All three of Canada's small wireless companies are now for sale, the latest signal that the federal government's years-long effort to create competition in the industry is at risk of failure.
Telus Corp. of Vancouver has entered talks to buy Mobilicity in a deal that sources say could value the target at between $350-million and $400-million. Meanwhile, Public Mobile – the smallest of the three independent wireless companies that launched operations in 2009 and 2010 – has hired investment bankers to find a purchaser. The two companies join Wind Mobile, the largest independent company, which has already been put on the block by its Dutch owners.
The potential sale of one or more of these companies stands to put Ottawa in a difficult position.
Five years ago, the government created special rules in a wireless spectrum auction that was designed to create strong competitors to the dominant players in the $19-billion industry, Telus, Rogers Communications Inc. and BCE Inc.
But the new entrants have struggled to gain enough market share to make their businesses viable, and each is said to be lacking the money to purchase another batch of spectrum that is needed to build ultra-fast LTE (long-term evolution) networks that the big three telecoms possess.
Telus has been in talks since at least February with Mobilicity, which is legally known as Data & Audio-Visual Enterprises Wireless Inc. The two companies signed a letter that included a period of exclusivity on the negotiations, which was extended last month.
"TELUS remains committed to pursuing the Acquisition Transaction and to working expeditiously to negotiate and execute definitive agreements in respect of the Acquisition Transaction on an accelerated timeline," says a document obtained by The Globe and Mail.
That confidential document is a letter dated March 19, 2013, signed by Stephen Lewis, Telus's vice-president of corporate development. It was addressed to Mobilicity president Stewart Lyons, and Michael Levin, managing director of investment banking at Canaccord Genuity.
According to the letter, Telus is looking to acquire "all of the issued and outstanding shares in the capital of Mobilicity." It is unclear how such a transaction would be structured given that there is a federal prohibition on incumbents buying Mobilicity's spectrum that remains in place until early 2014.
Although Rogers recently struck an "option deal" to purchase unused spectrum from Shaw Communications Inc., the federal government is reviewing its policy on transfers of wireless licences – signalling it could make it tougher for big carriers to acquire spectrum from so-called new entrants.
Both Telus and Mobilicity declined comment on Thursday.
One source said Mobilicity is likely worth between $350-million to $400-million if the carrier is mostly valued on its spectrum. Mobilicity launched service in 2010 after paying $243.1-million for its advanced wireless spectrum (AWS) licences during the last spectrum auction in 2008.
Although Mobilicity has managed to increase its subscriber numbers in recent years, it, like other new entrants, has competed mostly by undercutting bigger wireless companies on price. Last week, it told Industry Minister Christian Paradis that the government's review process on spectrum transferability has "further impinged access to capital for new entrants" because investors are now worried about the "liquidity of spectrum assets."
That is a problem because bidders for the next auction have to declare themselves in early June.
Separately on Thursday, Mobilicity suffered a legal blow when an Ontario Superior Court ruled that one of its bondholders, Catalyst Capital Group Inc., can proceed with a legal application that seeks to nix a $75-million lending agreement that gave Mobilicity a key financial lifeline earlier this year.
As for Public Mobile, it has hired bankers to find a buyer, and a small number of pension funds have taken a look at its books. The sale process started because OMERS Private Equity, one of the company's backers, wants out.
Public Mobile, which is among the smallest of the new entrants, paid $52.38-million for four wireless licences in 2008. Those licences cover a population of about 17.6 million in parts of Ontario and Quebec.
Compared to other new entrants, Public Mobile paid far less for its wireless licences. At the time, there was some concern that there would not be a wide selection of handsets that would function on the type of spectrum it purchased.
Moreover, its spectrum, which is known as "G block" in industry parlance, was not part of the set-aside of licences reserved for new entrants during the last government auction in 2008. That means an incumbent can acquire those licences at any time since they are not subject to a standstill agreement.
But it is unclear whether any incumbents would make an offer for Public. Still, the business is likely worth $100-million to $150-million as the value of its spectrum has appreciated over time, according to a source. Public Mobile could not be immediately reached for comment.
"We see the Canadian wireless sector at a crossroad," Drew McReynolds, an analyst with RBC Dominion Securities Inc., wrote in a research note on Wednesday. "Either new capital is invested in the new wireless entrants keeping a fourth national wireless strategy alive, or the new wireless entrants get consolidated by one or more of the three large wireless incumbents."