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Judgement Day has arrived for Canadian wireless

17 May

mobilicity

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.

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4 Comments

Posted by on May 17, 2013 in mobile, telus

 

4 responses to “Judgement Day has arrived for Canadian wireless

  1. Jean-Fran├žois Mezei

    May 17, 2013 at 12:30 am

    When a company enters what is commonly called “bankruptcy protection”, the secured creditors become in control of the company (via bankruptcy judge).

    To acquire Mobilicity, Telus must strike deals with Mobilicity’s creditors. (Which the press release said Telus was doing). And this dictates the cost to Telus to acquire Mobilicity.

    Generally, secured creditors don’t get paid back in full, so there is never any money left for unsecured creditors or shareholders (the last to get any money).

    Depending on how much debt is written off, how much is paid off and how much is left to pay, it is possible that Mobilicity might emerge as a profitable subsidiary with very little debt. At that point, the customers become more profitable.

    Do not discount the possibility that this is just a placeholder offer. When the canadian banks wanted to sell Microcell/Fido (which had become profitable through re-orgnisation which resulted in banks owning Microcell)), Telus also made a bid for it. But it was likely designed to set a floor price which Rogers had to beat. (Telus was still CDMA back then, so the GSM Fido was very incompatible and of little value to Telus who already had Clearnet).

    Telus’s offer for Mobilicity may be similar, setting a foor price that other entities would have to beat to get control of Mobilicity. Since one of the major creditors has indicated they might be interested, this gets interesting.

     
    • Peter Nowak

      May 17, 2013 at 9:29 am

      Yes, but Mobilicity is not in bankruptcy protection yet.

       
  2. jvanl

    May 17, 2013 at 12:57 am

    The verdict is FAIL.

     
  3. redneckonthetrain

    May 20, 2013 at 7:02 am

    Drastic government action? hmmm…. what could they do.

    How about seamless and reasonable incumbent/newcomer roaming rates? That would sure go a long way! Who wants a mobile phone that you can’t take short road trips with, or use in smaller cities and towns.

    http://www.itworldcanada.com/news/wind-loses-again-on-roaming-complaint/145183

    CRTC says no to seamless roaming:
    “With the ruling Wind can only hope that Industry Canada will come to its rescue in its review of roaming conditions as part of the rules for the upcoming 700 MHz spectrum auction.”

     
 
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