Expect legal fights from new entrants if transfers blocked, analyst warns Paradis

Canada's new entrant wireless carriers want the freedom to sell their spectrum holdings to incumbent companies and would challenge the government in court if they were blocked from doing so, Scotia Capital telecom analyst Jeff Fan said. “Legal actions could be a real messy situation for IC . Imagine Wind and Mobilicity suing the government for allegedly breaking contractual terms on the licences they obtained four years ago,” Fan wrote in a research note Monday. “We think this development would not help IC’s case of attracting new strategic investors. We thought the list of interested strategic investors was already short,” Fan said. National wireless incumbents BCE Inc., Telus Corp. and Rogers Communications Inc. may acquire spectrum reserved for new entrants as Mobilicity (owned by Dave Wireless Inc.), Wind Mobile (owned by VimpelCom Ltd.) and Public Mobile Inc. are up for sale, and as Shaw Communications Inc. plans to sell its unused “set aside” spectrum to Rogers in 2014. That spectrum was reserved for new market entrants in Industry Canada's 2008 wireless auction and came with a five-year moratorium on transferring it to incumbents. Fan said in the research note that, judging by the new entrants' comments filed with Industry Canada this month for its consultation on new rules for spectrum transfers, the small wireless players want the option to sell their spectrum licences to an incumbent. Fan pointed out that none of the new entrants told Industry Canada that it should block the transfer of their spectrum to the incumbents. “This confirmed to us that the new entrants’ intentions are to eventually sell or transfer their licences to the incumbents. After all, that would be the easiest, most lucrative, and most rational option,” Fan said, adding that his firm does not “pay much attention to financial investors” who appear to be interested in the new entrants because the investments are not likely to be long-term. “We think the speculated financial investors are looking at this simply as an opportunity to pick up spectrum from the new entrants and flip them to incumbents,” Fan wrote. “We assume they are rational and will not financially back money-losing businesses over the long run.” In March, The Wire Report reported that investment firm Fairfax Financial Holdings Ltd. was making an offer for Wind. The Globe and Mail, citing anonymous sources, said in a report Saturday that Fairfax has now decided against a bid. The Globe and Mail also reported Saturday that Newton Glassman, head of private equity firm Catalyst Capital Group Inc., which is in a legal fight over a financing deal for Mobilicity, has also stepped in with an offer for Wind Mobile. “Effectively, IC is trying to change terms that current licensees do not want changed,” Fan said. “f new entrants can’t sell to the incumbents, they lose on how much they would get back. We estimate this could be up to hundreds of millions of dollars, which would be very material.” Industry Minister Christian Paradis said Monday that the Industry Department never intended for incumbent telecom carriers to have access to the wireless spectrum reserved for new entrants in 2008. “Consolidation might occur. On the other hand I think we put the best policies in place in order to enhance ,” Paradis said, reiterating that he wants policies that ensure a fourth wireless competitor in each region of Canada. Jean Brazeau, Shaw’s senior vice-president of regulatory affairs, said in a conference call with analysts on Friday that the company’s arrangement for an option to sell its spectrum to Rogers in 2014 complies with Industry Canada’s 2008 spectrum auction rules. He said he expects the deal to gain regulatory approval. “The agreement we've entered into with Rogers is in full compliance with the conditions, the license conditions on their AWS,” Brazeau said, according to a transcript of the call. “The only restriction is for the Minister to approve these licenses, and we could sell it to anyone after 2014. So I think we're in full compliance.” Brazeau said a decision by Industry Canada to restrict the sale of the AWS spectrum to Rogers would “fly in the face of the principle of contractual certainty” and “devalue” Canada’s wireless spectrum. “We understand why the minister is looking into this, but at the end of the day, I think they will comply with the framework of the AWS license regime,” Brazeau said. “I think the transaction will be approved by the minister.” Fan said the situation appears to be “no win” for the government because if it blocks the transfers, it risks legal action, and if it allows consolidation to proceed, competitors would be removed from the market. He said the United States is struggling to create a third national wireless player to compete with AT&T Inc. and Verizon Communications Inc., and that this should be a lesson for Canada. “e think IC should declare victory while it is ahead. Don’t fight a battle that cannot be won,” Fan wrote. “Canada is not large enough to support four facility-based competitors.” Iain Grant, a telecom analyst with research firm the SeaBoard Group, said in a new report this month that the new entrants being up for sale is “worrisome indeed, because if the competition withers and dies, the incumbents will just revert to their old ways,” and “Canadians will pay the price.” Grant said the federal government could reinvigorate the wireless marketplace by allocating the 700 MHz band, which will be up for auction starting Nov. 19, to the new entrants exclusively. “Award the 700 MHz band to the new entrants alone, based on the results of the AWS/G-Block new-entrant spectrum awards ,” the SeaBoard Group report said. “Recognize that when we fostered competition in the wireless marketplace by encouraging new entrants with set-aside spectrum, the spectrum we set aside was less than ideal for the purpose.” Grant said Canada's incumbents could wait for access to the 600 MHz band, which may be freed up for mobile use if some over-the-air TV broadcasters choose to vacate the frequencies in the United States. In March, Industry Canada released its final rules for the 700 MHz auction, which caps each of the three incumbent telcos to one block of “prime” spectrum per licence area, effectively reserving one prime block per market for a fourth bidder. The SeaBoard Group report, titled “Withering on the Vine: Some gardening tips for Industry Canada,” also recommended that the department further strengthen its roaming and tower-sharing rules to foster more competition. Grant wrote that the government's efforts to promote competition through telecom policy have created more consumer benefits than commonly thought. The new wireless entrants have lowered pricing and the average cost of using a wireless device, the report said. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and reporting and copy editing by Nicholas Kyonka at nkyonka@thewirereport.ca

Expect legal fights from new entrants if transfers blocked, analyst warns Paradis

News | 04/16/2013 7:06 pm EDT

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