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

Telus Corp. has served notice that it's dropping a $350-million takeover bid for Mobilicity, ending a drawn-out effort to scoop up the struggling small player and its valuable wireless spectrum.

This move comes just weeks after the federal government warned the incumbent that it would take retaliatory measures if Telus did not abandon its bid for Mobilicity and the cellular frequencies that had been earmarked for new wireless players.

This turn of events leaves Mobilicity, now in bankruptcy protection, without a solid bidder to take over its business, recent reports from its bankruptcy monitor would suggest. It also leaves bondholders, who are owed hundreds of millions of dollars, at risk of significant losses.

A source said Vancouver-based Telus sent word of its decision to Mobilicity on Tuesday, informing that it was withdrawing its offer because conditions of the deal had not been met.

Telus is now "no longer in the mix" to obtain Mobilicity, the source said.

The source did not say which conditions had not been met. However, one requirement was that Ottawa approve the transfer of spectrum between Mobilicity and Telus – a transaction the government has consistently opposed.

Telus declined to comment Wednesday, as did Industry Minister James Moore's office. A spokesman for Mobilicity said no one was available to comment.

Telus ran afoul of the federal Conservative government earlier this year by making a third bid for Mobilicity despite Ottawa's disapproval.

The federal government had made it clear it did not want a major incumbent to gobble up wireless spectrum, which was set aside for new entrants to foster more competition.

In April, the government threatened to cut Telus out of an upcoming auction of publicly owned spectrum if the carrier persisted in its attempts to acquire Mobilicity, The Globe and Mail reported.

The government warned that if Telus persisted in tying up Mobilicity in legal battles, Ottawa would redesign an April, 2015, auction of 2,500 Mhz frequencies to effectively bar the Vancouver company from acquiring any of this spectrum.

The threat was also meant to send a message to the other two major incumbents, BCE Inc. and Rogers Communications Inc., government sources say. It doesn't want any of the Big Three incumbents thinking they can buy spectrum allocated for new entrants, such as the assets currently held by Shaw Communications.

The federal government's end game is to create a situation where struggling small players Wind and Mobilicity merge and their spectrum gets rolled along with other spectrum into a vehicle that's sufficiently enticing for a well-capitalized new player.

But Ottawa's long-sought goal of a "fourth carrier" that will usher in more fierce competition is still elusive. "I don't think there is a fourth national carrier anywhere to be seen," Canaccord Genuity Corp. analyst Dvai Ghose said in interview. "If Vidéotron decides to take the mantle, I don't think they are going to make a decision at least until the new year."

In February, Quebecor Inc's Vidéotron made a $233-million play on Canada's wireless industry – buying valuable 700 Megahertz wireless spectrum in the country's four most populous provinces. Mr. Ghose said he assumes Vidéotron was also one of the other companies vying for Mobilicity.

Could Vidéotron end up buying Mobilicity as well as Wind? It remains to be seen, Mr. Ghose says.

Quebecor has already signalled it expects more concessions from Ottawa on roaming rates and access to rivals' towers.

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