Which white knight will rescue Globalive Wireless Management Inc.?
With the startup’s launch stalled by the Canadian Radio-television and Telecommunications Commission (CRTC) over its debt to partner Egyptian-based Orascom Telecom, someone will have to step forward to save the company.
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Interviews with industry analysts and competitors suggest the company has only two alternatives: Intervention by the Harper government, or discovering a Canadian investor to put a significant and satisfactory amount of money into the venture.
There are many candidates on a list of saviours, including
–Industry Minister Tony Clement. Should Globalive appeal to the cabinet to overturn the commission’s ruling, he’ll have to recommend a course of action.
Clement can make it easy: Find a compelling reason, overturn the CRTC ruling and tell the commission to reconsider in light of the new findings. But industry observers wonder if Clement would torpedo the ruling of an independent agency.
Another choice is asking Parliament to quickly change the foreign ownership laws. This is stickier for two reasons: First, any change requires the agreement of at least one of the opposition parties. Second, Clement has to decide how to change the law.
As it stands now, Industry Canada and the CRTC do separate assessments of foreign ownership. Although the guidelines are the same, that’s how Industry Canada could grant Globalive its spectrum licence but the CRTC could deny it a carrier licence.
Critics have long complained that Canada is the only country in the world that has two laws controlling foreign ownership. Until Globalive came along, that wasn’t a problem.
The question Clement faces is which law’s standard should be eliminated? Or should there be a new, less restrictive test that would encourage more foreign ownership in the telecom sector. Would such a test arouse nationalist sentiment and make quick legislative change impossible? Perhaps not: Few raised objections when Industry Canada approved the depth of Orascom’s debt and equity investment in Globalive. On the other hand, only bureaucrats had seen the extent of the deal;
The pressure is on Clement to find a solution: His department approved Globalive as a bidder in last year’s auction. His department approved Globalive’s spectrum licences.
–Shaw Communications CEO and vice-chair Jim Shaw. His cable company, which won licences in last year’s AWS spectrum auction, has put off getting into the wireless business for the time being. Investing in Globalive would get him into the action fast.
Shaw’s spectrum is largely in Western Canada. Pairing it with Globalive’s Ontario and Atlantic spectrum would make a contender strong enough to face incumbents Bell Canada Enterprises Inc., Rogers Communications and Telus Corp.
Last month Shaw, which just extended its reach into southern Ontario, reported that for the fiscal year that ended Aug. 31 it had $504 million in cash;
–Bragg Group chair John Bragg. The privately-held company’s Bragg Communications Inc. cable division operates in all 10 provinces, although mainly in smaller cities. It also won spectrum last year, largely in the Maritimes, and like Shaw has decided to sit things out. The same advantages Shaw would see apply to Bragg ;
–Manitoba Telecom Services Inc. CEO Pierre Blouin. Another spectrum winner, MTS has something Globalive could use — an extensive fibre optic network across the country. MTS’ Allstream enterprise division already has a presence in all provinces. A share of Globalive would make a good match.
However, MTS has a deal with Rogers to co-build a new HSPA wireless network in Manitoba, which also gives it the right to sell wireless to business outside the province using Rogers’ wireless network. It isn’t known if that deal has a clause forbidding MTS from buying into another wireless company. Also, would MTS give up a deal with Rogers, an established company, to go with a startup?
–Quebecor Inc. chair Pierre Karl Peladeau. His Quebec-based Videotron cable division will soon begin using the spectrum it won last year covering all of Quebec. It also won spectrum covering Toronto, the company’s first communications outside its home province. Wireless gives Videotron a treasured triple play of cable, home phone and wireless offerings, but not outside Quebec. So does it want to ally itself with Globalive?
There are other investors with money, but few can offer a combination of cash and telecom expertise to counter the finding that Orascom dominates Globalive.
There are unknowns: The CRTC’s main objection to Globalive Wireless’ structure is that Orascom not only holds most of the shareholder equity, it also holds all of its $508 million debt. If the government doesn’t change the law, how much lower does that debt have to be to satisfy the commission? Do Canadians have to own most of the debt, or could foreigners share it as long as Orascom doesn’t have the biggest slice?
Injecting one of these telecom companies into Globalive won’t be easy, either. Orascom has protected its investment through an intricate shareholders agreement that gives it certain rights and a technical service agreement. Orascom admits the TSA is the main way it will get its money back.
Competitors expect to eventually face Globalive Wireless. “I think there are solutions that Globalive has, and they have to look at what they want to do,” said Dave Dobbin, president of another wireless startup, Toronto-based Data & Audio-Visual Enterprises Wireless Inc. Although it doesn’t have a carrier licence yet, it plans to launch service early next year.
“I think Orascom will bring in a different Canadian partner,” said Ken Englehart, Rogers’ senior vice-president of regulatory affairs.
Similarly, the TD Newcrest division of TD Securities (a unit of the TD Bank) wrote in a research note Friday that there are ways in which Globalive Wireless can fix its capital structure. But, it added, “we view these fixes as difficult and time consuming.”
On the other hand, having tasted victory before the CRTC the incumbents may try to finish off Globalive. In a research note issued Friday, Newcrest analysts said Bell, Rogers and Telus will likely ask Industry Canada to review its decision to okay Globalive’s foreign ownership structure. If the department reverses its stand and agreed with the commission, Globalive Wireless would have to return its licences.
As for the funding, Newcrest analysts noted that Orascom forecast that Globalive will need $1.4 billion to take advantage of all of the spectrum it has across the country. Of that, Orascom has promised US$700 million, while wireless equipment vendors will put in the equivalent of some US$250 million. That leaves a gap of at least $375 million, and maybe more.
If the current Globalive investors allow new equity to come in at a material discount to book value, Newcrest writes, then perhaps funding could be found — but that would put Orascom in a loss before the wireless company opens its doors.
“The bottom line,” the report says, “is that this capital restructuring is likely to require Globalive/Wind Mobile to reduce the scope of its business plan in order to reduce capital.”
That means launching in fewer cities. It may also mean not getting into price wars with incumbents that would cut into profits.
To some the situation isn’t as bad as it seems. Lawrence Surtees, vice-president of telecom research at IDC Canada who has covered the industry for years as a reporter and analyst, thinks the CRTC over-reached in its decision. Acknowledging he isn’t a lawyer, he believes the startup has good grounds for appeal.
An appeal or negotiations with any potential investor or lender will take time, and Globalive has some 500 managers, technicians and support staff. How long can it pay them without revenue? However, Iain Grant, managing director of SeaBoard Group, a Montreal telecommunications consultancy, suggested that despite Globalive’s talk that it is near launch, taking a few months more to build out its network and hone procedures is a good idea. In fact, he suggested, management would welcome it.