TORONTO – Telus really wants to buy Mobilicity and has made another bid for the company, despite the knowledge the federal government really doesn’t want to see this deal happen.
Late Thursday, Data & Audio-Visual Enterprises Holdings and its affiliates (collectively, Mobilicity) announced Telus would acquire it for $350 million. The proposed transaction will move forward under the Companies' Creditors Arrangement Act rules. Mobilicity has been under creditor protection since September.
"The transaction is a good outcome from Mobilicity's restructuring efforts and extensive sales process," said William Aziz, Mobilicity's chief restructuring officer, in the press release. "I am confident the transaction will serve the best interests of Mobilicity's customers and employees."
Perhaps, but most are betting the federal government will not agree with Telus and Mobilicity’s feelings on this latest transaction, the third time in less than a year Telus has tried to purchase the struggling wireless newcomer. In both previous occasions, the federal government rejected the deals saying it did not want more consolidation of smaller wireless players by bigger ones – and that it would most likely say no if asked again.
“We will not approve any spectrum transfer request that decreases competition in our wireless sector to the detriment of consumers,” Industry Minister James Moore said last year.
The difference this time around however, is that the five-year moratorium prohibiting the transfer of Mobilicity’s wireless spectrum, which was set aside for new entrants in the AWS auction of 2008 and which also brought the likes of Wind, Videotron and Eastlink into the wireless game, has officially expired.
Despite that original five-year rule, the federal government has said repeatedly it will not allow the transfer of that spectrum to an incumbent like Telus, Rogers or Bell.
“We believe that this deal is ‘dead on arrival’ for the regulators," – Jeff Fan, Scotia Capital
“We believe that this deal is ‘dead on arrival’ for the regulators but at this point, there is no real downside to Telus' move,” wrote Scotia Capital analyst Jeff Fan in a research note sent to clients on Monday. “Plan A is to have the bankruptcy court overrule (Industry Canada’s) rejection. If the court sides with IC, then we think that plan B would be for Mobilicity to pursue the next bid (or wait for another lower offer to emerge). The lower offer would help Mobilicity crystallize the "damage" for potential legal action against IC in the future.
“We do not believe IC will budge on allowing the transfer of set-aside spectrum licenses to the incumbents. (Retail) prices are again on the rise and we are not sure what victory the government can really declare. We believe IC is determined to devalue Wind and Mobilicity to the point that it becomes attractive for consolidation. It is not even clear that IC will even let (Shaw) or (Quebecor) sell their spectrum licenses to RCI under their option agreements,” adds Fan.
According to Mobilicity, however, this new deal – which will see Telus operate Mobilicity as a “going concern”, according to the press release, will make it so the vast majority of its 165,000 active subscribers will be able to “seamlessly migrate onto Telus' advanced HSPA network after the transition,” that staffing will remain the same, and all of Mobilicity’s landlords and business partners will be paid.
With the help of its financial advisors and the independent, court-appointed monitor, Mobilicity says it contacted 25 organizations about submitting bids as part of its sale process. Of the 25, six organizations submitted participating materials and five bids were received by the December 16, 2013 extended bid deadline. Of that, “only the Transaction with Telus was determined to be an acceptable transaction,” reads the press release. “Approximately 95% of the holders of Mobilicity's 15% senior unsecured debentures due 2018 also support the transaction and have agreed to vote in favour of the plan.”
Mobilicity, the release continued, says the deal won’t affect competition in the Canadian wireless sector, satisfies the criteria considered by Industry Canada in determining whether to approve a transfer of spectrum licences and meets Industry Canada's policy objectives in respect of utilizing spectrum for advancing network expansion into non-urban areas.
On April 23, 2014, Mobilicity will ask the Court for an extension of the current stay of proceedings from April 30, 2014 until June 30, 2014. In the meantime, it continues to be business as usual for Mobilicity's wireless customers.
Considering Mobilicity paid $243 million for its spectrum in 2008 and its tax losses are likely more than $100 million, Telus seems to be getting a pretty good deal, according to Canaccord Genuity analyst Dvai Ghose in a note to clients. While the deal is subject to approval from Ontario Superior Court of Justice, the Competition Bureau and Mobilicity's debt holders, the most important one standing in the way is Industry Canada.
“Third time lucky? We do not think so,” added Ghose. “Industry Canada twice rejected Telus’ bid for Mobilicity in 2013 (the first time in June the second in October). While the five-year new entrant set-aside of Mobilicity’s AWS spectrum expired in February 2014… Industry Canada has made it clear that new entrant set-asides will be extended indefinitely, despite independent new entrant financial challenges. If Industry Canada approves this transaction, it could set a precedent whereby Wind could also sell to an incumbent; Shaw could sell its AWS spectrum in the west to Rogers as proposed; Vidéotron could sell its AWS spectrum in Toronto to Rogers as has also been proposed; and perhaps Vidéotron could sell its 700 MHz spectrum to an incumbent. Consequently, we expect Industry Canada to reject this proposal.”
While Industry Canada did approve the purchase of Public Mobile by Telus in 2013, Public did not own any set aside spectrum and so Industry Canada and the Competition Bureau approved the deal.
“For us, the future of Mobilicity is not particularly material to the future of wireless in Canada – In our view, Canada cannot support four national wireless carriers." – Dvai Ghose, Canaccord Genuity
“So what happens to Mobilicity if the deal is not approved by regulators?” asks Ghose. “We do not know if Wind is one of the five bidders, but we wonder if it has the financial backing to buy Mobilicity given that its financial backer, VimpelCom, has not been allowed to acquire control of Wind, seemingly for political reasons, and decided not to finance 700 MHz spectrum purchases for Wind. It has also written down its stake in Wind to zero.
“We also do not know if Vidéotron was one of the five bidders and was rejected by Mobilicity. If its bid was rejected due to price, Mobilicity bond holders may have no choice but to sell to Vidéotron at presumably a steep discount to the $350 million now being offered by Telus. However, in order to enjoy Mobilicity’s tax losses, Vidéotron would have to operate the asset, which could lead to unnecessary headaches.
“If Telus is not allowed to buy Mobilicity and Videotron is not interested, Mobilicity may have to cease operations and lose its tax losses,” writes Ghose. “For us, the future of Mobilicity is not particularly material to the future of wireless in Canada – In our view, Canada cannot support four national wireless carriers. We also believe that there is significant competition between the incumbents, a key reason why we expect Rogers to report weak Q1/14 wireless results after the close on Monday, while Bell Mobility and Telus Mobility are expected to continue to take postpaid subscriber, revenue and cash flow share from Rogers Wireless.”
