Telus Corp. is setting up a showdown with Ottawa by trying for a third time to buy a small Canadian wireless company in a deal that the government has already repeatedly blocked.
The Vancouver-based carrier announced late on Thursday that it has agreed to purchase Mobilicity, a small wireless player that filed for bankruptcy protection last September. The deal is valued at $350-million.
On two previous occasions in the last six months, Ottawa has killed the acquisition, saying it would hurt competition. This time around, the companies hope a number of new factors will influence Ottawa to change its position. A five-year moratorium on selling wireless spectrum to incumbent carriers has ended. The government set the moratorium when it auctioned off the spectrum in 2008 to reserve a portion of the spectrum for small players. The move was aimed at boosting competition in the Canadian wireless sector, where the vast majority of customers buy services from three major carriers – Rogers Communications Inc., BCE Inc.'s Bell and Telus.
"The landscape has changed," William Aziz, Mobilicity's chief restructuring officer, said in an interview. "We're working with Industry Canada … and trying to find a solution."
Mr. Aziz said Mobilicity's share of the Canadian wireless spectrum is not significant, and that the Telus acquisition is "not going to change the competitive landscape."
Analysts at TD Securities said it was likely that Ottawa will deem Mobilicity's spectrum holdings too small to have a serious impact on competition. "Also, with the passage of time, new entrants in some regions, combined with new regulations (on things such as roaming rates and contract terms), have been resulting in lower prices and increased flexibility for consumers, so Industry Canada should be able to declare victory in its pro-consumer quest without having to block the sale of Mobilicity's spectrum to an incumbent," they wrote in a research note.
Industry Minister James Moore has shown no signs of changing his mind on the Telus Mobilicity deal in recent months. "We will not approve spectrum transfer requests that decrease competition in our wireless sector," his spokesman Jake Enwright was quoted by The Canadian Press as saying in response to the latest deal.
But now that the moratorium has expired, Telus and Mobilicity can argue that Ottawa has no legal footing to continue blocking the acquisition – setting up a potential court battle. If Ottawa rejects the deal again, it may set the stage for Mobilicity's exit from the Canadian marketplace entirely, which may be more detrimental to wireless competition in Canada than the acquisition itself.
Despite Ottawa's best efforts, Canada has not proven an especially successful place for small wireless operators. According to court documents, Mobilicity operates at a loss and, based on current forecasts, will exhaust its cash by early July.
Telus purchased Public Mobile, another small and struggling wireless player that specialized in ultra-cheap talk-and-text plans, in late 2013. The deal was possible because Public Mobile's spectrum was not covered by the five-year moratorium. Telus will begin to migrate Public Mobile's 280,000 customers to its own network next month, a move that will require those customers to buy new handsets that are compatible with the Telus network.
Wind Mobile, another relatively small player in the Canadian wireless market, is also facing myriad challenges. Last month, the company's foreign financial backer essentially wrote off its Canadian investment, citing issues related to Ottawa's foreign ownership rules.
Since the fall, Mobilicity has been operating under creditor protection. The company said it approached some 25 potential corporate bidders and received five bids, but Mr. Aziz described the Telus offer as "the only acceptable transaction."
Mobilicity is also pushing the deal as a win for its creditors and subscribers. The company said that the "vast majority" of its 165,000 active subscribers would integrate "seamlessly" into the Telus network, and that the deal would have no impact on any claims against the restructuring company. Mobilicity will also continue to honour its lease and service contracts and will not change staffing levels following the acquisition, the company said.
Telus originally offered $380-million for the company last year, but Industry Canada rejected it, saying it would not approve any agreements that reduced competition in the Canadian wireless sector. Telus tried again early this year by putting forward a $350-million offer, only to have Ottawa block it again. A Telus spokesperson declined to comment on the latest deal.