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Mobilicity has been on the market for years, but has struggled with regulatory hurdlesKevin Van Paassen/The Globe and Mail

Prospective investors in a recapitalized fourth wireless player are undoubtedly taking note of the $1.2-billion lawsuit launched by Mobilicity's original backers against the federal government, over claims it broke promises made more than five years ago.

Analysts say the move could serve as yet another roadblock to new players considering putting money into a venture that could include Wind Mobile and even Quebecor Inc.'s participation.

"Rules can always be changed and [a new fourth player] might be promised a future exit strategy, but as [one Mobilicity investor] pursues its lawsuit based on allegations of breached promises, private equity may remain reluctant to put more money into the sector amidst uncertainty surrounding government policy, particularly as it relates to how new entrant wireless assets can be sold," National Bank Financial analyst Adam Shine said Monday.

In the statement of claim filed last week, U.S. private equity firm Quadrangle Group LLC and John Bitove's Data & Audio-Visual Enterprises Investments Inc. (DAVE) allege Industry Canada encouraged them to invest in a cellular startup to take on the country's Big Three carriers, BCE Inc., Telus Corp. and Rogers Communications Inc.

The legal filing says the government offered certain assurances in return, including conditions around wholesale roaming, cell tower sharing, foreign ownership restrictions and, finally, that investors would be able to sell to the incumbent providers after five years if necessary. So far, the latter has been blocked by the federal government.

The lawsuit seems to be a "last resort" by Mobilicity's backers and highlights the need for those assessing a current investment to account for regulatory uncertainty, Barclays Capital Inc.'s Phillip Huang said in a research note Monday.

However, Mr. Huang also noted that the legal claim could pressure the government to improve conditions for a potential fourth player.

"We believe the negative publicity may put incremental pressure on the government to negate these claims, perhaps by demonstrating to potential investors in the fourth player that they have learned from the failure of prior entrants and will ensure better conditions to support a recapitalized fourth player," he said.

He noted that the government has already moved to assure investors more spectrum will be available, with two auctions including rules that favour new entrants planned for early next year. Plus, he said, the government is likely to implement further pro-competition measures before the federal election next year, including ensuring lower wholesale roaming rates.

"While these conditions may not guarantee the success of a national fourth player, they certainly do improve the chances," Mr. Huang said.

Scotia Capital Inc. analyst Jeff Fan also points out that it is only Mobilicity's equity investors that have filed the lawsuit, not its bondholders, who still stand to gain from a potential sale.

Like Mr. Huang, Mr. Fan said if Canada's telecom regulator mandates lower wholesale roaming rates after a hearing on the issue later this year, that could encourage investors to consolidate Wind Mobile and Mobilicity.

Yet, Canaccord Genuity's Dvai Ghose questioned whether financial or strategic players would invest, "given the experience of new entrants dealing with the government to date."

Mr. Ghose, who has previously expressed skepticism over the prospect of a recapitalized fourth national carrier emerging, said Friday, "Industry Canada's inconsistencies make it hard to justify investments in Canadian wireless new entrants."

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