Telus Corp. might have been hoping that when the Harper government approved it buying startup Public Mobile last week that would open the door to its purchase of financially struggling startup Mobilicity.

If so, it was wrong.

According to the Globe and Mail, Ottawa has for the second time turned down the Toronto-based carrier’s attempt to be rescued by Telus. Mobilicity had sought an opinion from Industry Canada on transferring its AWS spectrum to an incumbent carrier because of its shaky financial state. It has been given until Dec. 20 to restructure and stave off legal action from creditors.

However, the government is sticking to its policy that the five-year ban on  new carriers transferring their AWS spectrum to an incumbent cannot be waived, no matter how dire the finances of a company. In Mobilicity’s case, the five year ban expires in February. However, it is unknown if even after that the government will relent, given its goal of having more competition in the cellular business.

Public Mobile is different. Like Mobilicity, it bought frequencies in the 2008 spectrum auction. However, it bought the less valuable PCS spectrum in the G-block, on which there was no ban on being sold to an incumbent carrier.

When Industry Minister James Moore announced last week it had approved the Public Mobile sale to Telus he pointed said that the transaction was given the green light because it only involved G-block spectrum, and not frequencies in the AWS band which are needed for the latest smart phones.

In a note to investors this morning, research director Dvai Ghose of Canaccord Genuity said that if Moore is to be taken literally Telus may still get its hands on Mobilicity after February. In fact, he observed, the new Apple iPhone 5C and 5S can run on Public Mobile’s G-block spectrum.

He also noted that while the government’s goal is to have four wireless competitors in every region of the country, if Telus got hold of Mobilicity and Public Mobile there would still be lots of competition for the three biggest incumbent carriers (Bell Mobility, Rogers Communications and Telus) – Eastlink in the Maritimes, Videotron in Quebec, Wind Mobile in Ontario, B.C. and Alberta. In Saskatchewan SaskTel is the incumbent, while Manitoba Telecom Services (MTS) is the incumbent in Manitoba.

Some industry observers feel an ideal answer would be for Mobilicity to be bought by Wind. The carriers both have AWS spectrum, and both operate in three provinces. However, it takes two to make a deal.

But, he warned, if the Ottawa continues to refuse to allow Mobilicity to be bought by an incumbent “surely Mobilicity will just cease to operate.”

If that happens its spectrum reverts to Industry Canada. “Surely this was not the aim of the 2008 set aside,” Ghose asks, referring to the AWS spectrum that was designated for new entrants only to get more competition. “Regardless, we believe that either the government will be forced to change its mind and Mobilicity will be acquired by Telus [TSX:T], or it will cease to operate – either scenario is positive for the incumbents and negative for the government.

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