A venture capital firm founded by Peter Thomson is teaming up with a New York private equity company to acquire Public Mobile, in a bet that the wireless startup can become a viable player in a crowded market.
The deal, which gives Mr. Thomson's Thomvest Seed Capital Inc. control of the company, adds a new wrinkle to the increasingly complex plot surrounding the Canadian wireless business. Public and two other independent companies – Wind Mobile and Mobilicity – launched wireless service in 2009 and 2010. But all three have struggled to gain a critical mass of subscribers. All are losing money and are, or were, for sale.
But Public Mobile's deal will see it receive a cash infusion from Thomvest and Cartesian Capital Group LLC to put it on sounder footing. The money positions the carrier to bid in the federal government's coming auction of the 700-megahertz frequency, which is a type of spectrum that will enable it to built an ultra-fast LTE (long-term evolution) network and offer an expanded lineup of smartphones.
"For the first time, you now have stability in one of the new entrants," said Alek Krstajic, chief executive officer of Public Mobile.
The federal government's policy is to ensure there are at least four wireless players in every region. This week, Industry Minister Christian Paradis rejected a proposed deal by Telus Corp. to buy Mobilicity. Government officials fear that allowing the deal will trigger a round of mergers that would see the new competitors swallowed up by Telus, BCE Inc. or Rogers Communications Inc., which collectively control more than 90 per cent of the Canadian wireless market.
Under Thursday's deal, Thomvest and Cartesian have promised to fund the company's development and in return get control. Other investors who backed the carrier for its launch, including a group of international private equity funds and the Ontario Municipal Employees Retirement System, will disappear from the picture. It's not clear what, if any, return on their investment they reaped.
"The way we really look at Public Mobile is as a legacy investment that doesn't fit our current investment strategy," said Paul Renaud, head of OMERS Private Equity.
The discount carrier currently offers service in the Toronto area and Montreal, but will likely pursue growth in other markets as well. Although Public Mobile CEO Mr. Krstajic argues that small carriers like Public, Mobilicity and Wind Mobile need to merge, he says that consolidation will not be led by any single carrier because of the costs.
"Look, none of us are going to be the consolidator – we are going to be consolidated ... The only people that can consolidate this industry are people with money," he said, adding that it would likely take a group of deep-pocketed investors. Now that Public is preparing to bid on 700-MHz licences, it is better positioned to be included in any merger.
Thomvest was not the only potential buyer interested in Public. There was one other bidder but the offer was not viable, Mr. Krstajic said. He declined to comment on the financial terms of the deal with Thomvest.
Thomvest is Mr. Thomson's investment vehicle in early-stage and growth-stage firms, in such areas as financial technology, security software and telecom. "Thomvest's strategy is to partner with entrepreneurs to build companies that transform their industries," Thomvest managing director Stefan Clulow said in a release.
Mr. Thomson is also co-chairman of Woodbridge Co. Ltd., the Thomson family's investment company, and a director of Thomson Reuters Corp. Woodbridge owns 85 per cent of The Globe and Mail. He could not be reached for comment.
"In our view, this is the beginning of a sustainable fourth carrier scenario as it will force Wind and Mobilicity to include Public in any merger discussions," Greg MacDonald, an analyst at Macquarie Capital Markets Canada Ltd., said in a note to clients.
With a file from Canadian Press