The deal, already backed by some Mobilicity debt holders, must now wind its way through a regulatory obstacle course involving several agencies and approval is far from certain. But the two companies suggested the alternative was death for the loss-making upstart.

“We believe this deal is significantly better than the alternative, which is highly likely to be bankruptcy,” Telus marketing chief Dave Fuller said by phone. Proceeds from the sale will be used to pay down the startup’s debt.

Privately held Mobilicity, whose formal name is Data & Audio-Visual Enterprises Holdings Inc, was one of three aggressive startups that entered the Canadian market after a spectrum auction which partially excluded the Big Three of Telus, BCE Inc and Rogers Communications.

But Mobilicity, which used cut-rate pricing of unlimited talk-and-text plans to challenge the established providers, has been losing money and building up debt.

Industry Minister Christian Paradis said the government will weigh Telus’ bid for Mobilicity carefully. Under the rules of the 2008 auction, Telus cannot take ownership of Mobilicity’s spectrum before February 2014.

“Our government has taken significant action to promote competition in the wireless sector,” he said. “The government will take the time required to review the proposal carefully.”

The government, which wants four cellphone options in each region, has turned its nose up at a separate spectrum transfer deal involving Rogers. But Telus said that should not set a precedent for its Mobilicity bid.

The Telus deal will also require nods from Canada’s competition watchdog and its telecommunications regulator, the remaining Mobilicity debtholders, and a provincial court.

NO END IN SIGHT

Analysts were generally positive on the deal’s implications for Telus, given Mobilicity’s 250,000 customers, its retail presence and the spectrum it paid C$243 million for in 2008.

Telus overtook BCE as Canada’s second-largest wireless company by subscribers last quarter, with 7.7 million. Rogers, the market leader, has more than 9 million subscribers.

The deal would likely result in tax loss carryforwards valued at around C$100 million, Desjardins analyst Maher Yaghi said. Mobilicity is operating at an annual loss of C$74 million on revenue of C$70 million, RBC Capital Markets analyst Drew McReynolds said, citing court documents.

Telus stock, up more than 13 percent this year, rose more than 1 percent to C$37.47 by early Thursday afternoon.

The bid may not mark the end of consolidation in the cut-throat industry ahead of another auction of airwaves due to start in November as demand explodes for speedy streaming of video and other data-heavy applications.

Another of the startups, Wind Mobile, may also be looking to sell itself. VimpelCom Ltd, owner of Wind Mobile, says it would consider various options, including divestment.

Mobilicity, whose pre-paid customers typically pay much less per month than those using high-end devices on long-term contracts, was expected to struggle to raise funds to compete in those auctions, where the rules are not as favourable to the startups.

Ottawa is looking at the rules on the sale of spectrum after Shaw Communications bought spectrum in the previous auction, but decided not to build a wireless network.

Shaw, the dominant cable company in Western Canada, is seeking to sell the airwaves to Rogers.

Mobilicity was founded by serial entrepreneur John Bitove and Quadrangle Capital Partners and Bitove’s Obelysk private equity firm have each long held a major equity stake. Its debt holders are mostly Canadian financial institutions, chief executive Stewart Lyons said.

“This is the only true alternative that was out there for us, and it is one that returns a fair bit of capital to all of the stakeholders,” Lyons told Reuters in a phone interview. “Given the spot that we’re in, I think this is the right deal for us and hopefully the government will approve it quickly.”

($1 = 1.0177 Canadian dollars)

(Additional reporting by Randall Palmer in Ottawa; Editing by Janet Guttsman, John Wallace and Chris Reese)

Privately-held Mobilicity, whose formal name is Data &
Audio-Visual Enterprises Holdings Inc, has been losing money and
approached Telus because of its “strong customer focus,”
Mobilicity said in a statement.

Mobilicity was one of three aggressive startup companies
that used cut-rate pricing of unlimited talk-and-text plans to
challenge the established operators.

The Globe and Mail reported in April that Mobilicity and
Telus were in acquisition talks.

Another of the startups, Wind Mobil, may also be looking to
sell itself. VimpelCom Ltd, owner of Wind Mobile, says
it would consider various options for the business, including
divestment.

Wind and Mobilicity were beneficiaries of a federal
government push for more competition in the wireless sector,
which had boasted some of the highest prices in the world. The
startups bought spectrum in a 2008 auction that was not open to
the biggest operators – Telus and rivals BCE Inc and
Rogers Communications.

Ottawa has since started the process of auctioning more
prime wireless spectrum as demand explodes for speedy streaming
of video and other data-heavy applications on smartphones and
tablets.

Mobilicity was expected to struggle to raise funds to
compete in an upcoming auction in which the rules are not as
favorable to the startups.

Ottawa is also looking at the rules on the sale of spectrum
after established cable company Shaw Communications
was also allowed to buy set-aside spectrum but later decided not
to build a wireless network. Shaw is seeking regulatory approval
to sell the airwaves to Rogers.

But the comparison to year-ago results is complicated by the
fact that TMX was acquired in September by a consortium of
Canadian financial institutions who also rolled in the smaller
Alpha exchange and Canadian Depository for Securities Ltd, a
trading clearinghouse.

Including these additional assets in the 2012 numbers for
TMX, income from operations fell 24 percent to C$60.2 million.

Net income for the quarter was C$37.8 million ($37.7
million), or 70 Canadian cents per share.

Excluding acquisition and other costs, earnings were 78
Canadian cents per share, beating the average analyst forecast
of 73 Canadian cents, according to Thomson Reuters I/B/E/S.

Revenue rose to C$172.2 million in the quarter, from C$162.3
million a year ago. But revenue fell 5 percent from the first
quarter due mainly to a drop in fees from share listings.

TMX also owns the Montreal derivatives exchanges and the TSX
Venture Exchange, where listings are heavily weighted toward the
resource sectors.

“The cyclical slowdown in commodities means that economies
like Canada will suffer somewhat,” TMX chief executive Tom Kloet
said on a conference call with analysts and investors. “The most
pronounced affect of these macroeconomic factors has been in our
equity listing and trading business.”

Analysts have suggested that TMX look outside of Canada for
opportunities to diversify away from resources. But large
acquisitions may be curtailed by the high level of debt TMX took
on in the takeover by the bank-led Maple consortium last year.

Equity trading volumes fell by nearly 20 percent compared
with the first quarter of 2012.

The number of follow-on offerings fell nearly 20 percent
from the fourth quarter, while the value of those offerings fell
by almost 30 percent.

Both companies scored in the fast-growing wireless space as
consumers grasp for the latest smartphones to stream video and
other data. But Telus also managed to increase its fixed-line
business on the back of its Optik TV product and it raised its
2013 dividend by 11.5 percent.

BCE profit rose 6.6 percent, and the company said it remains
on track to hit its full-year earnings targets.

Telus shares were up 1.8 percent at C$37.35 on Thursday
morning, while BCE shares were down 0.4 percent at C$47.72.

Vancouver-based Telus competes against cable company Shaw
Communications Inc for television and Internet
customers in Western Canada and against Rogers Communications
Inc and BCE’s Bell for wireless subscribers across the
country.

“Things are going exceptionally well at Telus,” said
Canaccord Genuity analyst Dvai Ghose. “Bell is obviously at a
much earlier stage both in terms of subscribers as well as
profitability” for its fixed-line unit.

Telus and Bell both signed up some 59,000 net new postpaid
wireless subscribers, who typically pay more to use high-end
smartphones on multiyear contracts. Market leader Rogers added
32,000 in the quarter.

Telus said its wireless customers paid an average of C$60.04
a month for service, as booming data usage more than offset
falling voice calls. Bell’s average bill was C$55.92.

Telus, unlike its biggest rivals, has not acquired companies
producing the content distributed over its network. But it has
moved forcefully to increase fixed-line revenue through Optik
TV, an Internet-based product that is challenging Shaw’s
dominant cable television position in Western Canada.

Telus said it added 34,000 TV customers in the quarter,
compared with the 47,000 Bell added with its equivalent Internet
TV product, Fibe, which is at a much earlier stage of
deployment. Telus added 16,000 Internet subscribers, versus less
than 2,000 for Bell.

BCE has in recent years moved aggressively to secure
ownership of news, sports, films and other content distributed
via its television and Internet services.

BCE said revenue at its Bell Media unit was flat as a weak
advertising market offset higher fees from rival distributors.

The company is currently seeking regulatory approval for its
revised C$3 billion bid for its biggest content provider, Astral
Media Inc.

The regulator rejected BCE’s first offer for Astral in
October, citing the inordinate influence it would give BCE.

BCE has since agreed to divest some Astral pay and specialty
television channels, although critics say the smaller deal does
not preclude Bell from setting exorbitant rates for the premium
content it owns.

BCE bought CTV, the country’s largest private broadcaster,
in 2011. Last year, it teamed up with Rogers to buy the owner of
the National Hockey League’s Toronto Maple Leafs and a stable of
other sports assets.

BY THE NUMBERS

Telus reported net income of C$362 million, or 56 Canadian
cents a share, in the three months to the end of March, compared
with C$319 million, or 49 cents a share, a year ago.

Operating revenue rose 5 percent to C$2.76 billion.

Analysts had on average expected Telus to earn 54 Canadian
cents a share on revenue of C$2.78 billion, according to Thomson
Reuters I/B/E/S.

BCE first-quarter net earnings rose to C$566 million, or 73
Canadian cents a share, from C$531 million, or 69 Canadian
cents, a year earlier on little changed operating revenue of
C$4.92 billion. On an adjusted basis, the company earned 77
cents a share. Analysts had on average expected BCE to earn 71
Canadian cents a share on revenue of C$4.96 billion.

“Telus fired on both cylinders and clearly has the stronger
balance sheet and cash flow profile,” Canaccord’s Ghose said.

Telus said it would aim to buy back up to C$500 million of
its own stock this year and for the next three years.

Telus said it plans to continue with semi-annual dividend
increases in the 10 percent per-annum range through to 2016.

(editing by Jeffrey Hodgson, Janet Guttsman and Matthew Lewis)