The Harper government’s refusal to allow financially troubled Mobilicity to sell its spectrum to incumbent carriers has landed it in court.
On Thursday Mobilicity’s parents and financial backers, Data and Audio-Visual Enterprises Investments Inc. (know as DAVE Investments), and U.S. fund Quadrangle Group LLC, filed a statement of claim in Ontario against Industry Canada demanding just over $1.2 billion in damages.
Mobilicity was one of a group of startups (including Wind Mobile, Quebecor and that Eastlink) that bought AWS frequencies in the 2008 spectrum auction. Their licences carried the stipulation that they couldn’t sell AWS spectrum for five years to incumbent carriers. For Mobilicity that term expired in February of this year. But after building a network in Vancouver, Calgary, Edmonton and Toronto Mobilicity attracted only about 250,000 subscribers.
In 2013 it struck a deal to sell itself to Telus when the five year ban expired. However then-Industry Minister Christian Paradis said the government wouldn’t allow the arrangement, despite the fact that Telus had court approval. His successor, James Moore, and Prime Minister Stephen Harper made it clear that the government’s new policy was that regardless of the licence provisions incumbent carriers will not be allowed to get their hands on the AWS spectrum of smaller carriers.
But any limits on a company to sell its assets also impacts its value.
Mobilicity has been struggling with its creditors to find a way to restructure.
If the court rules against the government it could have a serious impact on its ability to ensure more competition in the cellular industry.
The government’s intention is to make sure that incumbents don’t wipe out startups, as happened when Rogers Communications bought Microcell (which called itself Fido) in 2004 and Telus bought Clearnet in 2000. Over the following years Bell, Rogers and Telus have snared over 90 per cent of cellular subscribers.
In its statement of claim Quadrangle and DAVE — headed by Toronto entrepreneur John Bitove — are claiming damages for negligence, and or reckless misrepresentation, breach of contract, intentional interference with economic relations, abuse of public office and loss of reputation and goodwill.
The claims have not been proven in court. Industry Canada has 20 days to a statement of defence. although that can be extended.
Quadrangle and DAVE initially invested $300 million in the carrier. Of that $243 million went to buying spectrum.
In a comment this morning to investors Dvai Ghose, head of research at Canaccord Genuity, noted the entire circumstances raises questions about the ability of new carriers to attract investors. Without an obvious way to sell its assets, why would an investor put money into an existing or new entrant, he asked.
The one startup everyone is thinking about is Wind Mobile, whose lead investor and minority shareholder, VimpelCom Ltd. has temporarily stopped putting money into its Canadian division and is looking to sell it.
The Quadrangle/DAVE statement of claim has an interesting narrative of the background of the company, one that hasn’t yet been challenged by the government.
It alleges that in 2006 a then Industry Canada assistant deputy minister approached Bitove, head of the Sirius XM satellite radio service in Canada, former shareholder in the Toronto Raptors basketball team and who also owned a company with a string of franchised restaurants. The claim alleges Bitove was told that if he and his partners invested in a new carrier and built a network “it would prevent unfair competition from the incumbents and create market conditions in which new entrants could establish themselves and compete effectively.”
Industry Canada told Bitove that “the investment would not be lost as any spectrum licences could be transferred to an incumbent after five years,” the claim alleges. It also says Bitove was told that such transfers had always been approved in the past.
The claim also said Bitove was promised that while the new carriers were building out their fledgling networks the government would require incumbents to provide domestic roaming on their existing networks “at commercial rates and on reasonable terms,” and require incumbents to give the startups access to their cell towers “at reasonable rates and reasonable terms.” It also promised to enforce foreign telecom ownership rules, which require Canadian control.
But, the claim says, “Industry Canada ignored all its promises.”
Mobilicity was relatively quiet publicly over the years since its launch in May 2010, but Wind Mobile has been openly critical of the government’s decision to stay out of the negotiations between startups and incumbents over roaming and cell tower access. It wasn’t until late last year that Moore said the government would act on roaming complaints, and earlier this year the CRTC ruled that Rogers discriminated against startups.
The statement of claim also complains that the government “applied different ownership and control requirements to Wind.”
After the 2008 auction and before it opened for business, Wind was subject to a bitter public hearing before the CRTC on who really controlled the startup — its Canadian shareholders led by Toronto telecom entrepreneur Anthony Lacavera, or Orascom Telecom Holdings, which provided the overwhelming amount of its financing. The CRTC ruled Wind was foreign controlled, a decision that was over-ruled by the Harper cabinet.