Buyout puts Wind on solid ground, says Lacavera

Wind Mobile CEO Anthony Lacavera says his $285-million buyout of majority shareholder VimpelCom Ltd., announced Tuesday, brings stability to his company after years of ownership uncertainty. Lacavera will buy out the majority stake Amsterdam-based VimpelCom had in Wind for $135 million and assume about $150 million in debt thanks to support from a group of investors including Toronto-based investment firm West Face Capital, as well as U.S. investors Tennenbaum Capital Partners and LG Capital Investors. “It's been a very long and winding road,” he said in a phone interview. “We've successfully stabilized the ownership picture, and now we can start talking about how we best approach growth and expansion opportunities.” VimpelCom has made no secret that it was not interested in holding onto Wind Mobile for the long term. In March, it wrote down the total value of its $768-million US investment in the wireless carrier. Lacavera said the buyout of VimpelCom vindicates the government’s policy of promoting a fourth wireless carrier to compete with the big three incumbents and puts speculation about Wind’s future to rest. “The government's policies have now proven out, and new capital has been drawn into the sector,” he said. “From now on, where we go is really up to Wind. We have to continue to deliver on our brand promise, and we have to continue to improve our network, and over time demonstrate to Canadians that they can trust us with their wireless choice.” The government has set aside 60 per cent of the spectrum in the upcoming AWS-3 auction for operating new entrants, a definition that includes Wind and appears to make it the only bidder for some of the provincial spectrum licences. Wind withdrew from Industry Canada's 700 MHz auction in January, the day before the auction started, due to a lack of financial support from VimpelCom, Lacavera said at the time. In June, Lacavera told an audience at the Canadian Telecom summit that his company needs access to LTE spectrum in order to remain competitive with the big incumbent wireless carriers. Now, Lacavera said his company is looking to raise money in order to participate in the upcoming AWS-3 and 2500 MHz auctions. “Nothing is certain by any means, but as long as we continue to show traction, continue to build our customer base, I think that investors will continue to be encouraged,” he said. Lacavera said the government’s implementation of a cap on wholesale roaming prices, its work on tower-sharing agreements and setting aside more than half of the spectrum in the upcoming AWS-3 auction for smaller carriers has helped Wind, yet his company doesn’t rely on government action. “It provides the framework to ensure the viability of a fourth carrier, but it doesn't guarantee the viability of the fourth carrier,” he said. “That's up to us, that's up to Videotron, that's up to Eastlink, in our respective markets. We've got to prove ourselves and our value proposition or we're going nowhere. “ VimpelCom tried to buy the share of Wind Mobile it did not own in 2013, only to have the deal blocked by Industry Canada over questions of foreign ownership. "While we do not comment on the business transactions of individual companies, our government has been very clear about our policies to encourage greater competition and investment in the wireless sector,” Jake Enwright, press secretary for Industry Minister James Moore, said in an email Tuesday. “More competition invariably leads to more choice, lower prices and better services for Canadian wireless consumers." The $285-million buyout of Wind led by its CEO means a partnership between the Ontario-based carrier and Videotron to build a national fourth wireless player is much more likely, analysts said. “We view this transaction as the first step in the ‘clean-up trade’ towards creating a fourth national wireless player in Canada,” RBC Securities analyst Drew McReynolds said in a Tuesday research note. “While the longer-term objectives of the new consortium of investors remain unclear, we assume that Mobilicity and the 700 MHz spectrum owned by Quebecor will ultimately be combined with Wind Mobile to form a more sustainable fourth national wireless player." Mobilicity, in bankruptcy protection since September 2013, has been blocked from its attempts to sell itself to Telus Corp. by the government on at least three occasions, and its founders are now suing the government. McReynolds said purchasing Mobilicity would be necessary for any national fourth carrier. “In our view, all of these assets would be required in order to maintain a competitive network and to rollout LTE,” he said. Lacavera, meanwhile, said there is “nothing to discuss about Quebecor.” Canaccord Genuity analyst Dvai Ghose said in a Tuesday research note that the private equity backers in this deal are unlikely to put up the money for participation in the upcoming AWS-3 and 2500 MHz spectrum auctions, making a partnership with Videotron or some sort of merger the two most probable outcomes. “We assume that private equity may just want to operate the asset with modest incremental funding until rules change, and WIND can be sold to an incumbent, perhaps after the 2015 Canadian federal election,” Ghose said. In the Tuesday news release, West Face Capital CEO Greg Boland said he and his partners “are pleased to invest in this transaction and we are excited by the future of Wind Mobile.” “The federal government's delivery on its promise to create the conditions for viable long-term wireless competition has not gone unnoticed by the investment community,” he said. Ghose said Tuesday the buyout was a “bargain basement valuation” that leads to questions about how much money the backers are willing to devote to bidding on spectrum or building out an LTE network. “While a combination of WIND’s assets with Videotron’s spectrum outside Quebec and perhaps Mobilicity is possible, we believe that this is problematic,” he said. In a previous note, released Monday night, Ghose said it was unlikely that Videotron and Wind’s private equity backers would be able to agree on a price, given that Videotron might consider its 700 MHz spectrum holdings as worth more than what it paid in the auction, and that the private equity groups would argue Wind is worth more than its valuation in this deal. Ghose also said Videotron could be waiting on the outcome of the CRTC’s ongoing review of wholesale wireless services to make a decision on a national expansion, and that the financial questions around which company would foot the bill for the spectrum and infrastructure required for a such a project could also affect a deal. Quebecor spokesman Martin Tremblay, reached by email Tuesday, said the carrier had no comment on the Wind Mobile buyout. Ghose and McReynolds agreed that, unlike the Mobilicity deal with Telus, the Wind buyout will be approved by regulators. Ghose said the experience of VimpelCom, which according to his note stands to gain $135 million in cash after investing more than $1.5 billion in Wind over the years, will make any outside investors wary of investing in Canada. “We assume that this debacle will make other foreign telcos very wary of investing in Canadian new entrants, potentially a key positive for Canadian wireless incumbents,” he said. Barclays analyst Phillip Huang said in a research note released Monday night that the Wind deal is good news for Quebecor because it reduces the chance that Quebecor will make "a potentially big risky investment on its own outside of Quebec” with the 700 MHz spectrum it bought this year. “QBR holds very valuable spectrum (700MHz and AWS) outside of Quebec, and it has the option to either: 1) contribute the spectrum and/or cash for a stake in Wind, potentially with a view to acquire control over time; or 2) sell the spectrum to Wind,” he wrote. The threat from Wind to the incumbent wireless companies — Rogers Communications Inc., BCE Inc. and Telus — is lower now that the company has private equity backing, Huang said, because there is no “new strategic player” getting into the market. And Huang said the deal should satisfy the government, which has been pushing for a fourth carrier to compete with the big three. “From a regulatory perspective, it would satisfy the government's goal to sustain four facilities-based wireless players in each of the major markets (at least through the next federal election in October 2015), potentially lowering the urgency to adopt more disruptive policies,” he said. — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Buyout puts Wind on solid ground, says Lacavera

News | September 16, 2014

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Buyout puts Wind on solid ground, says Lacavera

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