Globalive’s fate rests in government’s hands, analysts say

The continued operations of Globalive Wireless Management Corp. now rest in the Conservative government's hands after the Federal Court of Canada ruled Friday that the cabinet erred in allowing it to enter the market, analysts say. “This incident is embarrassing for Canada,” Dvai Ghose, an analyst with Canaccord Genuity, wrote in a research note Monday. “We believe any attempt to close down Wind could make Canada a laughingstock in the eyes of foreign investors who could perceive that the regulatory environment in Canada today means that if one does not like a regulatory decision, one only needs to appeal to a different arm of the government. In our view, this must be resolved.” On Friday the Federal Court struck down a decision by the government to allow Globalive to enter the telecommunications market in late 2009. The government's decision went against a previous CRTC ruling that said the company was controlled “in fact” by non-Canadians, including Egyptian-based Orascom Communications. The Conservative government's ruling allowed Globalive to launch wireless phone services in Canada under the Wind Mobile brand. Industry analysts say the ruling pressures on the government to clarify its ownership rules and ensure Globalive can continue its operations. Jonathan Allen, an analyst at RBC Dominion Securities Inc., wrote in a research note Sunday that he expects the government to move quickly on the file. “In our view, the Federal Government will have to move quickly to fix things or risk looking really bad just months before an election,” he wrote. “Consequently, we believe the timeline for foreign ownership will be advanced very quickly—and likely focus on removing limits for small/new carriers ... And other political parties would likely have to support it or risk being responsible for the company's failure,” he said. Phillip Huang, an analyst with UBS Investment Research, also wrote in a note Monday that it's unlikely any political party will stick out its neck to oppose changing the rules. “We are not political experts, but we find it difficult to imagine that any political party would risk being blamed for putting over a quarter million Canadians out of their wireless services, many of whom only just committed to Wind over the holidays,” he wrote. Maher Yaghi, an analyst with Desjardins Securities, also said in a research note Monday that the opposition parties are likely to support the move due to public outcry. Ghose noted that while the Liberals are likely to support the government to change the ownership rules to help Globalive, the NDP and the Bloc Québécois are not. Liberal MP and industry critic Marc Garneau said the party supported the CRTC's original ruling to deny Globalive entry into the market. Garneau said the court's Globalive ruling creates a difficult situation because the company has already drawn in several hundred thousand subscribers. “We'll wait to see what they decide to do on this particular one, because a lot of water has gone under the bridge,” he said. Garneau said he urges the government to provide clarification on the foreign ownership rules, adding that the review must look at both the Telecommunications Act and the Broadcasting Act. Brian Masse, an NDP MP and his party's industry critic, said by phone that the NDP supports the court's ruling and has always believed the CRTC's original ruling was the correct one. Masse said Globalive is large enough to try to meet the foreign investment rules “so that they can get into the market in a fair way and compete in a fair way.” But Masse said that the party would like to see more clarification of the foreign ownership rules. He added that the foreign ownership issue and the Investment Canada Act will be discussed at the House industry committee in the coming weeks. Serge Cardin, the Bloc Québécois industry critic, also said by phone that the party supports the court's ruling. Cardin said that although the party favours preserving the existing foreign ownership rules, it would be willing to study a proposal advanced by the Conservatives as long as it ensures there will be some level of Canadian control over foreign influence. Heather Hume, a spokeswoman for Industry Minister Tony Clement, said by email that the government is studying its options, including a possible appeal of the decision. Hume added that the government is continuing its consultations on foreign investment, and that the rules must be clarified before the 700 MHz and 2500 MHz auctions. “As we move forward on the framework for the 700-megahertz auction, we will consider foreign investment as part of an integrated regulatory approach,” Hume said. “The policy of the Harper Government has been clear in this regard—we are in favour of more choice and more competition.” Canada’s Telecom Act currently restricts foreign investment in the sector to 20 per cent direct investment and 33 per cent indirect. Despite analysts' concerns, Globalive chairman Anthony Lacavera said by phone Monday that the court ruling will not impact Wind's operations. “There is a perception out there that our operations are going to be impacted because we will have our licence revoked. But that's simply not at all what the judge was doing in this decision,” he said. “Nowhere is the judge trying to shut Wind down. He's saying the government came to its conclusion erroneously.” Lacavera said he met with Globalive's lawyers over the weekend to review its options going forward, including a possible appeal. He said it's unclear what would happen if no appeal is made, adding that Globalive may be subject to a new review by the CRTC. Lacavera said that cabinet could amend its decision to satisfy the judge's ruling, or the court could extend its stay period, which is currently set at 45 days. “The court could extend the stay period before the control in ownership review planned for April, but there may be an election in April, so it could get deferred,” he said. Lacavera added that the government must create a clear definition in the Telecommunications Act for how much foreign capital is allowed. Industry analysts said the most probable development following the ruling is that the government or Globalive will appeal the court's ruling. “We expect that Wind will file an appeal in the next few days. Typically, the appeals court would quickly decide (in a matter of days) whether to hear the case,” Allen said. But Ghose said by phone that an appeal would be unlikely to succeed. “The court is probably right that the Telecom Act doesn't have anything about foreign investment and encouraging foreign investment,” he said. If an appeal does not succeed, Allen wrote that it may be difficult for Wind to comply with the ownership rules in a short time period. RBC estimates that Wind has more than 250,000 customers and has invested close to $1 billion in its operations. Allen also estimated that Orascom currently holds 90 to 95 per cent of Globalive’s equity and debt. “Simply changing Wind's equity voting structure will likely not be enough,” he wrote. “A full capital structure change may be needed—including raising more Canadian capital.” Allen said MTS is a possible investor. “The company has had aspiration of being a national wireless carrier in the past,” he said. Allen noted that Shaw Communications Inc. may also be a possible buyer “at the right price.” “Wind would boost Shaw's spectrum holdings and help it expand nationally.” But Ghose said it's unlikely MTS would invest in Globalive because the acquisition would be hard to defend in terms of its dividend. He also said Shaw could be interested in Globalive's assets in Western Canada, but is unlikely to want to purchase assets in Eastern and Central Canada. Incumbents also cannot acquire the new entrants' assets before 2014, under Industry Canada's 2008 advanced wireless spectrum auction rules. Ghose wrote in his note that Wind could merge with a new entrant like Mobilicity, but urged that the uncertainty created by the ruling would hurt its prospects. kfournier@thewirereport.ca

Globalive’s fate rests in government’s hands, analysts say

News | February 7, 2011

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