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Spectrum auction rules don’t make sense

Not even Wind Mobile’s backer, VimpelCom, sees Canada as a key telecoms market for growth.

Deborah Baic/The Globe and Mail

If the federal government wants a fourth wireless carrier in every market, the rules for the coming spectrum auction are a funny way of showing it.

Competing against the industry's giants – BCE Inc., Telus Corp. and Rogers Communications Inc. – in the key markets of Ontario, Alberta and British Columbia requires enough money, willpower, subscribers and spectrum. None of the smaller wireless companies that registered for the January sale of wireless licences has all of those things.

Ottawa's auction rules make it very difficult to change that. Mergers – or even talks about future deals – between auction participants are strictly verboten.

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Private equity firms such as Catalyst Capital Group Inc. and Birch Hill Equity Partners may have the will and the cash, but they lack any subscribers and spectrum. John Bitove's Feenix Wireless Inc., another applicant, fits into this category as well.

Wind Mobile, the largest of the existing new entrants with aspirations to build a national network, has subscribers and some spectrum. The money and the will are in question. Wind's foreign backer, VimpelCom Ltd., has put the business up for sale. When VimpelCom's top executive talks of key markets for growth, Canada is not on the list.

But if the government wants to make the fourth carrier happen, it must let people with willpower and cash talk to those with subscribers and spectrum.

Under the rules of the spectrum auction, those conversations are not possible. Those who have registered for the auction can't talk to one another until after the final payments for spectrum are made some time next spring. The government wants to avoid collusion, ensuring enough bidders to drive up prices for spectrum.

The anti-collusion rule is good for taxpayers. But it is at odds with the fourth-carrier policy upon which the government has spent so much time, energy and political capital.

Put yourself in the shoes of the auction's smaller players, as you decide whether to bid hundreds of millions of dollars for spectrum. That's a decision that must be made in coming days as there is a deadline to put up full deposits at the end of October. (The deposits are refundable, but getting the money together is time consuming and in some cases costly.)

Catalyst and Birch Hill are private equity funds. If they want money to buy spectrum, they have to go out and ask their investors or banks for hundreds of millions of dollars to bid on the airwaves they need to build a national network. They will have to tell their investors, mainly pension funds and the like, that they are bidding on spectrum. They will also have to tell them they have no way to make a deal to buy Wind Mobile – so even if they get the spectrum they might have to start from scratch building a network that will likely cost billions.

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They might have to mention that other wireless upstarts, such as Mobilicity, have ended up insolvent trying to do that very thing. Oh, and even if they do get the spectrum, the exit plan is in question, given that the government has been rather sticky about allowing companies to sell spectrum.

That should be a fun conversation.

Companies like Birch Hill could, of course, focus instead on Wind's poor cousin. Mobilicity is the second-largest of the new companies that entered the wireless market in 2009 and 2010. With less than 200,000 subscribers, it is about one-third as large as Wind. It's not in the auction, so it can entertain all suitors. The downside is that Mobilicity is a terrible business, as shown by the millions of dollars it loses each month. Besides, Mobilicity is trying yet again to sell to Telus.

Catalyst or Birch Hill could also withdraw from the auction. Then they could talk to Wind to try to sew up a deal before the spectrum auction ends. Wind could then buy spectrum with its new owner's backing.

That presumes a complicated deal can get done in the next couple of months when there's not much reason for Wind to rush. The government is apparently entertaining the possibility of Telus buying Mobilicity, or at least has not publicly killed the notion. If that can be done, why wouldn't Wind's owners wait to see if they could sell to an incumbent as well? BCE or Rogers, which would have cost-cutting synergies and a desire to put a bullet in a competitor, could almost certainly pay more for Wind than someone coming fresh to the market, such as Birch Hill or Catalyst.

That's already bad for the government's four-carrier strategy. Now take the scenario a step further. The spectrum auction ends just a couple of months before restrictions on Wind's ability to sell to an incumbent expire. If you are Jo Lunder, running VimpelCom, do you want to put more money into buying spectrum in a market you are trying to leave, especially if the new spectrum comes with more limits on selling to incumbents?

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Already, one big name is not in the auction. Verizon Communications Inc. had a look at both Mobilicity and Wind, with an eye to buying one or both, adding some spectrum, and creating a fourth carrier. Then Verizon backed out. Mobilicity said in a recent court filing that the big U.S. wireless carrier it was in talks with gave up "due to uncertainty surrounding the government's upcoming spectrum auction."

Now, given the strange dynamic created by the auction rules, there is a possibility that Catalyst, Birch Hill and even Wind will decide that it makes no sense to bid for spectrum. The rules designed to keep the auction full of bidders will have done exactly the opposite.

Oops.

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