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Telus said Mobilicity’s 250,000 customers should experience no interruption in serviceMichelle Siu/The Globe and Mail

Telus Corp.'s $380-million agreement to buy faltering carrier Mobilicity presents the federal government with a stark choice – admit failure in its years-long push to create more competition in the wireless business or try to salvage the goal of having at least four players in every regional market.

Mobilicity is one of three small companies to have launched service since 2009 to take advantage of Ottawa's policy of encouraging new entrants. The government has championed wireless competition as a kitchen-table issue, arguing that new players would help bring down prices.

But all three independents are now for sale. Mobilicity is the first one to have struck an agreement, and its proposed sale to Vancouver-based Telus, the country's second-largest wireless company, has turned up the pressure on the Conservatives, who must decide whether to allow the deal to proceed.

Technically, Telus is not even allowed to buy Mobilicity right now. Its valuable wireless spectrum, the radio waves used to transmit cellular signals, cannot be transferred to an incumbent until early 2014 under regulations set up to foster competition. But the two firms are asking the government to waive the rule, warning that Mobilicity will sink under the weight of its losses otherwise.

The company has attracted 250,000 subscribers, but it is losing $74-million a year. In court filings, Mobilicity said that it has searched extensively for other offers to no avail. "The purchase will save Mobilicity from bankruptcy," David Fuller, Telus's chief marketing officer, said in an interview.

Some Mobilicity bondholders and its chief restructuring officer, William Aziz, are lobbying aggressively to secure Ottawa's blessing on the Telus deal, sources say.

But the government is still wrestling with what to do with the faltering wireless policy, which dates back more than five years. In 2008, the government set aside valuable spectrum licences for new entrants to try to create competition, force down prices and improve service. Now, much of that spectrum appears headed back into the hands of big players unless Ottawa takes action.

But government officials are struggling to figure out how to prevent that, since the new players collectively have barely 1 million subscribers, most of which spend far less per month than the customers of the dominant players, and are financially unattractive to foreign buyers. Industry Minister Christian Paradis is in the midst of a review of Ottawa's spectrum-transfer policy, with the results due in coming weeks.

One option for the government is to stall for time, in the hope that another buyer might emerge to save Mobilicity and the largest independent, Wind Mobile.

In addition to the Telus transaction, Rogers Communications Inc. has struck an "option deal" to eventually buy spectrum that is owned by Shaw Communications Inc. – unused airwaves that were also part of what was set aside for new competitors. BCE Inc. has also signalled its eagerness to acquire new-entrant assets should Ottawa allow mergers in the sector. (BCE owns a 15-per-cent stake in The Globe and Mail.) Public Mobile faces no restriction on the sale of its assets because of the type of spectrum it purchased.

Notwithstanding Thursday's announcement and the other activity in the wireless industry, there is a movement afoot that would allow Ottawa to save some face, should Wind be sold to a major player. That compromise, which is being floated to government officials, would see Amsterdam-based VimpelCom Ltd. cleared to sell Wind to an incumbent, but with the stipulation that the Toronto-based carrier continue to run as a standalone operation.

Essentially, that means Wind would maintain a separate management team and possibly an independent share-ownership structure. In return, the incumbent buyer would acquire Wind's spectrum assets and tax losses on its balance sheet. Under such a scenario, Wind would continue to use its own network infrastructure, such as antennas, but it would use spectrum that is controlled by an incumbent.

Still, the broader issue for Ottawa is that creating a viable fourth player out of the pack of stragglers will require someone with a big chequebook and the desire to keep fighting Telus, BCE and Rogers, each of which is vastly bigger.

"If the government blocks the [Mobilicity] sale, we will be left asking who will finance these independent new entrants, especially if they can never be sold to the incumbents who are the only obvious buyers," wrote Dvai Ghose, a telecom analyst with Canaccord Genuity, in a note to clients. "Perhaps the free-market-focused Conservative government will eventually come to the conclusion that the market could not support a fourth player in every region and so it should concentrate on managing the incumbents rather than artificially forcing competition."

Minister Paradis signalled he would not rush his decision on Telus and Mobilicity. "The government will take the time required to review the proposal carefully," he said in an e-mailed statement.

Mobilicity says it has no other option. "We have spent a lot of time talking to a lot of people, including every single new entrant [carrier]," the company's president and chief operating officer Stewart Lyons said.

"There was not a deal to be found. We beat the bushes as far as they could possibly be beaten and as hard as they could possibly be beaten … There was not a deal to be found with the other new entrants. It was not offered. It was not on the table. It was not possible, so this is where we are at."

Mobilicity's Plan B is to enact a revised recapitalization plan to patch up its balance sheet. But Mr. Lyons stressed that fallback plan is not the preferred option for the company.

Telus, which is Canada's second-largest wireless carrier with some 7.7 million mobile subscribers, began takeover talks with Mobilicity earlier this year. The Vancouver-based telco says the deal would ensure that Mobilicity's 250,000 customers experience no interruption in service. It also plans to keep Mobilicity's 150 employees.

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