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Wind Mobile’s parent says it is participating in the court-monitored sale of rival Mobilicity.Kevin Van Paassen/The Globe and Mail

The federal government has privately signalled it will block the sale of wireless startup Mobilicity to any of the Big Three carriers, even after a ban on such deals expires early next year, sources say.

Twice this year, Ottawa has rejected proposals by Telus Corp. to buy the struggling carrier, which is operating under court protection from its creditors. Among other reasons, the government cited a policy of restricting transfers of wireless spectrum to incumbent telcos for the first five years after a new wireless company receives its licence.

In Mobilicity's case, that five-year moratorium expires in February, 2014. Last month, Telus chief executive officer Darren Entwistle raised the possibility that the company would make a third attempt at a deal at that point. But sources familiar with the matter say the government has indicated it won't consider it.

Telus's second offer, in fact, was deliberately structured so that the proposed transfer of Mobilicity's spectrum would not occur until after the set-aside period expires in February, sources say, but the government turned it down anyway.

"We will not approve any spectrum transfer request that decreases competition in our wireless sector to the detriment of consumers," said Jake Enwright, press secretary to Industry Minister James Moore.

The government's tight restrictions on deals have dealt a serious blow to cash-strapped Mobilicity as it proceeds with a court-monitored sales process. With the transferability of its spectrum mired in doubt, Mobilicity now faces the prospect of having few eligible buyers.

It plans to ask the courts to force a sale to Telus if it fails to receive other serious offers, say people familiar with the situation.

Such an outcome would create an embarrassing predicament for the government, which is making a concerted effort to create more competition in the wireless market. Ottawa has budgeted to spend $9-million on an advertising campaign that promotes its wireless policies.

But critics are questioning the viability of Ottawa's goal of ensuring at least four carriers in every region, and suggest its handling of the wireless file is creating a level of uncertainty that could dampen future investment in the sector.

"In our view, if Industry Canada continues to block incumbent wireless bids for Mobilicity, it could cease operation and its spectrum could lay fallow," Dvai Ghose, an analyst with Canaccord Genuity, wrote in a note to clients on Tuesday.

"We also assume that the vast majority of its remaining customer base would move to Bell, Telus or Rogers anyway and that its employees could lose their jobs. This is hardly an enticing outcome for Industry Canada or the Mobilicity bondholders, who may well take legal action against the government."

In order to win Ottawa's blessing the second time around, Telus promised to ensure employment for Mobilicity's more than 100 employees; to provide interim funding for the small carrier; and to continue the Mobilicity brand with a rejuvenated service offering.

The government, however, rejected the proposal in October due to concerns about spectrum concentration, especially in urban markets. Industry Canada, however, told the companies it would potentially consider a limited transfer of spectrum that Mobilicity holds in Red Deer, Alta., and Windsor, Ont.

Telus and Mobilicity declined to comment.

Vancouver-based Telus, however, did secure Ottawa's blessing this fall to acquire another struggling new entrant carrier, Public Mobile, for an undisclosed amount.

An indefinite extension of the moratorium that prevents large carriers from purchasing Mobilicity's spectrum would also have profound consequences for other new entrant carriers such as Wind Mobile. Its major foreign investor, VimpelCom Ltd., is lobbying Ottawa on its wireless policies in light of its approval of Telus's purchase of Public Mobile.

Globalive Wireless Management Corp., which operates the Wind Mobile brand, confirmed Tuesday that it is "assessing the value" of Mobilicity's assets but offered no guarantees that it would make a binding offer for its smaller rival.

Sources have said Mobilicity is seeking at least $350-million for its assets, which include spectrum, 189,239 active subscribers and tax losses that are worth almost $500-million. The company paid $243.1-million for licences reserved for new entrants during the 2008 spectrum auction.

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