s position on AWS spectrum sales by new entrants isn’t clear. Earlier this year Industry Minister Christian Paradis said he is reviewing a deal struck by Rogers Communications Inc. for an option to buy the unused spectrum bought in 2008 by Shaw Communications when the 2014 limit expires.
Ottawa has done at least one thing to help the new entrants by allowing carriers with less than 10 per cent of the market to be controlled by foreign companies. So far, however, only Wind has seen a possible benefit. Meanwhile a June 11 deadline is looming for all carriers to put money down for participation in the November auction of highly-prized spectrum in the 700 MHz range. Ottawa has structured the auction to ensure that at least four carriers — three incumbents and one new entrant — win frequencies in every region in that auction.
Wind, Mobilicity and Public Mobile face conflicting needs — they aren’t growing as fast as they had hoped and are racking up debt. At the same time they need more spectrum to compete against the incumbents, particularly if they want to match the higher speed data LTE service offered by incumbents.  
Ottawa may not want to see Wind, Mobilicity or Public Mobile not participate in the November auction for obvious reasons — fewer bidders means less revenue from the auction. One alternative is to delay the auction, unless the Harper government gives up and lets the new entrants disappear.
To put the $380 million valuation in perspective, Mobilicity paid just over $243 million for its spectrum in 2008.
Mobilicity operates in Vancouver, Calgary, Edmonton, Ottawa and Toronto and has about 250,000 subscribers. By comparison, Telus has about 7.7 million wireless subscribers.
It has an HSPA network built and operated by Ericsson Canada.
As part of the deal with Telus, Mobilicity has started proceedings in Ontario’s Superior Court to approving a plan of arrangement under the Canadian Business Corporations Act, which specifies that approval is needed by debt holders.
This morning’s statement says Telus has support agreements with “a significant number” of those debt holders to support the deal.
Industry and financial analysts have long said that Telus, Rogers and Bell Mobility are too big for Wind, Mobilicity and Public Mobile to each survive on their own. It has been argued from the start that at least they should have agreed to share a network. Instead each built their own.
On the other hand, the incumbents haven’t made it easy for new competitors. Under Industry Canada rules, the incumbents have to allow new entrants to share their antenna towers. However, the new entrants complain that there are always excuses why it doesn’t happen.
“This isn’t the end of the story,” said Iain Grant, managing director of the SeaBoard Group, a Montreal-based telecommunications consultancy, “this is merely the first serious bid. We expect others will be looking at this bid and wondering if they too will step up.”
Catalyst Capital Group, which says it is Mobilicity’s largest secured debt holder, may be one of them. In a statement the private equity firm which specializes in  investing in distressed companies, said it doesn’t want to buy the carrier outright. What it does want to do is “offer our restructuring and telecommunications industry expertise to invest in the right player, provided the policy and regulatory environments are appropriate.”
The statement also says Catalyst “is open to any deal that fully honours its rights” as a debt holder. 

One question, Grant added, is whether Telus will get Mobilicity’s spectrum, which most observers assume is the most important part of the startup. As noted earlier, Mobilicity can’t sell the spectrum until next year.

Rogers has protected itself in the proposed Shaw deal which is structured as an option – essentially it has the first right to buy Shaw’s spectrum when the deadline expires. The news release announcing the Telus deal makes no mention of the spectrum, Grant notes; instead it asks for speedy approval.

Grant says Telus may have a cunning strategy. If Industry Canada approves the deal this year (and to do so it would have to grant Telus an exception to the sale embargo on the Mobilicity licence), it gets the startup’s spectrum and customers. Perhaps the government would attach a condition that Mobilicity has to run as an independent division to maintain competition.

But, Grant speculates, Ottawa could approve the sale of everything except the spectrum. In that case Industry Canada would take back the frequencies, and Telus would demand all or part of the $243 million Mobilicity paid Ottawa in 2008.

For its part, under this scenario, Industry Canada could resell that spectrum. Or, Grant says, the government could parcel out the former Mobilicity spectrum to Wind and Public Mobile to help them. In the early years of cellular, Rogers and Bell got spectrum without paying for it to get the industry going.

However, in an interview David Fuller, Telus’s chief marketing manager, said the deal is contingent on the transfer of the spectrum – no spectrum, no deal.

Telus has asked the government to approve the deal “on an expedited basis,” he said given that Mobilicity faces “likely bankruptcy.”

Mark Goldberg, a Thornhill, Ont.-based telecommunications consultant, said that if Mobilicity is forced to close 250,000 subscribers would have to scramble to find a new provider.

He also said the sale of Mobilicity should have little impact on cellular competition here. He said that organizations and consumers still can pick from the three national incumbents, their budget divisions (Chatr and Fido, owned by Rogers; Solo and Virgin, owned by Bell; and Koodo, owned by Telus), Public Mobile in Toronto, Ottawa and Montreal, Wind in three provinces, Videotron in Quebec, Eastlink in Nova Scotia; MTS in Manitoba, SaskTel in Saskatchewan and several virtual carriers who lease spectrum from others like PC Mobile.

Fido may be owned by Rogers, he added, but its sales people fight for customers with its parent’s stores.