Small wireless carrier Mobilicity is embarking on a “restructuring process” in a bid to remain viable nearly three years after first launching service.
The wireless firm, legally known as Data & Audio-Visual Enterprises Holdings Inc., said Friday that it has obtained two orders from the Ontario Superior Court of Justice allowing it to pursue “strategic options,” including a possible sale or recapitalization plan to clean up its balance sheet.
Mobilicity’s transition plan raises new questions about the company’s long-term future as it struggles to secure more financing ahead of a government auction of wireless spectrum in November. In particular, the planned restructuring could pave the way for Telus Corp. to eventually acquire the financially strapped carrier – an outcome that is bound to raise the ire of consumer groups, while dealing a blow to the federal government’s goal of maintaining competition in the $19-billion wireless sector.
Its restructuring could also complicate a high-stakes legal battle with one of its senior bond holders, Catalyst Capital Group Inc., which is also eyeing control of the carrier. Catalyst said late Friday that it "intends to take an active role in the restructuring" to ensure stakeholder rights are respected and that Mobilicity remains a viable mobile carrier.
“We’re working on a bunch of things to sustain the long-term viability of the business, look after our customers and employees,” executive chairman John Bitove said in an e-mailed statement.
Specifically, the pair of court orders obtained on Friday authorizes Mobilicity to ask its debtholders to vote on two plans of arrangement pursuant to the Canada Business Corporations Act.
The votes will take place at meetings on May 21, the company said.
The first is an “acquisition plan” that “provides a structure for an as yet to be determined purchaser to acquire all of the outstanding shares of Mobilicity.” The money from any potential sale would be used to repay all of the company’s outstanding first- and second-lien debt and its outstanding unsecured debt securities.
The second plan is an alternative arrangement – a “recapitalization” proposal that would be triggered if a sale of the company cannot be completed. Under such a scenario, a recapitalization would reorganize the company’s “share capital,” facilitate the repayment of certain second-lien notes and provide the carrier with badly needed cash so it can continue to provide service to its customers.
“These two plans are mutually exclusive, though both plans are being pursued in parallel so that one of the two plans can be implemented on an expedited timeline,” the company said in a release. “If both plans are approved and the sale plan cannot be completed on the terms contemplated, then the recapitalization plan would be engaged.”
Telus is still seen as a potential buyer of Mobilicity. As first reported in The Globe and Mail earlier this month, the Vancouver-based wireless incumbent has been in talks to buy Mobilicity since at least February. A potential deal could value Mobilicity between $350-million and $400-million, according to sources. Telus has declined comment.
“With Industry Canada reviewing spectrum licence transfer rules, it is highly unlikely that any incumbent would step forward at this stage to acquire Mobilicity,” wrote Jeff Fan, a telecom analyst with Scotia Capital Inc., in a note on Friday. “And while non-incumbents may step forward, we believe the price non-incumbents will be willing to pay is well below the incumbents and therefore, Mobilicity will likely move forward with Plan 1 (Recap) for the time being before considering its next move.”
“As we have written … if Industry Canada denies licence transfers by Mobilicity (or Wind) to the incumbents in March, 2014, Mobilicity (and Wind) may have no choice but to take legal actions against the government, which will create a messy situation.”
Separately, Mobilicity is embroiled in a legal battle with one of its bondholders in an Ontario court.
Catalyst, a fund company run by distressed-debt investor Newton Glassman, controls more than 25 per cent of Mobilicity’s senior secured notes. It has launched a legal application to quash a $75-million lending agreement that gave Mobilicity a key financial lifeline earlier this year. A hearing in that matter has been scheduled for late May.
"The Catalyst Capital Group is encouraged to see that today’s court orders maintain the parties’ substantive rights," the company said in a statement late Friday.
"However, Catalyst is concerned that it is hard to see how the proposed plans would provide the capital required for Mobilicity to grow its business, acquire spectrum or provide viable, sustainable services to Canadian consumers. In fact, the conditions on the proposals may result in the opposite outcome."
Among its concerns, Catalyst suggested that second-lien noteholders could be hurt by Mobilicity's financing.
"Catalyst is very concerned that neither the new financing nor the proposed plans will benefit creditors or result in a successful sale of Mobilicity, which, according to Mobilicity’s court papers, has apparently been attempted for many months," the company added.
The court has already heard that Mobilicity has about $450-million worth of debt and is thirsting for additional financing.
Catalyst tried to engage Mobilicity in alternate financing discussions in 2012 but talks broke down early this year, court heard during a hearing last month. A lawyer representing the unnamed purchasers of Mobilicity’s new notes accused Catalyst of using the legal proceeding as a “leverage play” to gain control of the company.
Sources have since told The Globe and Mail that Mr. Glassman is also eyeing rival new entrant Wind Mobile, and is seeking to consolidate it with Mobilicity to create a fourth national wireless carrier.
For its part, the federal government declined comment on Mobilicity's restructuring plans, saying only that any transactions that require regulatory approval would be considered upon submission.
"Industry Canada is responsible for the review of spectrum licence transfers, and the Competition Bureau for mergers between competitors ... We are currently consulting on the issue of spectrum licence transfer requests, and remain committed to promoting at least four wireless competitors in each region," Industry Canada said in an e-mailed statement to the Globe.