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Court scraps cabinet ruling on Globalive, dealing blow to new entrant

Wind Mobile's Anthony Lacavera

JENNIFER ROBERTS/Jennifer Roberts for the

The federal court's stunning move to overturn a cabinet decision that allowed Globalive Wireless Management Corp. to operate in Canada throws a new obstacle at the largest of the new independent cell phone companies, just as it was beginning to build a critical mass of subscribers.

Globalive, which is backed financially by Egyptian communications giant Orascom Telecom, was denied a licence in 2009 to operate by the federal telecommunications regulator on the grounds that it did not meet Canadian ownership requirements for phone companies. Weeks later, the Harper government vetoed that decision, permitting Globalive to launch under the Wind Mobile brand. In about 14 months of operation, it has acquired more than 200,000 customers.

But late Friday afternoon, the court said the government erred and gave Globalive 45 days to comply with the law. The shares of the country's three main wireless providers -- Rogers Communications Inc., BCE Inc. and Telus Corp. -- all jumped on the news.

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The court decision capped an already tumultuous week for Canadian telecommunications, during which the Prime Minister and the federal Industry Minister publicly questioned a recent CRTC ruling on Internet pricing that had led to a vitriolic consumer backlash at the regulator, the government and the sector's largest phone and cable companies.

In an interview, Globalive chairman Anthony Lacavera said he is exasperated by the ongoing battle but will fight to prove his company is in compliance with the "control in fact" section of Canadian telecom ownership rules, which determines whether his company is overly influenced by its Egyptian backer. The chaos in Egypt has, at times, made it difficult to reach Cairo-headquartered Orascom's executives, including its billionaire chairman Naguib Sawiris, whom Mr. Lacavera said is obviously distracted by the violence engulfing his country, where he is one of the most prominent citizens.

"I've got another fight on my hands," Mr. Lacavera said.

But the court rejection is unlikely to result in an operational shutdown of Wind's cellular business. Legal experts said Wind can pursue a handful of legal strategies, including to seek an extension of the stay. But the company would have to convince the court that more time is essential. Wind could also sidestep Friday's ruling by returning to the CRTC with a new financing structure that satisfies the regulator's original concerns, which focus around the vast amount of Globalive debt held by Orascom -- though it would likely have to find some new Canadian investors to do so.

Another option is to appeal the decision to the Federal Court of Appeal, and if that fails, the Supreme Court of Canada. Such a course could take months, possibly years, forcing Wind and other telecom companies to operate under a cloud of uncertainty.

Public Mobile, another new wireless company, asked for the judicial review of cabinet's order in council last year, with CEO Alek Krstajic saying at the time that he didn't want to shut down Globalive - that he simply wanted clarity on the policy. Many, including Mr. Krstajic and Telus, have argued the cabinet decision of 2009 amounted to a change in the country's foreign ownership rules.

"If the order in council had said, 'We've changed the laws, and anybody who is a new entrant like Globalive can have the same kind of structure as Globalive and can get foreign capital,' I can tell you right now this application would not have been brought forward," Mr. Krstajik said during a cross-examination. "But the fact that they tried to say… 'This isn't in a change in the law, so look the other way, this thing isn't really a change in the law and it only applies to Globalive,' made it a direct impact on me.. They're allowing Globalive to have access to foreign capital that I don't have."

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However awkward a prolonged court appeal would be for telecom companies, regulatory sources said it would be politically expedient for Industry Minister Tony Clement and the minority Conservative government, given that election fever is in the air and foreign ownership is a controversial subject. Some suspect that Mr. Clement, when he threatened to overturn a CRTC ruling on Internet pricing that could raise bills for Canadians who download a lot, was doing so because of the likelihood of an election soon.

The court's decision on Friday took financial analysts by surprise. Some elaborated on a variety of scenarios ranging from Wind gaining Canadian capital more easily thanks to its strong brand presence, to a last-ditch merger with rival Mobilicity.

Jonathan Allen, a telecom analyst with RBC Capital Markets, suggested in a note to clients that it would be impossible for the federal government to allow Wind to collapse amidst billions of dollars of investment and Conservative cries for more competition.

"[The government]will look exceptionally bad to the public -- allowing/encouraging a company to invest a billion dollars in Canada, add a quarter-million customers, and then let the rug be pulled out from under the company," Mr. Allen wrote. "So with the Conservatives potentially losing face just a few months ahead of an election, we believe the government will move quickly to resolve the situation and avoid a disruption."

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