ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Newton Glassman is one of Bay Street's most successful risk takers, a specialist in squeezing sparkling returns out of distressed firms. The latest move by his Catalyst Capital Group private equity firm is a gambit to create a successful fourth player in Canada's wireless telephone business. One is always hesitant to bet against The Vulture of Bay Street – particularly since Mr. Glassman has succeeded in the telecom space before – but the odds look particularly long in this case.
Canada has three weak wireless startups – Mobilicity, Wind Mobile and Public Mobile – which entered the business at the encouragement of the Canadian government; all of them are now up for sale. All three are estimated to have average revenue per user (ARPU) of less than $30, well below the $50-plus level of the incumbents. They have few high-value smartphone customers, and a tiny combined market share. Mobilicity's parent, Data & Audio-Visual Enterprises Wireless Inc. (DAVE) is known to be going through tough times financially.
Where others see trouble, Mr. Glassman sees opportunity. He's bought more than 30 per cent of DAVE's senior secured notes and is fighting a financing plan by the company in court. At the same time, he is also trying to advance a plan of his own that would give him a say in the company's future. He's also believed to be a bidder for Wind. Presumably, Mr. Glassman's plan is to take control of Wind and Mobilicity on the cheap and use the combined entity as a beachhead. If it can be done in Quebec (where Quebecor's Videotron business has launched its own wireless phone business) and the Maritimes (cable firm Eastlink), as Mr. Glassman observed to the Globe and Mail this week, "are you trying to tell me you can't have a fourth competitor in greater Metro Toronto?"
Several challenges lie ahead. Winning control of two rivals and merging them is no small undertaking, particularly since one is subject to a court process. Even if Mr. Glassman can get both, it would take a huge chunk of cash to make a fourth player viable – likely more than $2-billion, by some street estimates – to compete for spectrum in two upcoming federal auctions and to build out a network able to handle high speed data transmission and capture more smartphone business. By the way, deposits for the next spectrum auction are due in a month. Mr. Glassman has a lot to get down, and quickly.
Most importantly, he must convince financiers there is value to be created by backing a fourth player. That's a tall order. The upstarts have had difficulty convincing consumers to switch out of multi-service "bundled offerings" from incumbents Bell, Telus and Rogers, and the cost to break long-term wireless contracts is high. The one so-called success, Videotron, is less impressive upon closer inspection: its subscriber count, at about 400,000, and ARPU, an estimated $41 in the fourth quarter, are well short of expectations, and leave Videotron well behind the incumbents.
Perhaps the best bet is for a fourth player to position itself as a takeover candidate. But Verizon or AT&T are unlikely to be interested in owning an upstart swimming against the tide in such a small market. If anything, they would likely go for one of the incumbents, should the government ever fully lift foreign ownership restrictions. As for selling out to Bell, Rogers or Telus, that's always a possibility, but likely to fall afoul of the federal government, which is desperate to see a fourth player succeed.
Competition is healthy in any industry, particularly telecommunications, so we wish Mr. Glassman good luck. He'll need it.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .