Telus informed government in advance of $380m deal for Mobilicity

Telus Corp. reached a deal to acquire new entrant carrier Mobilicity, including its 250,000 customers, for $380 million, the companies said, indicating they informed Industry Canada about the deal in advance. In releases Thursday, the companies said the agreement, which remains subject to regulatory approval by Industry Canada and the Competition Bureau, would allow Mobilicity (operated by Dave Wireless Inc.), to pay off its debt. The release said Telus would integrate the new entrant's operations into its own and that the acquisition is the best alternative for Mobilicity as it has been “losing a significant amount of money every month.” Industry Minister Christian Paradis must approve the deal and the transfer of Mobilicity's spectrum assets to Telus. This spring, the minister held a consultation on new rules to govern the transfer of spectrum licences, and a decision on the new policy is expected in advance of a June 11 deadline to submit applications to participate in Industry Canada's 700 MHz wireless auction in November. “he situation is getting messier for the government,” Scotia Capital telecom analyst Jeff Fan said in a research note Thursday. “The bottom line is this makes it less likely that a strategic investor will step up to consolidate the new entrants and participate in the auction to create a stronger fourth operator. Therefore, we think this is positive for the wireless incumbents.” As part of the department's spectrum transfer policy, the minister says he wants to ensure the presence of four carriers in each “region” of the country, and it's not clear whether the department will permit the transfer of Mobilicity's spectrum—set aside for new entrants in 2008—to an incumbent. According to the licence rules for the set aside spectrum that Mobilicity acquired in the 2008 wireless auction, it cannot be sold or transferred to an incumbent during the first five years. Paradis said in April that the “intent of the policy was not to have this set aside spectrum to end in the hands of the incumbents.” With Telus' $380-million agreement for Mobilicity, Paradis is now faced with decisions on two bids by incumbents for “set aside” spectrum. The minister must also decide on Rogers Communications Inc.'s proposed purchase of unused “set aside” spectrum from Shaw Communications Inc. for $325 to $350 million. Alexandra Fortier, a spokeswoman for the minister, said in an emailed statement Thursday that the government will "take the time required to review the proposal carefully,” and that the government "has taken significant action to promote competition in the wireless sector." Stewart Lyons, Mobilicity’s president and CEO, said in a phone interview Thursday that Telus could get control of Mobilicity’s new entrant spectrum before its moratorium on transfers to incumbents expires in February. “We’re asking to transfer the spectrum sooner rather than later. It’s not an option ,” Lyons said, referring to Rogers’ deal with Shaw, which gives the company an option to purchase Shaw’s spectrum when the Industry Canada moratorium expires for those licences in September 2014. If the deal isn't approved, Lyons said, the company would pursue a recapitalization plan to keep its operations afloat. “We’re in a tough spot and we need this deal to happen to serve everybody well and to treat everyone properly,” he said. “We’re pretty confident the government will appreciate that and approve the deal.” Lyons said Mobilicity has been pursuing potential buyers for several months and was in talks with Telus “for quite some time.” He said the company held merger or acquisition talks with other carriers and “financial players” around the world “including all the ones in Canada.” “This is the only real offer we received,” he said. Lyons said the company has already secured approval of the deal from the “vast majority” of its debtholders, though he did not say whether that includes private equity firm Catalyst Capital Group Ltd., a major bondholder with Mobilicity through a $75-million financing agreement. According to the federal registry of lobbyists, Telus met with four Industry Canada officials to discuss telecom and industry issues on April 24, including deputy minister John Knubley, and Kerry Gillis, senior assistant deputy minister for spectrum, information technologies and telecommunications. Iain Stewart, assistant deputy minister of the strategic policy sector at Industry Canada, and Vincent Caron, a policy adviser in Paradis’ office, were also at the meeting, the lobbying registrations show. The company also met with Gillis on April 2 and again on April 26, according to the registry, and held two other meetings April 15 and 19 with Sean O’Leary, Paradis’ senior telecom policy adviser. Telus also held meetings in February with Knubley and with Joanne McNamara, deputy chief of staff in the Prime Minister’s Office, and Sean Speer, director of policy in Finance Minister Jim Flaherty’s office, according to the lobbyist registry. In its release Thursday, Telus said the two companies informed the government about the deal and said the companies are "fully committed to working cooperatively to secure timely approvals for the transaction." The new entrant wireless carrier said in April that it obtained orders from the Ontario Superior Court for a court-approved restructuring process or a sale. Mobilicity said it will post on its website an amended recapitalization plan in the event that the Telus acquisition does not go through. The company said Thursday it is pushing back investor and debtholder meetings for votes on its restructuring and acquisition plans from May 21 until May 23, 2013. Catalyst, which says it is interested in operating a Canadian wireless carrier, had launched a lawsuit over its debt with Mobilicity that could have permitted the private equity firm to assert control over the new entrant. One person with knowledge of the deal said on a background basis that Catalyst will receive a full payout on its debt plus a return of more than 40 per cent. Mobilicity’s shareholders must approve the deal, the companies said Thursday, “after which TELUS and Mobilicity will seek court approval of a transaction that will see Mobilicity emerge as a wholly-owned subsidiary of TELUS.” “TELUS has entered into support agreements with a significant number of Mobilicity’s debtholders who have committed to vote for the plan,” the companies said. “TELUS and Mobilicity anticipate an expeditious legal and regulatory review in view of the current circumstances Mobilicity is facing.” Telus said it would "retain all 150 Mobilicity employees," who would have the opportunity to secure long-term positions with the company. David Fuller, Telus' chief marketing officer, said the company is filing an application with Industry Canada to officially approve the deal, which has no closing date. He said he can't speculate on which way Industry Canada will go on the application though the company has been keeping the government fully informed. Fuller said Telus' main argument for approval is that Mobilicity was likely headed for bankruptcy and that Telus' ownership of the new entrant would save 150 jobs and ensure continued service for customers. "We believe the government has all the information they need now to make a considered decision in favour of the transaction," Fuller said. "Some of those meetings that you've seen in that registry were keeping them appraised of what was happening." Fuller said there is no break fee or major cost to Telus if the deal does not go through. He confirmed the agreement would pay in full all of the senior secured notes Catalyst has with Mobilicity. If the deal is approved, Telus will integrate Mobilicity's network and spectrum with its own, Fuller said, adding that the company has not yet decided whether it would continue to use the Mobilicity brand. Catalyst said in a statement Thursday that it welcomed a deal that honours its debt agreement. “Catalyst's investment in Mobilicity has always been as a secured lender. We have neither bid on the company nor had any interest in acquiring it outright,” the statement said, adding that the company believes Canada can support a national fourth wireless carrier. “Catalyst Capital Group looks forward to continuing to explore the potential for a viable made-in-Canada fourth national carrier in the weeks and months to come, as we protect our rights as a secured lender to Mobilicity,” the firm said. It's not clear whether Catalyst or new entrants, including Public Mobile Inc. and Wind Mobile, will participate in the wireless spectrum auction in the fall, with the deadline for applications approaching June 11. The wireless auction rules do not permit consolidation between auction bidders. Mobilicity spent $243.2 million in the 2008 Industry Canada auction for AWS spectrum licences. The company has 10 MHz of spectrum in Industry Canada’s Eastern Ontario and Southern Ontario “tier 2” licence areas, as well as 10 MHz covering each of the areas of Edmonton, Calgary and Red Deer, Alta., Vancouver and Victoria, B.C., and parts of southern Ontario. Fan wrote in the research note that Mobilicity could challenge the government's decision in court if the deal is denied. The government could also delay the 700 MHz auction to buy more time to sort out the rules, he said, though that would not reduce regulatory uncertainty. “The government could introduce new regulations to benefit the new entrants, but we believe that would be insufficient as they need more capital (up to $1.5B-$2B combined) to be revived,” Fan wrote. “We do not believe there are strategic investors with the patience and risk tolerance to revive the new entrants and participate in the auction.” In a research note Thursday, Canaccord Genuity analyst Dvai Ghose said the government could ask Mobilicity to demonstrate that it cannot find another buyer before it approves the deal with Telus. “e assume that the Government would rather have a non-incumbent third party acquire Mobilicity and so may ask Mobilicity to show through bankruptcy, whether it can attract an independent buyer before begrudgingly allowing its sale to an incumbent,” Ghose wrote. He said it would create financial uncertainty in the industry if the government blocks the sale. “e will be left asking who will finance these independent new entrants, especially if they can never be sold to the incumbents who are the only obvious buyers,” he said. Ghose wrote that $380 million is a “reasonable price” for Mobilicity considering the company’s $240 million in spectrum holdings and its estimated $100 million in debt that would be paid off. He said the bid is “relatively low risk” for Telus. Fan said Industry Canada's review of the deal could be delayed by a possible cabinet shuffle this summer. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and reporting and editing by Simon Doyle at sdoyle@thewirereport.ca

Telus informed government in advance of $380m deal for Mobilicity

News | May 16, 2013

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Telus informed government in advance of $380m deal for Mobilicity

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