Public Mobile’s request to challenge Globalive “could drag out for months”

On Friday Public Mobile asked the Federal Court to overturn the decision that allowed Globalive to launch. Public Mobile CEO Alek Krstajic said “We believe Cabinet’s decision is unfair to other wireless carriers, especially new entrants like Public Mobile that have played by the rules and secured substantial Canadian investment. Furthermore, while we respect the Government’s authority we believe what it has done amounts to a change in law, and only Parliament can change Canadian law.”

Jeff Fan and his team over at Scotia Capital have weighed in on the continuing topic. In their Daily Edge newsletter titled “Public Mobile Challenges the Government’s Globalive Decision”, they state some possible implications of the action and believe “This could drag out for months”. It reads:

“Last Friday, wireless new entrant Public Mobile applied to the Federal Court (Canada) to overturn the Government of Canada’s decision that allowed Globalive Wireless to operate.

Highlights of Public Mobile’s Federal Court Application
■ Public Mobile applied to the Federal Court (Canada) asking it to overturn the Government’s Dec. 10, 2009 decision that allowed Globalive Wireless to operate. Public Mobile believes the Government’s decision effectively “threw out” Canadian foreign ownership laws, which Public Mobile asserts only Parliament can change.

■ Specifically, Public Mobile is asking the court to quash the Government’s decision and to declare:
1. The decision was made without, or was beyond, the Government’s jurisdiction;
2. The Government’s decision was an error in law;
3. The Government’s decision was contrary to law.

■ Public Mobile is not opposed to Globalive’s presence in the marketplace and is not opposed to more competition. However, it is looking for a level playing field for all wireless carriers.

■ The Federal Court, Canada’s national trial court, hears and decides legal disputes, including claims against the Government of Canada.

■ Public Mobile is in the process of building a wireless network covering 19 million POPs in Ontario and Quebec to provide unlimited talk and text for $40/mo, with a service launch anticipated in 1H/F10.

■ Public Mobile is backed by numerous Canadian investors with the largest being the OMERS pension fund.  Public Mobile also has non-Canadian investors.  The CRTC initiated on December 18, 2009, a Type 2 Ownership and Control review (non-public process) of Public Mobile.

Our Thoughts on Public Mobile’s Application
■ We believe this was a good move by Public Mobile.  Whichever way the court rules, we believe Globalive’s competitors (other new entrants and incumbents) will benefit.

■ Greater uncertainties and costs for Globalive. We believe this adds uncertainty and potentially costs for Globalive. While we do not expect this application will stop Globalive from operating immediately (i.e., no injunction), it could impact its efforts in successfully attracting new investors given the possibility that the court could overturn Industry Canada’s decision. At a minimum, even if investors come forward, this could raise Globalive’s borrowing cost.

■ Incumbents could benefit. Incumbents (Rogers, TELUS, and BCE) are not the applicants in this case.  We believe they passed at the opportunity as this could damage relationships with Industry Canada, which is currently reviewing annual spectrum fees.  Nevertheless, we believe they should benefit from the Globalive uncertainties and potentially the higher  borrowing costs.

■ Public Mobile and DAVE Wireless could also benefit. Public Mobile and DAVE do not plan to launch for several more months and anything that creates a barrier for Globalive should be beneficial for the other new entrants.  With Orascom being a significant foreign backer, we believe Globalive has some competitive advantages over the other new entrants. Furthermore, Public Mobile and DAVE could also benefit if this leads to changes in foreign ownership rules.

■ This could drag out for months. Public Mobile also believes it has a reasonable chance of success.

■ This could be the catalyst for broader changes.  We believe this could be the catalyst that begins the process that would ultimately lead to a relaxation of the foreign ownership rules.  If the court rules against the government, in order for the government to maintain its pro-competition objective, it may have to consider changes to the foreign ownership rules.