Ottawa’s auction rules put wireless upstarts in tight spot

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Struggling wireless companies are facing a new obstacle to their long-term survival – an obscure clause in Ottawa's rules for the upcoming auction of spectrum.

Mobile carriers have until June 11 to put down deposits to secure their spots as bidders in the sale of the coveted 700 megahertz frequency, scheduled for November. The spectrum is considered crucial for wireless players to build faster LTE networks that are proving popular with smartphone-using consumers.

But the government's rules state that once a company submits an application to bid, it is prohibited from having any discussions about a potential sale or merger with other registered bidders until final payments for spectrum are made, which is likely to be in early 2014. That's a problem for three new-entrant carriers, Wind Mobile, Mobilicity and Public Mobile, all of which are in need of money and are now looking for buyers or partners.

Any freeze on potential merger-and-acquisition activity could deal a blow to the government's goal of ensuring sustainable competition with at least four carriers in every regional market.

If that trio of upstarts signs up as bidders, they run the risk of alienating potential buyers, including incumbent carriers like Rogers Communications Inc., BCE Inc. and Telus Corp. Additionally, new entrants would also be barred from pursuing a merger among themselves until the auction is long over – an outcome that would drive up their own costs to bid.

Conversely, if they sit out the auction in order to preserve discussions with potential acquirers, they risk damaging the value of their businesses by not acquiring 700 MHz spectrum. That particular band of radio waves is in high demand because it is particularly suited to facilitate mobile data traffic – so the licences are key to building networks that can attract higher-end smartphone customers.

It is also unclear whether Ottawa plans to introduce new rules that would restrict the Big Three from buying new entrants. This confluence of factors is raising the spectre that the government may have to delay the auction.

"If you are looking at selling, you are taking an axe to the parties you can talk to [by registering for the auction]," said a source familiar with the situation. "And you are eliminating the incumbents [as a potential buyer of an an upstart] because there is no question that they will register."

The government's rules were created to prevent collusion among bidders. Specifically, the policy states: "Any discussions regarding an addition or a significant change of beneficial ownership, from the receipt deadline for applications until the deadline for the final payment on winning bids, involving two bidders or any of their affiliates or associates, would fall into the area of prohibited discussions and would be considered contrary to the auction rules."

Although deposits are refundable, any bidder that withdraws would face scrutiny over the reason for bailing out.

Industry Canada did not immediately respond to a request seeking comment on Tuesday, while Wind, Mobilicity and Public Mobile declined to comment. All three of those carriers, however, have asked Ottawa for more help. Mobilicity has requested assistance in raising capital and Public Mobile has asked for a later deadline for applications and deposits.

Earlier this year, Telus began talks to acquire Mobilicity. Rogers is considered a potential bidder for Wind Mobile, while BCE's chief executive officer said last week that his company would also be interested in bidding for new entrant assets if Ottawa permits mergers in the sector.

"It is very, very unclear as to what the government does here. Clearly, every new entrant is waiting for the opportunity to sell to an incumbent. The government is looking at that," said Dvai Ghose, a telecom analyst at Canaccord Genuity.

He said the government needs to clarify the rules on industry mergers before June 11. "And even if it does, unless it completely blocks any mergers and acquisitions at all – even between new entrants, which is ludicrous – how can you really have an auction in November? It is a very difficult thing."