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A Telus store is seen on Bloor Street West in Toronto on Aug. 15, 2013.

Galit Rodan/The Canadian Press

The Conservative government has been ordered to participate in mediation over the proposed sale of Mobilicity – and the transfer of its spectrum – to Telus Corp.

The move puts additional pressure on Ottawa to approve a $350-million deal to acquire the struggling small carrier. The government has threatened to cut Telus out of an upcoming auction of publicly owned spectrum if the carrier persists in its attempts to acquire Mobilicity, The Globe and Mail has reported. Mobilicity's parent company, Data & Audio Visual Enterprises Holdings Inc., announced the court-ordered mediation in a statement on Friday, saying that former Ontario Chief Justice Warren Winkler would lead it.

Bill Aziz, Mobilicity's chief restructuring officer, urged Ottawa to relent for the good of the carrier's employees and dealership investors.

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"This isn't about Telus. This is about Mobilicity … We have a company that has some spectrum. It has tried very hard to deploy in the marketplace and spent a lot of money trying to do so and it's acted in good faith and the moratorium for a sale was over on February 12, 2014," he said.

Industry Minister James Moore, who is trying to foster more competition in the wireless sector by attracting new entrants, declined comment as tensions rise over Telus's third attempt to swallow Mobilicity.

While Ottawa has agreed to attend mediation, federal government sources said that it will never consent to the sale, as that spectrum has been earmarked for new entrants, rather than major incumbents. Ottawa has already vetoed Telus's two previous attempts at an acquisition. Conservative officials feel that James Moore, as Industry Minister, has unfettered discretion on allocating spectrum, sources say.

The federal government would appeal any ruling that approved the Telus-Mobilicity transaction, sources say, and proceed with the threat it made in comments published in The Globe and Mail Friday. Should Telus tie Mobilicity up in legal battles, Ottawa will redesign an April, 2015, auction of 2,500 Mhz frequencies to effectively bar the Vancouver company from acquiring any of this spectrum.

Telus declined comment on the threat Friday, opting not to add more fuel to the controversy.

Ottawa's warning is also meant to send a message to the other two major incumbents, Bell and Rogers, government sources say.

It doesn't want any of the Big Three incumbents thinking they can buy spectrum allocated for new entrants, such as the assets currently held by Shaw Communications.

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The federal government's end game is to create a situation where struggling small players Wind and Mobilicity merge and their spectrum gets rolled

along with other spectrum into a vehicle that's sufficiently enticing for a well-capitalized new player.

Ottawa isn't divulging which investors it has in mind, though.

Mobilicity's Mr. Aziz says Telus's bid "was the only acceptable and executable offer that we received."

He said if Telus is not allowed to buy his company, "the downside is Mobilicity could go out of business and be shuttered and then all those people will lose their jobs. The people who are dealers who invested in this will very likely have difficulty sustaining their businesses."

Canaccord Genuity Corp. analyst Dvai Ghose said in a note to clients that he finds Ottawa's threat bizarre because Mobilicity has said its only move is to sell to Telus and Ottawa has offered no alternative.

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He suggested that Ottawa is concerned the bankruptcy judge may approve Mobilicity's sale to Telus, "causing further embarrassment" for the government. "Nonetheless, we do not see how constantly changing rules including set aside provisions and bidding eligibility helps attract capital for new entrants," Mr. Ghose wrote.

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