Poor reception

Ottawa’s drive to create more wireless competition has put Mobilicity investors on hold By blocking Mobilicity’s sale to Telus, the government has practically assured that Mobilicity will fetch far less than the $350 million Telus was willing to pay

Ottawa’s policy to create and sustain competition in Canada’s wireless industry has turned into a gong show — and, so far, Mobilicity is the major casualty. Launched in 2008 in the hope of becoming a national wireless carrier, Mobilicity has failed to attract sufficient customers. It has languished in no-man’s land under bankruptcy protection for 15 months, forced to either restructure its operations or find a buyer. A few months ago, Mobilicity did the latter, but the federal government twice blocked a proposed sale of its wireless spectrum to Vancouver-based Telus Corp. The rationale: selling to an incumbent would reduce competition, not foster it, which was the point of setting spectrum aside for entrants in the first place.

Faced with the less lucrative prospects of restructuring — which has already cost $12 million in professional fees since the company filed in 2013 — Mobilicity’s major investors launched a $1.2- billion lawsuit against Industry Canada for blocking the sale. Quadrangle Group LLC claims it invested in Mobilicity at the behest of John Bitove, a Toronto-based businessman involved with Sirius XM satellite radio, after he was given assurances from the federal government that his investment group would be able to transfer the spectrum it purchased in 2008 after five years. The lawsuit filed in September 2014 says the government allegedly “breached” all kinds of its assurances, allowing “spectrum to be transferred” being one.

A much-anticipated statement of defence from Industry Canada is expected this month. Meanwhile, Bitove’s $44 million in Mobilicity is in limbo as is the $312 million Quadrangle tossed into the company. Private-sector players have sued governments before, but these lawsuits rarely get to court and everyone involved knows as much. That’s why aside from trying to embarrass Ottawa, Quadrangle’s end game is to resurrect Telus’s $350- million offer.

That gambit likely won’t succeed. For one, attempts to persuade Ottawa to reconsider, including court-ordered mediation with former Ontario Chief Justice Warren Winkler during the summer, failed. At the same time, Telus bailed, withdrew its offer and refused to participate in the mediation talks. Bitove and his U.S. partners alleged that federal Minister of Industry James Moore “threatened economic sanctions against Telus if it did not permanently abandon” its efforts to buy Mobilicity. Too bad that explosive claim probably won’t ever be tested in a courtroom.

In any event, the damage has been done. By blocking the sale to Telus, the government has practically assured that Mobilicity will fetch far less than the $350 million Telus was willing to pay. Consider that a deep-pocketed consortium of investors from Canada and the U.S. paid $285 million to help Globalive Wireless Management Corp. consolidate its control of Wind, the other fledgling startup, which has emerged as the fourth-largest service provider in Canada with close to 800,000 subscribers. With only 156,300 active subscribers, Mobilicity’s estimated value falls in the range of $125 million to $150 million. In other words, Mobilicity almost pulled off a heist — and its investors know it. Notwithstanding the political pressure to stay out of the fray, it’s hard to imagine why Telus would return with the same rich offer.

With new entrants accounting for less than 4% of the country’s wireless market at the end of 2013, Ottawa’s dream for a vibrant fourth carrier to take on the big three incumbents — Bell, Rogers and Telus — looks more like a fantasy. Its policy waffling should put a chill on future investors. Undeterred, the federal government plans another spectrum auction in early 2015. Mobilicity will be forced to sit on the sidelines, shackled by bankruptcy courts. The auction will afford startups another opportunity to bulk up, making them more attractive and worsening any prospects of a decent recovery for Mobilicity’s investors.