I 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.