Efforts by a U.S.-based hedge fund to get Telus Corp. to go public with details over its compliance with Canadian foreign investment rules are throwing new light on who can own what in Canada's telecom industry, and what's at stake as the federal government and its regulators consider updates to the rules.
At issue, Mason Capital Management LLC has gone to the British Columbia Supreme Court to get the carrier to release details over its plan to convert non-voting shares into common shares.
Although the plan was abandoned in May -- just before shareholders were scheduled to vote on it at the company's annual general meeting -- Mason continues to push the issue via litigation. The fund, which recently increased its holdings in Telus common shares from 18.7 per cent to just under 20 per cent, had argued the plan was unfair to common shareholders because it would have given non-voting shares, which historically trade for less than common shares, a one-time premium.
As an activist investor, Mason had been growing its holdings in Telus to give weight to its efforts to shoot down the share structure proposal. The New York-based hedge fund also has sizable short-sell positions on Telus's non-voting shares, and last month began looking for buyers for its nearly 20 per cent common share holdings.
Two opposing views
The dustup over the share conversion proposal, which Telus says it plans to reintroduce at some future point in time, comes on the heels of a complaint lodged by Globalive Wireless Management Corp. with the CRTC.
Globalive alleges the failed conversion plan knocked Telus out of compliance with Canadian telecom foreign ownership rules, and has asked the regulator to conduct a public review into the carrier's ownership structure.
Canadian law limits foreign ownership of telecom carriers to 33.3 per cent. Globalive says Telus ownership is currently 48 per cent non-Canadian, an allegation Telus emphatically denies. The carrier, which says at no time has it exceeded the one-third ownership limit, says Globalive is using shareholders' postal or zip codes instead of their residency as the basis for its calculations, a method it claims is inadequate to determine compliance.
The Globalive complaint is also something of a turnabout for both companies, as Telus, in partnership with competing upstart Public Mobile, had asked the CRTC in 2009 to look more closely into the ownership structure of its competitor's then-parent company, Orascom Telecom Holding SAE.
The entry of Globalive's Wind Mobile brand into the Canadian wireless market hung in the balance after the CRTC ruled that Egypt-based Orascom's 80 per cent ownership of Globalive failed to meet the foreign ownership threshold. Industry Canada subsequently overturned the regulator's decision and cleared the way for Wind Mobile's entry into the Canadian wireless market. Since then, Orascom has merged with Amsterdam-based VimpelCom Ltd.
No sign of a truce
Although the Supreme Court of Canada this past April decided to dismiss the case outright, the two companies remain at loggerheads. A month later, a dispute between the two companies over access to a rapid transit line in Vancouver spilled over when Globalive asked the CRTC to step in.
The ongoing arguments over foreign ownership percentages, share structures and underground infrastructure underscore just how much is at stake between these two companies, one an incumbent carrier with deep roots in western Canada, the other with designs on core markets in Vancouver, Calgary and Edmonton. Unlike the more geographically and services-diversified Rogers and Bell, Telus is more exposed to encroachment by Wind Mobile, which explains the differential interest both companies have in tying each other up in court.
No imminent solution
The out-of-market activity will likely continue in the absence of additional guidance on foreign ownership from the federal government. Despite Industry Canada's announcement in March that it would loosen foreign ownership rules for participants in the upcoming 700 MHz spectrum auction — updates to the Telecommunications Act will allow wholly foreign-owned companies with a market share of 10 per cent or less to participate. Industry Minister Christian Paradis said last month a broader review of the rules, including those that apply to incumbent national carriers, isn't imminent because it would require public hearings, which he said aren't going to be held anytime soon.
The government may be taking a wait-and-see approach to bringing the rules in line with changing wireless market dynamics. But as the 700 MHz auction, set to move forward in the first half of 2013, looms, the ability of both incumbents and newcomers to attract both Canadian and foreign-sourced capital hinges on a level playing field, with rules that apply equally and visibly to all participants. That wait-and-see strategy may need to be revisited before the first bids are launched.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. firstname.lastname@example.org