(Adds context and comments from Telus and from analysts, updates share price)
By Alastair Sharp
TORONTO, May 16 (Reuters) - Telus Corp, one of Canada’s biggest wireless phone companies, said on Thursday it will pay C$380 million ($370 million) for debt-laden Mobilicity, testing the resolve of a government committed to opening the market to smaller players.
The deal, already backed by some Mobilicity debt holders, must now wind its way though a regulatory obstacle course involving several agencies and approval is far from certain. But the two companies suggested the alternative was death for the loss-making upstart.
“We believe this deal is significantly better than the alternative, which is highly likely to be bankruptcy,” Telus marketing chief Dave Fuller said by phone. Proceeds from the sale will be used to pay down the startup’s debt.
Privately held Mobilicity, whose formal name is Data & Audio-Visual Enterprises Holdings Inc, was one of three aggressive startups that entered the Canadian market after a spectrum auction which partially excluded the Big Three of Telus, BCE Inc and Rogers Communications.
But Mobilicity, which used cut-rate pricing of unlimited talk-and-text plans to challenge the established providers, has been losing money and building up debt.
Industry Minister Christian Paradis said the government will weigh Telus’ bid for Mobilicity carefully. Under the rules of the 2008 auction, Telus cannot take ownership of Mobilicity’s spectrum before February 2014.
“Our government has taken significant action to promote competition in the wireless sector,” he said. “The government will take the time required to review the proposal carefully.”
The government, which wants four cellphone options in each region, has turned its nose up at a separate spectrum transfer deal involving Rogers. But Telus said that should not set a precedent for its Mobilicity bid.
The Telus deal will also require nods from Canada’s competition watchdog and its telecommunications regulator, the remaining Mobilicity debtholders, and a provincial court.
Analysts were generally positive on the deal’s implications for Telus, given Mobilicity’s 250,000 customers, its retail presence and the spectrum it paid C$243 million for in 2008.
Telus overtook BCE as Canada’s second-largest wireless company by subscribers last quarter, with 7.7 million. Rogers, the market leader, has more than 9 million subscribers.
The deal would likely result in tax loss carryforwards valued at around C$100 million, Desjardins analyst Maher Yaghi said. Mobilicity is operating at an annual loss of C$74 million on revenue of C$70 million, RBC Capital Markets analyst Drew McReynolds said, citing court documents.
Telus stock, up more than 13 percent this year, rose more than 1 percent to C$37.47 by early Thursday afternoon.
The bid may not mark the end of consolidation in the cut-throat industry ahead of another auction of airwaves due to start in November as demand explodes for speedy streaming of video and other data-heavy applications.
Another of the startups, Wind Mobile, may also be looking to sell itself. VimpelCom Ltd, owner of Wind Mobile, says it would consider various options, including divestment.
Mobilicity, whose pre-paid customers typically pay much less per month than those using high-end devices on long-term contracts, was expected to struggle to raise funds to compete in those auctions, where the rules are not as favorable to the startups.
Ottawa is looking at the rules on the sale of spectrum after Shaw Communications bought spectrum in the previous auction, but decided not to build a wireless network.
Shaw, the dominant cable company in Western Canada, is seeking to sell the airwaves to Rogers.
Mobilicity was founded by serial entrepreneur John Bitove and Quadrangle Capital Partners and Bitove’s Obelysk private equity firm have each long held a major equity stake. Its debt holders are mostly Canadian financial institutions, chief executive Stewart Lyons said.
“This is the only true alternative that was out there for us, and it is one that returns a fair bit of capital to all of the stakeholders,” Lyons told Reuters in a phone interview. “Given the spot that we’re in, I think this is the right deal for us and hopefully the government will approve it quickly.”
$1 = 1.0177 Canadian dollars Additional reporting by Randall Palmer in Ottawa; Editing by Janet Guttsman, John Wallace and Chris Reese