Thursday morning netted one of those surprising-but-not-really bits of news, with the announcement by Telus that it is acquiring small wireless carrier Mobilicity for $380 million. The deal is subject to government approval, which is in no way guaranteed. I wrote a piece over on Yahoo detailing why the acquisition is bad news for everyone, from consumers to the incumbent carriers themselves – and especially the government.
With additional funding unlikely to come from either within Canada or without, and other similarly cash-strapped new entrants Wind and Public Mobile unable or unwilling to buy the bleeding entity that is Mobilicity, there really doesn’t seem to be any other alternative. The deal has been rumoured for some time and was widely expected to become official ahead of the June 11 deadline for putting down deposits on the next wireless spectrum auction, which is scheduled for November.
With the wireless industry a giant mess of the government’s own creation, Industry Minister Christian Paradis and his colleagues are now under immense pressure to do something drastic. With Canadian bills already the highest in the world and edging higher, and the first of the low-cost competitors about to fall, there really is no delaying dramatic action any longer. What form that will take will be the fun thing to watch over the next few weeks.
The deal is actually bad news for Telus, and Bell and Rogers too, because of that. As analysts at Veritas Investment Research pointed out earlier this week before Telus announced its deal, Rogers’ own effort to buy Shaw’s spectrum will inevitably hurt the incumbents because it has reignited the debate about whether new carriers can survive, as well as all the related issues of high prices and competition. The Telus-Mobilicity arrangement will only speed up the dropping of the hammer.
In many ways, the incumbents might be better off to let the new carriers die on their own, then swoop in to pick up their assets once all is said and done. At least then they can say “we told you so,” and not be seen as purposely killing off competition.
Telus is trying to frame the acquisition as the only way to keep service flowing to Mobilicity’s 250,000 customers and keep its 150 workers employed. Even Mobilicity is trying to put a bold face on the deal, with executives releasing some mushy statements about their acquirer. Says president Stewart Lyons:
A concern for our customers and employees led us to approach Telus, which has a reputation for a strong customer focus, as evidenced by their industry leading client loyalty… I am confident Telus will look after our employees and our customers, mitigating any disruption to their service, while offering the best outcome for all stakeholders.
The statements are an obvious effort to convince government of the positives of the deal, given the harsh rhetoric Mobilicity and other new carriers have leveled at Telus and the other incumbents in the past. Just last year, Lyons was thanking politicians for taking action against the “restrictive, oppressive wireless practices” of its big competitors.
Nobody is fooled. The deal has little to do with continuing service – Mobilicity customers can easily switch over to Wind if they have to – or jobs, which Telus could cut anyway. It has everything to do with the smaller company’s investors and debt holders stopping their bleeding and getting an exit, and especially with Telus taking out a particularly aggressive competitor. Companies always try to make important mergers palatable to government by highlighting the benefits to everyone but themselves, but this particular deal is far from passing that particular smell test. The best thing for the country may indeed be to let Mobilicity fail, have its customers flip over to Wind and its spectrum revert to the government.
Beyond that, it’s interesting to dissect the deal itself. At $380 million for 250,000 customers, Telus’ cost of acquiring each new individual subscriber would be $1,520, or nearly five times its normal cost of acquisition of $369 in the most recent quarter. The real value in the deal is naturally Mobilicity’s spectrum licenses, for which the company paid $243 million in 2008. Subtracting that, Telus is paying $548 per customer, which is still a lot compared to what a new subscriber usually costs the company.
All told, though, that might actually be a small price for Telus to pay for making sure that no one else can use that spectrum, especially on the miniscule chance that a foreign player might be interested in it.
Either way, the wireless doo-doo has officially hit the fan. Let’s see how far it sprays.
ADDENDUM: Greg O’Brien over at CARTT.ca rightly points out that when Mobilicity’s tax losses are factored in, Telus is paying virtually nothing per subscriber.