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A person holds a mobile phone while walking by a Mobilicity store.Michelle Siu/The Globe and Mail

The federal government isn't giving up on its efforts to see a fourth wireless carrier in every regional market, rejecting Telus Corp.'s controversial bid to buy struggling upstart Mobilicity, but leaving the door wide open to industry consolidation down the road.

Although Industry Minister Christian Paradis said Tuesday that he is killing the Telus acquisition to encourage competition, he was careful not to issue a permanent ban on big carriers acquiring new entrants once a federal prohibition on such deals expires in 2014. "The intent is to make sure that we have a fourth player. Then after that we have to follow the evolution of the market," Mr. Paradis told journalists in Ottawa.

Ottawa had feared that if it allowed Telus to swallow Mobilicity now, two other small carriers would soon fall into the arms of other incumbents, such as Rogers and BCE. The public repudiation of the $380-million Telus deal and the two-month postponement of a key spectrum auction have allowed Ottawa to buy more time for its fourth-carrier policy to gain hold. And by delivering what appeared, at first blush, to be a warning shot at the Big Three, the Conservatives tried to score more political points with consumers a day after the CRTC's wireless code spelled the end of three-year contracts.

Indeed, just hours after Mr. Paradis made the announcement, the Tories sent an e-mail to a list of subscribers that encouraged them to donate to the party, saying it was "standing up for wireless consumers" against "the big telecommunications companies."

"Our Conservative government is taking action to reduce your cell phone bill – and we wanted to make sure you have heard about it," Conservative Party of Canada executive director Dan Hilton says in the e-mail.

The longer-term future of the four-carrier policy may hinge on the fate of Wind Mobile, which is also in play. If Wind, the largest of the three upstarts, survives as an independent competitor in the key markets of Ontario, Alberta and British Columbia, Ottawa would have achieved its four-carrier objective regardless of what happens to Mobilicity.

That's because other carriers, including SaskTel, Manitoba Telecom Services, Quebecor and Eastlink, already fulfill that pivotal role in other regional markets across the country.

If Ottawa manages to secure Wind as the linchpin in its wireless policy, it could ultimately justify the sale of Mobilicity to Telus, while also allowing Rogers to eventually buy unused wireless licences from Shaw Communications Inc. and Quebecor's Vidéotron unit while avoiding the spectre of "diminished competition" – a key criterion under which such deals will be judged, Mr. Paradis said.

"I'm sending here the message to the market to say that we won't [allow a sale] prior to this five years, and after that, beyond that, we will go with this policy framework," Mr. Paradis said.

As for Telus and Mobilicity, both companies were assessing next steps. "The Telus transaction, as of today, is denied. And we'll look at our options and Mobilicity will look at their options and we'll proceed from there," said Ted Woodhead, senior vice-president of regulatory affairs at Telus.

Those possibilities include Telus providing bridge funding as it works out a new deal for Mobilicity that would take effect in February – when that small carrier is free to pursue a sale to an incumbent and when Wind's fate is clear.

Telus could also walk away, which could prompt Mobilicity to seek new funding from its existing lenders or from one of its major bondholders (private equity firm Catalyst Capital).

It could also file for bankruptcy protection under the Companies' Creditors Arrangement Act – a move that could increase the likelihood of an eventual merger with Wind. Greg MacDonald, an analyst at Macquarie Capital Markets Canada Ltd., wrote in an e-mail that a viable fourth carrier is now more likely, and that bankruptcy protection could allow bondholders to unlock potential new-entrant merger scenarios. That is, in my view, what Industry Canada wants."

Wind CEO Anthony Lacavera said he hasn't looked at Mobilicity for some time because his firm would have been outbid by incumbents, but that he remains open to resuming merger talks.

In the interim, Mr. Paradis's decision to maintain Mobilicity's existing licence conditions by not extending or shortening the five-year standstill period has the effect of preserving the value of its spectrum, despite its financial woes, since those assets remain liquid and could be sold as of February. "To say Mobilicity will be bankrupt because of the decision this morning, I think it is not a foregone conclusion," Mr. Paradis said.

Some analysts said Ottawa's new policy on spectrum transfers – which will be laid out in greater detail in the coming weeks – casts uncertainty over the proposed Rogers deals. But Mr. Paradis offered no specifics on those "option" agreements because he said they had not been presented to him yet. For its part, Rogers plans to file the paperwork next year and argues that those deals would allow it to better compete with rivals BCE and Telus, which share a network.

With a file from reporter Steven Chase in Ottawa