Federal telecom regulators have demanded assurances that celluar startup Globalive Wireless is truly independent from Orascom Telecom, the Egyptian –based conglomerate that is providing virtually all of the company’s financing.
The Canadian-Radio Television and Telecommunications, which has to be convinced that any telecom carrier is under Canadian control before allowing it to go into business, fired tough questions Wednesday at Globalive officials at the start of a two-day hearing into the wireless company’s structure.
“Where is the heart of this beast?” asked commission chairman Konrad von Finckenstein looking at the two holding companies that control Globalive Wireless. “Who is going to run this show [and] at what board level?”
Later, he said he was “stunned” by a clause in one agreement that gives Orascom the right to force the Canadian majority owners to sell the company if Orascom wants to get out of the business. The net effect is there’s a “sword of Damocles” over the majority owners, he said. “I must say this clause gives me problems.”
And he said it is “illogical” that Globalive Wireless’s chief executive officer will be on a committee to chose the independent chair of the holding company, and could be the “swing vote” if there was a tie between the two Canadian and two Orascom directors.
The Toronto-based company hopes to start service this year under the Wind Mobile brand, licenced from Orascom.
But it has to quell doubts it is completely independent as required under Canadian law from Orascom, which has loaned it $508 million to pay for the $442 million in licences it won at last year’s AWS spectrum auction, and $66 million in bridge financing for operating costs.
“Orascom is currently acting as banker, financier and in some respects as an indirect operator” of Globalive Wireless, said CRTC vice-chair Leonard Katz. “Is Globalive Wireless financially independent or not?”
Von Finckenstein wondered too, noting that Orascom insists on keeping 51 per cent of the equity of the holding companies, even if new Canadian shareholders are found. From Cairo by videolink, Orascom chairman and CEO Naguib Sawiris replied that this is an accounting issue. But von Finckenstein said it “also has the effect it will always be your company. You will always own the biggest slice of it.”
As expected, incumbent wireless carriers, who have already publicly complained that the well-funded would-be competitor is offside the law, took their own shots.
Taking the toughest line, Mirko Bibic, Bell Canada’s senior vice-president of regulatory affairs, said that Globalive Wireless’ structure is so offside the foreign ownership requirements that its is “irretrievably broken.” The commission should refuse to allow it to go into business, he said, and the spectrum it won at last year’s auction covering most of the country “is to be forfeited and returned to Industry Canada.”
Michael Ryan, a lawyer for Telus and author of text on Canadian telecom law, said that company documents show “Globalive and its Canadian investors have yielded a degree of influence over Globalive’s affairs [to Orascom] that have compromised management’s ability to act independently.” Therefore, he said “it is ineligible to operate as a telecommunications common carrier.”
Ken Engelhart, Rogers Communications’ senior vice-president of regulatory affairs, complained Globalive is dependent on Orascom’s brand and technical expertise. “The pervasiveness of the levers granted Orascom in the debt agreements, the shareholders agreements, the technology agreement and the trade market [brand name] agreement is to Rogers’ knowledge unprecedented in the context of companies that have been considered to be Canadian owned and controlled,” he said.
For their part, Globalive Wireless management and its leading Canadian shareholder, Anthony Lacavera, fought back, accusing the incumbents of trying to stop competition.
Lacavera and Ken Campbell, Globalive Wireless’ chief executive officer, said operational decisions of the cellular company are being made by Canadian management. While Orascom has a technical services agreement with Globalive to advise on buying equipment and network design, it is not an exclusive deal, Campbell said.
The company has 260 staffers now, he said, and is hiring 300 people for its stores and Peterborough, Ont. call center.
Hank Invten, a lawyer for one of the Globalive holding companies, argued that having a CEO play a role in selecting board members is “quite common” in the telecommunications industry. (Von Finckenstein suggested the company may want to rethink that arrangement.)
Invten also said the CRTC has adopted rulings that minority shareholders, like Orascom, can influence a company’s decisions. But there is no evidence, he suggested that Orascom dominates Globalive’s decisions.
From Cairo, Sawiris told the commission that “I knew from day one that Orascom Telecom cannot control Globalive. I told our legal and finance team from the outset to work with Tony and his team to fully comply with your ownership and control rules.”
In fact, he said, if it wasn’t for Canadian ownership restrictions he’d want a bigger ownership stake. “We are long-termers. We don’t go into countries and sell out and make money and leave … It’s not about control.” In fact he said doubted any other investor would have risked what he called a “very dangerous situation” in Canada, in which incumbents have great market penetration.
Globalive CEO Campbell “does everything,” but Orascom has buying leverage, he said. Recently, he added, “one [unnamed] Canadian competitor threatened a supplier to block our handsets” if it sold to Globalive. “If we didn’t have the same leverage on that supplier around the world, Globalive would be at a very risky situation.”
And Lacavera reminded the commission that Industry Canada has already agreed that Globalive meets foreign ownership laws.
As for the massive financing from Orascom, Lacavera said that he tried many Canadian and foreign sources for investment and failed to find anyone else. An Iceland-based telecom investor pulled out just as last year’s spectrum auction started, leaving only Orascom as his partner. He wants to broaden the ownership, but today, with financial markets unsteady, it is impossible to find investors, he said.
Sawiris said that Orascom doesn’t want to be a bank. Perhaps leaning on the commission, he said that without final regulatory approval from the CRTC any lender “needs to be half as crazy as we are” to lend to a startup fighting against incumbents.
But he added, “I strongly believe that final regulatory clearance [from the CRTC], improved markets and the imminent launch of the Globalive service will provide a good platform for raising additional money.
Anticipating the commission’s unease at the amount of Orascom money it is relying on, Globalive officials asked that the CRTC not set a time limit on when Orascom’s investment had to be watered down. Any deadline would affect negotiations with an investor, they said.
Orascom is an international telecom giant. Directly or through affiliates it has 100 million subscribers in Italy, Greece, Algeria, Namibia, Burundi, Egypt, Bangladesh, Pakistan, Central African Republic, Tunisia, Zimbabwe and North Korea, so it has tremendous buying power.
A number of Globalive's arguments were vigorously challenged by the incumbents.
Telus’ Ryan noted that other cellular startups – Quebecor’s Videotron, Public Mobile and DAVE Wireless are finalizing launch plans – haven’t had trouble finding capital. He wondered if Globalive and Orascom are being flexible enough for investors.
Globalive argued it hasn’t opened its doors yet, so it’s too early to determine the proper time to determine Orascom’s influence. But Bell, Rogers and Telus noted that Globalive has already picked its brand and network provider, suggesting the damage has been done.
Pointing to the fact that Orascom can veto any purchases over $5 million, any borrowings over $20 million and any changes to the wireless company’s business if it affects 10 per cent of its revenues, the incumbents say Globalive management is impotent.
Orascom’s massive financing alone makes Bell, Rogers and Telus suspicious. “There is not a single significant strategic or operational decision that Globalive can make without Orascom’s permission,” said Rogers’ Englehart.
One of the key issues is the complex financing and ownership structure created by Orascom and Lacavera. Lacavera is owner of Globalive Communications, which runs a number of telecom businesses, including Yak Communications, an Internet and long-distance dial-around provider.
To meet Canadian foreign ownership laws, Globalive Wireless is held by Globalive Canada Holdings Corp. (GCHC), in which Orascom Telecom Holding Canada Ltd. has a one-third voting share. The other two-thirds are held by Globalive Investment Holdings Corp., of which Orascom has 32 per cent and Lacavera has 66 per cent through his AAL Telecom Holdings.
Globalive Wireless isn’t the only thing GCHC owns. It also holds Lacavera’s Yak and other telecom interests, which have been folded into a company called Globalive Telecom Holdings. The two divisions are to be run separately.
But as a result of having two holding companies, the incumbents argue that comined Orascom holds 65 per cent of the wireless company’s equity, way offside. Globalive counters that the arithmetic is illogical.
The incumbents point out that while Orascom has only one-third of the votes in the holding companies, it has over 40 per cent of the directors. (In one company, three of seven directors, in another two of five.)
It’s the corporate structure that von Finckenstein found confusing. It was explained that GCHC is to be the vehicle for attracting investment, while GIHC is the holding company. But critics suggest it’s a way to get around the ownership rules.
Perhaps in a bid to defuse potential clashes with the commission, at the outset of his submission Lacavera announced changes to the structure and certain agreements. Because he has an advisory contract with Globalive Wireless, until Wednesday he was listed only as a director of the holding companies, although he’s the major Canadian shareholder. Yesterday he announced that he will be the chairman of all three companies. He also said that he will drop AAL Telecom Holding’s right to pull out of Globalive Wireless after one year, and its right to force Orascom to buy its share after a year, called a “put.” Instead, the put won’t be exercisable for three years.
Despit the tough questions from the commission, after the session Lacavera was confident. "Our launch will proceed on schedule." he said through a company spokesman." We already have Industry Canada's approval and have made changes to our already-approved structure that we are confident will satisfy the CRTC."
The hearing goes behind closed doors Thursday, where the commission will grill Globalive on confidential business documents. It will resume next week for closing arguments.