Birch Hill gives Federal government an escape from its Gordian wireless knot
The debt and equity holders of Wind Mobile have to be feeling pretty good on this holiday Monday about where things are headed.
Last week, the Globe and Mail reported that a Canadian private equity firm was considering an acquisition of Wind Mobile and Mobilicity. That the two failing companies had been shopped to local private equity firms regularly for the last 12 months wasn’t news. But “five” sources told the Globe that Birch Hill Private Equity Partners, one of Canada’s best PE funds, was seriously looking at the deal. That’s news given that so much time had elapsed since everyone else had passed.
The difference this time, so the story goes, is some form of network sharing agreement with Rogers Communications (RCI:TSX). Somehow, this was the return-enhancing special sauce that other PE firms hadn’t considered, and made the opportunity a viable one for Birch Hill. Up until that point, millions of private equity dollars had been sunk into Wind, Mobilicity and Public Mobile, with nary an IRR point to show for their efforts. I’m not privy to the math, but the theory seems to be that a network sharing agreement, where Rogers pays Birch Hill’s Wind to use part of its would-be spectrum, turns what otherwise has been toxic for such PE firms as Columbia Capital, M/C Venture Partners, OMERS and Quadrangle Capital Partners into a good vertical investment.
Although it is being positioned as a way for Rogers to block Verizon’s entry to Canada, I think commentators are missing the point. Firms such as Birch Hill propose these types of deals to make money. If the were driven by some selfless public policy craving there are other way to contribute to the political landscape than risking, say $150 million of your $1 billion fund. If the Canadian wireless oligarchy benefits, too, than we won’t see any backbiting by Bell and Telus should this proposal ever wind up on the desk of Industry Minister James Moore for approval.
It all might be for naught, of course, since Verizon’s own media handlers responded to Friday’s Globe — Birch Hill story with their own leak later that morning that its Board would be meeting this week to consider its own acquisition of Wind and, we assume, Mobilicity. One has to believe that Verizon can outbid Birch Hill (no matter who they’ve aligned themselves with), but now that a competing offer has hit the press, I’m sure Wind’s Tony Lacavera’s enjoying his first positive taste of a deal dynamic since 2008.
That doesn’t mean Birch Hill won’t wind up with just Mobilicity as a consolation prize, but the strategy of owning and growing Canada’s 4th network seems to hinge on also owning Wind given its far larger footprint and subscriber base.
If anyone thinks Ottawa is going to step in here and play favourites, they’ve not been reading the tea leaves. That’s not to say they shouldn’t. If the true goal is four national carriers, perhaps a Canadian PE-backed Wind deal is the right answer. The daily newspaper advocacy campaign would stop, and the Canadian interest groups who’ve rallied behind Bell’s anti-Verizon print campaign might even pat the government on the back for listening to them (in a way). Whether or not a 4th carrier backed by merchant bankers, who are in business to earn a great return for their own limited partners, are the likely group to lead wireless rates dramatically lower remains to be seen.
However, if Verizon’s not known for being a low cost provider, then perhaps the issue is academic. Whoever gets the Wind prize may well just play along, just as National Bank does with Canada’s Big 5 banks. Canada’s a small market, which means we will and likely should pay more for certain services that rely on critical consumer mass than the citizens of our former founding nations, England and France, for example. We pay more than Americans for books, cars, and a case of Coke.
Why do we expect to pay the same as Americans for our wireless plan? We’ve yet to see proof that either Birch Hill or Verizon’s presence will actually lower rates, and I never found that Wind’s BlackBerry plan was any better than available from my existing carrier — which required the presence of new entrants, of course. And then there’s the question of how long a Birch Hill-backed player would remain independent. These investments aren’t for life.
If it’s the contracts that the government wants to fix, then they already have the regulatory tools to do so. Cell phone number portability is an example of a change that the Feds made to help consumers switch carriers if they wanted a better plan; cancelling 3 year contracts was another.
If the government remains convinced that a 4th national carrier is the answer to increased competition, then it should be ummoved (see prior post “Feds need to keep their eye on the Telco prize” July 29-13). But it’s not clear if either Verizon or a new Wind is the answer.
Before he approves either deal, Minister Moore will want to better understand that issue. But the clock’s ticking. There are only a few months left before the spectrum acquisition moratorium ends.