Struggle for control sharpens between Mobilicity and Catalyst

Mobilicity’s management says Catalyst Capital Group Inc. is trying to leverage a $60-million lending agreement to take control of the floundering new entrant carrier. Catalyst says it’s simply trying to recoup what it's owed. Neither side appears set to back down. In affidavits filed with the Ontario Superior Court over the past month, Catalyst and Mobilicity management have sparred over competing plans for Mobilicity, which is trudging through bankruptcy protection proceedings. At issue is control over the company’s operations and finances, including a possible sale of the company and who would be entitled to any proceeds. “he Catalyst financing terms would give Catalyst the ability to block a potential sale transaction or a plan that may otherwise have the support of the requisite majority of current noteholders,” William Aziz, Mobilicity’s chief restructuring officer, said in an affidavit dated Oct. 16. “ own interest in establishing itself as an operator in the wireless space would pose a significant conflict of interest where the Mobilicity Group has opportunities to sell to another, possibly competing, buyer,” he said. Mobilicity, the new entrant carrier operated by Dave Wireless Inc., filed for bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA) with the Ontario Superior Court last month. The company said at the time that it had roughly $526 million in debt as of the end of July, which includes the $60 million it owes to Catalyst as a “first lien”—or top priority—debtholder in the company. The good news, it said, was that it had a potential sale lined up, and was making plans for how to divvy up the money. James Riley, Catalyst’s managing director and chief operating officer, said in an affidavit dated Oct. 9 that $445 million of Mobilicity’s debt is held by the operating company, and the rest by holding company Dave Holdings Inc. Riley said proceeds from any sale of the company should go first to Mobilicity’s debtholders, leaving the value of the holding company’s shareholder interest worthless unless the company is sold for more than $445 million. As a result, Riley said, stakeholders in the holding company are attempting to “structure a sale transaction which effectively disregards the separate corporate existence” of the two registered companies in an effort to lift their priority in the creditor repayment list. A majority of the holding company’s creditors, he said, also hold first lien debt in Mobilicity, giving them more control over how a sale of the company would be structured, and which further complicates the issue. Riley said in the affidavit that Catalyst wants to see Mobilicity sold as soon as possible out of concern that the company’s value is deteriorating. He said Mobilicity’s management has decided to “substantially reduce” funding for ongoing operations, which has “significantly impacted ability to retain its subscribers,” its only source of revenue. Mobilicity, he wrote, reported that it lost nearly 50,000 subscribers between June 30 and Sept. 30, from approximately 250,000 subscribers that it had in late May. “ appears to be caught in a vicious circle. It’s diminishing customer base results in declining revenues. Without the cash required to maintain and improve service, conduct promotions, or undertake appropriate marketing efforts, its business appears to be deteriorating further,” he wrote in the affidavit dated Oct. 19. Riley asked the court to order Mobilicity to reopen a concluded process to secure “debtor-in-possession” financing, a type of funding that’s designed to help companies get through a bankruptcy proceeding and which can be converted to equity once the company restructures. Among other requests, Riley also asked the court to disregard an ad-hoc committee of Mobilicity’s debtholders that was formed to consider a potential sale and interim financing arrangements, which he said was comprised of “conflicted” debtholders. He said the committee would give debtholders a veto over any deal that might not serve their interests. In its place, he asked the court to appoint a new creditors’ committee that would include at least one Catalyst representative. In his Oct. 16 filing, Aziz said Mobilicity opposed Catalyst’s requests, as did the ad-hoc committee and some of the company’s other creditors. He said granting Catalyst’s requests would have a “destabilizing” effect on the company and “would disregard the value that creditors have provided and continue to provide to the Mobilicity Group’s restructuring process.” Aziz said Catalyst wanted to force Mobilicity to accept debtor-in-possession financing of at least $100 million on Catalyst’s terms, which could allow Catalyst to later claim an equity stake in the company. He said this was more money than the company needs to continue operations and that the arrangement would give the private equity firm “extensive control over the actions of the Mobilicity Group.” That could permit Catalyst to block a potential sale of the company to a competitor as Catalyst waits to take part in Industry Canada’s upcoming auction of 700 MHz wireless frequencies, which is scheduled to start in January, Aziz said. In his affidavit, Aziz said Mobilicity previously rejected five separate financing proposals from Catalyst, at least two of which would have prioritized the repayment of new debt over others. Aziz also denied that Mobilicity’s assets were deteriorating in value, and predicted that the wireless provider would still have at least 180,000 active subscribers at the end of October. He said that since Mobilicity filed for bankruptcy protection, it has experienced “minimal customers attrition,” losing “only 942 subscribers” in the two weeks following the Sept. 30 filing. Aziz asked the court to extend a stay protecting Mobilicity from its creditors through Dec. 20 as management tries to close a deal to sell the company. The court is scheduled to consider that motion at a hearing Thursday. Industry Canada, he said, is “actively reviewing” the proposed transaction. The Wire Report reported this month that incumbent wireless provider Telus Corp., for the second time, is the interested buyer. Riley said in his Oct. 19 affidavit that he does not believe any company has made a formal offer to acquire Mobilicity. “Rather, it appears to me that the ‘Proposed Transaction’ is a hoped for transaction which has been proposed by the Mobilicity Group,” he said. Riley noted that Industry Canada blocked Telus’ first deal to acquire Mobilicity, citing rules that prevent an incumbent carrier from acquiring the new entrant or its spectrum until a moratorium is lifted in February. The government’s new spectrum transfer rules, he added, allow the industry minister to block future deals that would result in an “undue concentration” of spectrum. He believes there is “very substantial risk” that Industry Canada will never approve Mobilicity’s sale to Telus, Riley said, and that “recent events and announcements have created a more negative climate for any Telus transaction with the Mobilicity Group than existed last May.” Aziz said Mobilicity’s management is still committed to pushing the deal through. “The Mobilicity Group should be permitted to move forward without further distraction to achieve this goal,” he wrote. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Struggle for control sharpens between Mobilicity and Catalyst

News | October 23, 2013

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Struggle for control sharpens between Mobilicity and Catalyst

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