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TORONTO (Reuters) - Rogers Communications Inc, Canada's largest wireless company, is attempting to thwart Verizon Communications Inc's entry into the country by backing a private equity bid for two small carriers that the U.S. telecom giant wants to acquire.
According to sources familiar with the deal, Rogers wants to help Toronto-based Birch Hill Equity Partners fund a purchase of controlling stakes in Wind Mobile and Mobilicity, which entered the Canadian market less than five years ago.
The plan would complicate a Verizon bid, perhaps pushing the company to raise its offer price, but industry insiders say that is far from assured Rogers and Birch Hill would win approval from the federal government.
Ottawa has repeatedly stressed that it wants to boost competition and lower wireless bills for consumers, and it has set rules in recent auctions of wireless airwaves designed to encourage new carriers to offer services.
Rogers - along with Canada's other major national telecoms BCE Inc and Telus Corp - argue that Verizon would unfairly benefit from the policies to stimulate competition. Those policies include a 2012 easing of restrictions on foreign ownership for smaller operators.
In keeping with its goals, Ottawa has opposed efforts by the Big Three to win control of airwaves owned by any recent entrants, and government policy prevents Rogers from making a direct big for Wind or Mobilicity.
Rogers, Telus and BCE's Bell currently control 90 percent of the market and 85 percent of the spectrum.
The Rogers-Birch Hill plan, initially reported by the Globe and Mail newspaper on Friday, is designed to circumvent those restrictions. The company would take no ownership in Wind and Mobilicity and would not control spectrum owned by them. Instead, the deal is structured to give Rogers access to the airwaves through a commercial agreement.
Even so, sources working with the industry but not directly involved in the deal said Ottawa would likely block any deals that result in "undue concentration," a concern sure to arise from the proposal.
"We believe there is a low likelihood that Industry Canada would approve any structure involving significant funding from an incumbent and/or an incumbent being the major pro-forma customer of a new entrant," Macquarie analyst Greg MacDonald wrote in a short note to clients.
A government official declined to comment directly on the proposed deal, pointing instead to a policy framework released in June that would frame the government's thinking on any sales.
James Moore, who took over as industry minister in a July cabinet reshuffle, made clear on Wednesday that the government has no intention of tweaking its rules governing the wireless sector. That includes restrictions on the transfer of spectrum and limits on how much spectrum the three dominant carriers can buy in an upcoming auction.
Verizon has been in talks to buy both companies and use them, and the spectrum they control, as a stepping stone into Canada, sources told Reuters in June.
Mobilicity has said it has received interest from several parties since delaying a vote on a recapitalization last month, but declined to comment on any particular potential buyer.
Verizon and Rogers declined to comment. A spokesperson for Wind Mobile declined to comment on the report, saying it was business as usual there.
Rogers and Birch Hill have done business together in the past. In 2010, Birch Hill sold Kitchener, Ontario-based Atria Networks, the owner of fiber optic cable, to Rogers and it made some C$355 million ($342.42 million) on the deal after debt.
Two of the private equity firm's partners are also former top executives at Rogers. The firm has C$2 billion in capital under management and it typically focuses on mid-market deals in the C$30 million to C$600 million range.
The upcoming spectrum auction precludes parties with bids to enter takeover discussions or network sharing deals while the months-lone process is underway. The deadline for initial bids is Sept 17.
Auction rules allow BCE, Telus and Rogers to bid for only one of the four prime blocks apiece, and two of the seven blocks available in total. Smaller players such as Wind, Mobilicity and Public Mobile, regional providers such as Quebecor's Videotron or a large new entrant like Verizon, may bid for up to two of the four prime blocks.
In considering approval of any proposed deals, Ottawa has indicated that it would also examine the overall distribution of licenses in a single region, how a change in ownership would affect services and other factors.
Additional reporting by Louise Egan in Ottawa and Krithika Krishnamurthy in Bangalore; Editing by Jeffrey Hodgson and Peter Galloway