UPDATE 1-Rogers designs plan to thwart Verizon move into Canada
TORONTO, Aug 2 (Reuters) - Rogers Communications, Canada's largest wireless phone company, has crafted a plan to gain control of two struggling rivals to impede any move by U.S. giant Verizon Communications Inc into Canada, an industry source has confirmed to Reuters.
The proposed deal, reported first by the Globe and Mail newspaper, would involve Rogers helping Toronto-based investment firm Birch Hill Equity Partners Management Inc to fund purchases of controlling stakes in the two small companies, Wind Mobile and Mobilicity.()
Verizon has been in talks to buy both companies with plans to use them, and the wireless spectrum they control, as a stepping stone into Canada, sources told Reuters in June .
The industry source with knowledge of the Rogers proposal said it comes with substantial risk that the federal government would ultimately reject the deal, given Ottawa's clear preference that Canada's three dominant wireless players - Rogers, Telus Corp and BCE Inc - get nowhere near the airwaves owned by their smaller competitors.
Government policy designed to increase competition in the industry blocks Rogers from making a direct bid for the two companies.
Under the proposed agreement to help fund Birch Hill, Rogers would get access to Wind Mobile's spectrum, allowing it to expand its high-speed wireless service without taking an equity stake in Wind, the source said.
Birch Hill is also looking to buy Mobilicity, with Rogers backing that deal as well, the source added.
Mobilicity 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 could not immediately be reached for comment.
Rogers and Birch Hill have done business together in the past. In 2010, Birch Hill sold Kitchener, Ontario-based Atria Networks, the owner of 5,600 km 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 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.
RISK OF GOVERNMENT REFUSAL
A Canadian government official declined to comment on its possible reaction to such a deal.
"We do not comment on speculation. On June 28, 2013 the government released the Spectrum Licence Transfer Framework. Any requests received by the department will be reviewed based on that framework," said Sebastien Gariepy, a spokesman for Industry Minister James Moore.
The Conservative government has stressed that it would like to see more competition in the sector, which it hopes will lead to lower wireless bills for consumers.
Telus, Canada's No. 2 wireless player, recently launched a legal challenge of the government's policy. In June, Ottawa foiled a C$380 million bid by Telus for Mobilicity by blocking the transfer of the start-up's spectrum licenses to Telus.
While the Rogers deal may interfere with Verizon's entry into Canada, analysts and industry experts said it is unlikely to ultimately be successful.
"Given its previously published views on spectrum concentration, 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.
Shares of BCE, Telus and Rogers tumbled last month on news that Verizon was looking to enter the market.
The three companies, which control about 90 percent of the Canadian telecom market, argue that Verizon would unfairly benefit from rules designed to encourage competition if it enters Canada.