By Alastair Sharp and Euan Rocha
TORONTO Aug 2 Rogers Communications Inc
, Canada's largest wireless company, is attempting to
thwart Verizon Communications Inc's entry into the
country by backing a private equity bid for two small carriers
that the U.S. telecom giant wants to acquire.
According to sources familiar with the deal, Rogers wants to
help Toronto-based Birch Hill Equity Partners fund a purchase of
controlling stakes in Wind Mobile and Mobilicity, which entered
the Canadian market less than five years ago.
The plan would complicate a Verizon bid, perhaps pushing the
company to raise its offer price, but industry insiders say that
is far from assured Rogers and Birch Hill would win approval
from the federal government.
Ottawa has repeatedly stressed that it wants to boost
competition and lower wireless bills for consumers, and it has
set rules in recent auctions of wireless airwaves designed to
encourage new carriers to offer services.
Rogers - along with Canada's other major national telecoms
BCE Inc and Telus Corp - argue that Verizon
would unfairly benefit from the policies to stimulate
competition. Those policies include a 2012 easing of
restrictions on foreign ownership for smaller operators.
In keeping with its goals, Ottawa has opposed efforts by the
Big Three to win control of airwaves owned by any recent
entrants, and government policy prevents Rogers from making a
direct big for Wind or Mobilicity.
Rogers, Telus and BCE's Bell currently control 90 percent of
the market and 85 percent of the spectrum.
The Rogers-Birch Hill plan, initially reported by the Globe
and Mail newspaper on Friday, is designed to circumvent those
restrictions. The company would take no ownership in Wind and
Mobilicity and would not control spectrum owned by them.
Instead, the deal is structured to give Rogers access to the
airwaves through a commercial agreement.
Even so, sources working with the industry but not directly
involved in the deal said Ottawa would likely block any deals
that result in "undue concentration," a concern sure to arise
from the proposal.
"We believe there is a low likelihood that Industry Canada
would approve any structure involving significant funding from
an incumbent and/or an incumbent being the major pro-forma
customer of a new entrant," Macquarie analyst Greg MacDonald
wrote in a short note to clients.
A government official declined to comment directly on the
proposed deal, pointing instead to a policy framework released
in June that would frame the government's thinking on any sales.
James Moore, who took over as industry minister in a July
cabinet reshuffle, made clear on Wednesday that the government
has no intention of tweaking its rules governing the wireless
sector. That includes restrictions on the transfer of spectrum
and limits on how much spectrum the three dominant carriers can
buy in an upcoming auction.
STEPPING STONE TO CANADA
Verizon has been in talks to buy both companies and use
them, and the spectrum they control, as a stepping stone into
Canada, sources told Reuters in June.
Mobilicity has said it has received interest from several
parties since delaying a vote on a recapitalization last month,
but declined to comment on any particular potential buyer.
Verizon and Rogers declined to comment. A spokesperson for
Wind Mobile declined to comment on the report, saying it was
business as usual there.
Rogers and Birch Hill have done business together in the
past. In 2010, Birch Hill sold Kitchener, Ontario-based Atria
Networks, the owner of fiber optic cable, to Rogers and it made
some C$355 million ($342.42 million) on the deal after debt.
Two of the private equity firm's partners are also former
top executives at Rogers. The firm has C$2 billion in capital
under management and it typically focuses on mid-market deals in
the C$30 million to C$600 million range.
The upcoming spectrum auction precludes parties with bids to
enter takeover discussions or network sharing deals while the
months-lone process is underway. The deadline for initial bids
is Sept 17.
Auction rules allow BCE, Telus and Rogers to bid for only
one of the four prime blocks apiece, and two of the seven blocks
available in total. Smaller players such as Wind, Mobilicity and
Public Mobile, regional providers such as Quebecor's
Videotron or a large new entrant like Verizon, may bid for up to
two of the four prime blocks.
In considering approval of any proposed deals, Ottawa has
indicated that it would also examine the overall distribution of
licenses in a single region, how a change in ownership would
affect services and other factors.