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A cell tower disguised as a bell tower.


Mobilicity, one of the small wireless companies struggling to build a lasting rival to the big cellphone providers, is grappling with a new challenge as one of Canada's most prominent distressed-debt investors tries to halt a recent financing deal.

Catalyst Capital Group Inc., a fund company run by investor Newton Glassman, has amassed a position in Mobilicity's bonds and has filed in an Ontario court to have a judge throw out a lending agreement that gave the company much-needed cash. The deal, announced Feb. 12, allows the wireless company the ability to draw as much as $75-million. It is believed that Catalyst objects to it on the basis that it harms the interests of senior debt holders. Mr. Glassman declined to comment.

In its five years on the scene, Mobilicity has confronted huge competitors, byzantine government rules and billion-dollar spectrum auctions in an attempt to build a viable business. The arrival of Catalyst heralds another fight for the company and illustrates the difficult landscape for new wireless entrants, which have been unable to gain significant market share against the three major incumbents: Rogers Communications Inc., Telus Corp. and BCE Inc.

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Last week, Industry Minister Christian Paradis issued new rules on matters such as roaming and sharing cell towers, in a bid to help companies like Mobilicity and Wind become viable. But it's not clear how much they will help the financially-strapped firms.

Catalyst specializes in buying debt and using that as a way to gain control or influence over companies when they are restructured or refinanced. The firm has used that strategy in situations such as the revamps of Stelco Inc. and CanWest Global Communications. Catalyst has parlayed that into big returns for those who invest in its funds. In CanWest, for example, the firm reportedly booked a 48-per-cent return.

For all the troubles and costs that come with fighting established companies such as BCE and Telus while constructing an expensive network, there are significant assets at Mobilicity to which a manager like Mr. Glassman would be attracted.

Mobilicity, which is based in Vaughan, Ont. and operates under the legal name Data & Audio-Visual Enterprises Wireless Inc., has a block of valuable spectrum, a base of subscribers, and a shot at emerging from a gaggle of upstarts as the fourth competitor in Canadian wireless.

Building a business in wireless involves constantly finding capital. In 2011, Mobilicity sold $215-million of bonds. Last month, needing more money, the wireless company announced another financing of as much as $75-million, of which $15-million has been drawn.

That new financing required consent from existing creditors who own the debt Mobilicity sold in 2011. Catalyst accumulated a significant chunk of the company's senior bonds and opposed the transaction, but enough other creditors assented that the deal could go ahead. Now, Mr. Glassman's firm is turning to the courts to try to stop the transaction.

Catalyst's application, filed on Feb. 25, asks the Ontario Superior Court of Justice for "an order setting aside the new notes," as well as an order "rectifying the adverse impacts" from the financing on Catalyst. The application does not make clear what those adverse impacts are.

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In response to questions about the court action, Mobilicity said in a statement that "like any early stage telecom company, Mobilicity has been actively reviewing multiple options. Mobilicity is focused on the service it provides its customers and was very pleased earlier this month to have closed a financing with investors familiar with the company. The financing will be used to assist with the company's continuing operational plans."

Mobilicity could use cash beyond making interest payments. The government is getting set for another round of spectrum auctions designed to try to encourage other companies in the wireless business to compete with the big three. So far, Mobilicity has not committed to entering the auction, and senior executives have said it is not clear that the company can raise the money needed to get involved.

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