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Will Telus try again for Mobilicity? It’s doubtful

06 Jun

MobilicityI had an entertaining email conversation yesterday with Iain Grant, president of telecom consultancy The Seaboard Group, that I had to share. I’d originally emailed Grant with some questions about cellphone subsidies, but we soon got to talking about the government’s recent refusal to allow Telus to take over Mobilicity, and what that means to other potential spectrum deals involving Rogers, Shaw and Videotron.

He thinks Telus will try again: “I still think Telus buys Mobilicity, after a mourning period gnashing teeth at government interference in marketplace. The cunning plan would be to buy Mobilicity, return the spectrum license to [Industry Minister Christian] Paradis at a press conference and ask for a refund.”

I told him I thought he was crazy. Paradis did, after all, kill the deal on the grounds that the wireless spectrum airwaves reserved for new companies cannot be transferred to incumbents. Under Grant’s suggestion, Telus would be brazenly asking for a refund on something it is not allowed to own.

His response: “Sure it could. [Telus] buys Mobilicity. It then ‘returns’ the license to the Minister – ideally at a press conference – and says ‘here you go, a 10-year license, purchased for $24 million and issued by Her Majesty the Queen in 2010. First gambit:  FULL REFUND + COST OF MONEY:  Ask for $243 million plus interest at 8% for the past three years = $306 million now. Second gambit:  FULL REFUND (simple) = $243 million. Third gambit: FULL REFUND less two years of usage = $243 – (2/10 of $243 = $48.6 million) = $194.4 million.

“Telus purchases Mobilicity – all its assets, rights and obligations – and returns those things it cannot use/don’t need to various vendors/suppliers. One of those vendors/suppliers is the government of Canada. It returns a license that ‘it’ paid for that still has many years to run. It would not be unusual to expect to be paid – in one form or another – for the ‘release’ of the license.”

I again told Grant he was nuts, that this sort of move would be akin to buying a car and then expecting to return it for a full refund a few years later because you can’t drive it. Even trying that would further antagonize the government: “Buyer beware applies in this case too. If these efforts at refunds are tried, a) there will be public outrage and heat on the government, and b) others will sue. Wind, Bell or Telus would have cause to sue, saying that Shaw & Mobilicity’s bids drove prices up, so they’ll want partial refunds too. The entire idea of refunds would lead to a giant [redacted] storm. No way anyone’s dumb enough to try that. Okay, maybe [redacted],” I wrote.

Grant’s rebuttal: “A license is different than a tangible good. Unlike a car, for example, the license only conveys a ‘right.’ A right to use a portion of a public good for private gain – the private gain part is a key element in the consideration and also in how a court would look at the transaction. Party A puts up (say) $243 million for a ten-year license. It presumably looks at the $243 million as a cost of doing business that is facilitated by the license. It would be treated as a capital expense under the income tax act.

“There would be valid accounting arguments for the costs of relinquishing that ‘right’ as well. And insofar as the government is about to ‘change the rules,’ taking the five-year prohibition on license transfer and extending it a further five years… as you change the rules you effect the marketplace, and disrupt the balance that government strives to offer, so I see a refund as a valid mechanism and a cunning tactic for both sides. For Shaw, Videotron and Telus on the one side and for the government on the other. The government could then re-tender or re-award the returned spectrum to a qualified party – think Wind – for the same price. Everyone wins, government saves face.

“The fact that prices in the auction were impacted by Mobilicity’s actions is valid, but given that Mobilicity was successful in only a few markets with a total bid exposure of $243 million suggests that its impact was marginal, given that Telus, Bell and Rogers spend billions.”

At that, I decided the only way to settle the issue was with a wager. I suggested $20 but we agreed on three pints of beer. I still think he’s crazy, but hey, maybe he’s right.

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6 Comments

Posted by on June 6, 2013 in telecommunications, telus

 

6 responses to “Will Telus try again for Mobilicity? It’s doubtful

  1. globeman

    June 6, 2013 at 12:24 am

    Yeah, I’m really pissed off at Shaw selling spectrum to Rogers. You could see it coming. Rogers and Shaw are two cable companies who have an unofficial non-compete agreement, and also have a similar story in that they are family companies, meaning the voting shares are owned by the family founders. It’s like Shaw was acting as second agent for Rogers, getting SET-ASIDE spectrum and then flipping it (THAT REALLY PISSES ME OFF). Damn, I HATE THE NEPOTISTIC, UNDEMOCRATIC, FAMILY PIECE OF SHIT CABLE COMPANIES IN THIS COUNTRY!

     
  2. Jean-François Mezei

    June 6, 2013 at 12:28 am

    The structure of the current Telus – Mobilicity deal sees Telus pay off creditors (all of the money goes into a Trust company who will pay off most creditors). After that, Mobilicity cancels its shares and recapitalise to a book value of $1. Telus then proceeds to purchase control of Mobilicity by buying all those new shares worth a total of $1.

    However, in short term Telus would have given $10 million in cold hard cash next week to keep Mobilicity operating until August. Then in August regular cash payments made to Mobilicity to keep it operating until deal is finalised.

    From the Industry Canada point of view, Telus could keep sending cash to keep Mobilicity afloat until the 5 year moratorium expires, after which it can proceed with the remainder of transaction and gain effective control. There might even be a way where Telus could pay off the creditors now and proceed with recapitalisation and purchase of the new shares only in February (this would hace advantage that Mobilicity might become cash positive once it is without debt).

    However, it is still not clear if Telus ever truly intended to buy Mobilicity. They had also made a bid for Fido (despite incompatile networks and no synergy since Telus already had Clearnet by then). So if telus was only setting a standars to be upheald by another bidder, they will likely bow out gracefully and easily.

    But if they really want it, there are still ways to go about it.

    If Telus drops out and offers no alternatives, then the judge and creditors have to gauge whether there are any other options other than liquidation. The whole goal at this point is to find the option that results in the fewest losses to creditors.

    One option would be to get Mobilicity to the verge of liquidation, and then there would be a bidding war to acquire only the customers. Wind would be a likely candidate. They can enable roaming for Mobilicity customers onto Wind’s network so the minute the Mobilicity network is shut down, the customers will fall back onto Wind.

     
  3. Marc Venot

    June 6, 2013 at 12:37 am

    As you said the rules were fixed and it wasn’t small print or cryptic. The only way that remain in the hand of Mobilicity is a call for mercy.

     
  4. russellmcormond

    June 6, 2013 at 1:56 pm

    A good analogy might be someone trying to return an infringing copy of a movie to a copyright holder demanding that the copyright holder pay the infringer the price that would have been paid for a legitimate license. It is an insane request that shows just how out-of-touch some of the legacy telecom industry is.

    Paradis should have just clarified that the license was not an “asset” that could have been part of the sale, and that the sale could go through with the understanding that the monopoly grant license would then be void (obviously with no refund). Sure, the mobility “company” can be sold, but the spectrum wasn’t property that could legitimately have been transferred in the first place.

     
  5. Ottawaboyevin

    June 6, 2013 at 6:06 pm

    The point of all of this spectrum business is to stop the profiteering , not bring canadians cell phones at below market prices. We need to ask why Mobilicity and Wind and stuff are going out of business. If the answer is Rogers and Telus and Bell are forcing them out through unnatural prices (ie: lowering them temporarily , and then raising them up again when the new guys are gone) the answer is to start sueing the big three. Or even letting other third parties in at a much reduced price assuming they do certain things (aquire 1 million customers etc) . The big three can only lose money for so long before they realize the situation is permanent.

    But if the reason is the prices are too low … thats another matter.

     
  6. gun26

    June 9, 2013 at 2:28 pm

    If Telus did anything remotely like Iain Grant suggests, it would further antagonize a government that is already disposed to dislike Telus and their oligopolistic friends Bell and Rogers. Would that really be a smart thing to do? It would make a few minutes of entertaining television at the cost of enmity from a government that will be in place two more years before the next election.

     
 
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