* Initial offer for Wind in $600 mln-$800 mln range -source
* Startups have struggled to compete with dominant players
* Upcoming 700 MHz auction key to market as data booms
TORONTO, June 26 (Reuters) - Verizon Communications Inc has offered to buy Canadian telecom startup Wind Mobile and is in talks to acquire Mobilicity, as it seeks to challenge Canada's three big wireless providers, sources familiar with the deals said on Wednesday.
One of the sources said Verizon had last week presented a tentative offer of $600 million to $800 million for Wind Mobile, with final pricing subject to due diligence. Another source cited Verizon's talks with Mobility, a rival startup.
Both sources declined to be named because they are not authorized to speak to the media.
The U.S. telecom leader, which sold its minority stake in Telus Corp in 2004, is looking to re-enter the Canadian market to boost its growth prospects.
For a relatively small sum, the potential deals would allow Verizon to re-enter Canada's high margin wireless business, placing it in a good position ahead of a government auction of spectrum, or wireless frequencies, said Barclays analyst Amir Rozwadowski.
Stocks of Canada's three biggest telecoms players, which control about 90 percent of the market, tumbled following the news on Wednesday, as the potential deals could reshape the Canadian wireless market with much more competition.
Telus fell 8 percent to C$30.70, Rogers Communications Inc lost 9.2 percent to C$41.67, and BCE Inc fell 4 percent at C$41.57.
The Canadian government last year eased foreign ownership restrictions for telecom operators whose revenue is less than 10 percent of the national market total. The acquirer can remain in Canada even if its share increases organically.
If Verizon enters Canada it could take up to 1.5 million subscribers from the Big Three over five years, said Macquarie analyst Greg MacDonald.
This would result in billions of dollars of lost revenue and substantially hurt valuations of the trio, analysts said.
Mobilicity, Wind and Public Mobile, the three startups that emerged from a 2008 government auction of spectrum, entered the market with cheap talk-and-text plans. While the Big Three faced pressure, the startups have yet to turn a profit, and Mobilicity debtholders are set to vote on a recapitalization plan early next week.
A number of carriers are jockeying to strike deals ahead of a second big auction for the coveted 700 mhz spectrum, which requires fewer towers than higher-frequency airwaves.
Other sources familiar with the situation have said that all the three startups have attracted offers from the three big Canadian players.
But the government wants to boost competition, and has made it clear that it does not want the startups to go to existing operators. Earlier this month, it quashed Telus' C$380 million bid for Mobilicity by blocking the transfer of Mobilicity's spectrum.
A bid from Verizon would likely be far more tempting to Ottawa, given that it would create a carrier able to boost competition across the country.
In March, the government said it was too early to talk about lifting foreign ownership restrictions for the large telcos. But it is expected to soon announce a policy on spectrum transfers and this will give Verizon more certainty on how to proceed.
Verizon declined to comment. Last week, Chief Financial Officer Fran Shammo however, confirmed publicly that Verizon was interested in entering the Canadian market.
A Wind spokeswoman and a Mobilicity spokesman both declined to comment.
Any new entrants will seek to clarify their ownership before Sept. 17, the deadline to apply for the 700 megahertz spectrum auction due to start on Jan. 14. Auction rules preclude talks between bidding parties after an initial expression of interest.
Seven blocks are available in the auction, but bidders will likely covet four that are aligned with the spectrum bought by AT&T and Verizon in the United States.
The government has said BCE, Telus and Rogers can each obtain only one of these prime blocks, leaving new entrants and regional cable operators such as Quebecor Inc and Shaw Communications to compete for the fourth.
Verizon is already using 700 MHz airwaves to build a U.S. network capable of handling heavy data use such as streaming video. Acquiring the same spectrum in Canada would let Verizon buy high-end devices at a discount.
Ottawa aims to raise at least C$900 million in the 700 MHz auction, but proceeds are expected to far exceed that as carriers jostle for the bandwidth upon which their networks depend. The 2008 spectrum auction brought in more than C$4 billion for the government.