OTTAWA/TORONTO (Reuters) - Canada rejected the transfer of Mobilicity's wireless spectrum licenses to Telus Corp (T.TO) on Tuesday, effectively blocking its takeover of the struggling startup as the government seeks to hold back industry leaders from swallowing smaller rivals.
The ruling is a warning to companies like BCE Inc's (BCE.TO) Bell and rival Rogers Communications (RCIb.TO) that any future deals will likely face obstacles.
However, Industry Minister Christian Paradis indicated that the government may still approve the big three wireless phone companies buying up airwave spectrum from smaller players after a ban on such deals expires in early 2014, as long as it did not result in "undue spectrum concentration."
During an auction that began in 2008, the government put a five-year ban on the transfer of spectrum - bandwidth used for phone calls and data transmission - set aside for new entrants.
Even though the ban expires only in early 2014, Telus last month struck a C$380 million ($367 million) deal to buy debt-laden Mobilicity because the start-up company faced possible bankruptcy unless it was acquired. Telus asked the government to waive the ban and allow it to take over Mobilicity's spectrum licenses.
Paradis said he believes Mobilicity had lots of options, and bankruptcy was not foregone conclusion. And his ruling to reject Telus' application effectively quashes the takeover deal.
"Our government has been clear that spectrum set aside for new entrants was not intended to be transferred to incumbents," Paradis said. "We will not waive this condition of license and will not approve this, or any other, transfer of set-aside spectrum to an incumbent ahead of the five-year limit."
After the expiry of the license transfer ban in early 2014, Paradis said, he would still frown on any license transfer that results in too much concentration of spectrum in the hands of a few players, in a particular region or market.
Telus will not challenge the government's ruling, said Ted Woodhead, head of regulatory affairs at Telus.
Mobilicity said it was reviewing the government's decision and would comment further after speaking with Telus and other stakeholders.
Mobilicity and other upstarts such as Wind, which bought spectrum during the 2008 auction, have so far helped to lower average wireless phone bills for Canadian consumers. But they have also struggled to be profitable, a factor that has forced them to explore alternatives.
However, Tuesday's decision has opened up the possibility that Wind Mobile could combine with Mobilicity.
Anthony Lacavera, the entrepreneur behind the launch of Wind Mobile, told Reuters on Tuesday he was eager to enter into talks with Mobilicity about an acquisition.
Veritas Investment analyst Neeraj Monga sees Mobilicity's creditors being open to a bid from Wind, as they are left with few options in light of the government's ruling.
But others remain skeptical that Mobilicity would be able to attract competitive bids given the challenges in the industry.
"The wireless industry is extremely capital intensive and it naturally gravitates toward more scale," said Chris Marangi, an associate portfolio manager at GAMCO Investors which owns stakes in a few Canadian telecom players. "Industry Canada can't change the laws of economics. They can't make an uneconomic industry structure work. They can't make it profitable."
Paradis' warning about not permitting proposed spectrum transfers that would result in undue concentration has potential implications beyond the Telus-Mobilicty deal.
Rogers last month announced a deal giving it an option to buy Quebecor Inc's (QBRb.TO) unused spectrum in the Toronto area. Quebecor's wireless arm bought the airwaves during the 2008 auction in which the federal government had set aside some airwaves for new entrants, including Quebecor.
In January, Rogers struck a similar deal with rival Shaw Communications (SJRb.TO) for an option to buy Shaw's unused spectrum in certain provinces.
Paradis did not directly comment on the Rogers deals, as the company has options in both cases and has not yet submitted any official applications to transfer the licenses.
"This was not the intention of the government, to have the set-aside spectrum to be sold to incumbents," said Paradis. "I cannot judge about some hypothetical proposals coming in, but the decisions will be based on the key parameters of the policy framework."
The government also said it was delaying an auction for 700 megahertz spectrum to give companies additional time to finalize their approaches and consider its decision on spectrum license transfers.
"The fact that the government has pushed back the spectrum transfer rules and the auction suggests that the government will make some changes to promote competition. If they were not going to make any changes, they wouldn't have changed the schedule," said Monga, adding that Ottawa may allow new entrants to pay for spectrum either over the life of the license term, or over a period of five years.