Here comes another piece of good news for Canada's Big Three wireless carriers: they will face one fewer competitor in a pivotal spectrum auction.
Private equity firm Birch Hill Equity Partners Management Inc. has withdrawn its application to bid in next January's auction of the 700 megahertz frequency – the most valuable wireless licences that have ever come up for bidding in Canadian history.
That disclosure by Industry Canada is not only spurring speculation about Birch Hill's motives for bailing out, but also fuelling fresh doubts about which new entrants will actually show up when bidding begins on Jan. 14, 2014.
The development is a boon to Rogers Communications Inc., BCE Inc. and Telus Corp. The three incumbent carriers will likely shell out less for some of the prized 700 MHz spectrum, which they plan to use to add more juice to their networks.
For the federal government, which is determined to spur more competition in the $20-billion wireless market, Birch Hill's withdrawal is yet another setback.
With the applicant list now down to 14, questions are being raised about how much money Ottawa can reasonably expect to raise from the auction – after delaying it twice – and more broadly, whether its pro-competition policies will work.
Toronto-based Birch Hill, which applied to bid as BH Wave Acquisition Corp., put down its initial deposit roughly a month ago. And while it will get its money back, its reasons for bowing out remain unclear.
"While we did not expect Birch Hill to be a serious bidder, we wonder why it would put down an initial deposit and then decide not to bid," wrote analyst Dvai Ghose of Canaccord Genuity in a note to clients on Wednesday.
"Perhaps it is because Birch Hill had no way of financing auction payments, or perhaps Birch Hill realized that the Government is unlikely to allow new entrant buyers to flip spectrum to the incumbents anytime soon."
Or perhaps it was the auction's anti-collusion rules that turned Birch Hill off. Registered bidders are not allowed to hold talks about mergers and acquisitions until after final payments for 700 MHz spectrum are made – likely next spring.
In addition to eyeing participation in the 700 MHz auction, Birch Hill was in talks this summer to acquire Wind Mobile and possibly Mobilicity – but its plans hinged on securing a network sharing agreement with Rogers. But the deal was never formally announced.
After Verizon Communications Inc. nixed its plans for a Canadian expansion, Birch Hill and another private equity firm, The Catalyst Capital Group Inc., appeared to become Ottawa's best hope of having at least four carriers in every region of the country.
But with the futures of independent carriers like Wind, Mobilicity and Public Mobile still up in the air; it is unclear how Ottawa's objective will be achieved in the key markets of Ontario, Alberta and British Columbia.
Catalyst, which is also a major bondholder in Mobilicity, has not revealed its plans for the auction or beyond. It, too, was interested in a potential takeover of Wind, according to sources.
Industry Canada clarified this week that it forbids two registered bidders to hold discussions about becoming "associated entities in the context of the 700 MHz auction." Any applicant that violates this rule risks getting kicked out.
However, it is permissible for two auction applicants to hold talks about existing or future network sharing agreements that do not involve 700 MHz spectrum.
Industry Canada will publish a list of provisionally qualified bidders on Oct. 22.
"So who, apart from the national and regional incumbents, Videotron and EastLink, is actually going to bid for much 700 MHz spectrum?" said Mr. Ghose.
"While Birch Hill's exit is not overly material," he added, "it reinforces the incumbents' strength, lack of interest in new entrants and the fact that auction proceeds may be very disappointing for the Government and encouraging for the incumbents."
Rita Trichur