Mobilicity bondholder looking to get in on Verizon action
Catalyst Capital Group Inc. isn’t interested in buying Mobilicity, but the successful private equity firm is trying to parlay its senior debt position in the struggling wireless newcomer into a role with U.S. giant Verizon Communications Inc.’ s plan to enter the Canadian market with an acquisition of rival Wind Mobile.
Sources told the Financial Post that Toronto-based Catalyst has been in discussions with Verizon as the secondlargest wireless provider in the U.S. prepares to enter the Canadian market. The discussions, described by an insider as “still in the introductory and early stages,” are in con- junction with Verizon’s talks with Wind Mobile’s owners to acquire the wireless startup for as much as $700-million. Catalyst is said to “be involved in the process for Wind,” although an outright bid by the private equity firm on its own is unlikely.
Catalyst owns more than 30% of the senior secured credit of Wind’s rival Mobilicity. Verizon has also floated the possibility of acquiring the financially crippled entrant, although the talks were “exploratory” and no offer has been tabled. Catalyst’s blocking position in the operating company of the Vaughan, Ont.-based carrier (the holding company is known as Data & Audio-Visual Enterprises Holdings Inc.,) is estimated to be worth $60-million. That means no transactions involving Mobilicity can likely be completed without Catalyst’s co-operation.
Newton Glassman, cofounder and managing partner of Catalyst, would not comment on the nature of his firm’s involvement with Verizon or Wind.
However, Mr. Glassman told the Financial Post that Catalyst “is not interested in Mobilicity on a stand-alone basis. Never were; never will be.”
Why? “Mobilicity on its own is a flea on an elephant’s butt of wireless telecom in Canada. The only way to build a fourth wireless provider in Canada is through Wind because of the subscriber base and spectrum.”
Wind has more than 600,000 subscribers and spent $442-million on cellular spectrum licences in the 2008 auction for the public airwaves. Mobilicity’s spectrum licences came to $243-million and it has about 250,000 subscribers.
The reclusive Mr. Glassman is currently embroiled in a legal battle with Mobilicity over the terms of a recent $75-million in second-lien financing. The lawsuit launched by Catalyst in an Ontario court in February continues despite the flurry of activity in the wireless sector and is pivotal to Mr. Glassman’s ultimate plans to be part of creating a major fourth wireless carrier in Canada.
“All we require and demand is that the actual indenture for the first-lien debt be honoured,” Mr. Glassman said in an interview.
For its part, the company says the private-equity firm brought the action in an attempt to gain leverage over Mobilicity following disappointment after talks with Catalyst on fresh financing fell through and the carrier negotiated different terms with other backers.
“[Catalyst is] a bitter bidder in the context of the secondlien financing,” Marc Kestenberg, a lawyer representing Mobilicity argued in court in March. Even so, Mr. Glassman reiterated his firm’s support for the small carrier, which is currently carrying $508-million in debt. “We will not stand in the way of any transaction for Mobilicity so long as our legal rights are respected as written in the indenture,” he said. “Anybody trying to take property that belongs to us will have a vigorous fight on their hands.”
That is the message Catalyst has likely brought to Verizon.
Meanwhile, industry sources familiar with events say they expect the federal government to seek concessions from Verizon, which has almost 100 million U.S. subscribers, such as trying to include a Canadian partner in its acquisitions.
At the same time, Verizon will try to squeeze Ottawa for its own conditions, such as relaxing the foreign ownership rules and allowing the company to sell spectrum, although it could face the same challenges in selling as the current new entrants who have been blocked from selling to the incumbents as an easy out.
Either way, acquiring Wind would be a low-cost way to enter the country even though sources say $700-million is too high for the company on its own.
The small carrier is likely a so-called Trojan horse for a future acquisition attempt by the U.S. giant for one of the large carriers — Telus Corp., Rogers Communications Inc. or Bell Mobility. Telus, the smallest of the incumbents and the only pure-play telecom player out of the three, is considered the likely candidate, and Verizon once held 20% of the company.
Barring a change in the foreign ownership rules to permit acquisitions of Canadian companies that account for more than 10% of the telecommunications market, Verizon would also have the opportunity to bid aggressively on spectrum in the upcoming government auction and build a fourthgeneration LTE network.
The auction rules limit the incumbent players to one premium block out of four and allow new entrants, which would include Verizon, to bid on two blocks per geographic area.
The share prices of all three major Canadian incumbents were battered on the possibility that Verizon would be entering the Canadian market. If that continues, it would make buying a major player much cheaper.
“Paradis will look brilliant because the government will be seen as a friend of consumers,” said an industry source familiar with the negotiations who asked not to be named. However, Ottawa is aware that the arrival of Verizon could “damage” the large players. As a result, many industry players predict that if Verizon gets the green light to buy Wind, Mr. Paradis can be expected to bless Rogers’ deals to purchase unused spectrum from Shaw Communications Inc. and Quebecor Inc.-owned Vidéotron.