Canada: CRTC Approves Bell-Astral Merger And Catches A Glimpse Of The Future Of Consolidation And Concentration

Last Updated: July 2 2013
Article by Stephen Selznick, Christopher Hersh and Imran Ahmad

Sometimes you have to stand on the shoulders of giants to see over the horizon. The Canadian Radio-television and Telecommunications Commission ("CRTC") did just that yesterday when it released its long awaited decision approving the application by Astral Media Inc. to sell its pay and specialty television channels, conventional television stations, and radio stations to BCE Inc.

At a purchase price of $3.4 billion (the CRTC valued the deal at approximately $4.1 billion when net debt and leases assumed are factored in), this is a precedent setting transaction in the Canadian media sector. This concentration of television and radio assets will see the merged and reorganized entity become one of the largest cross-platformed Canadian broadcasters in terms of audience share in both English and French-language markets.

The CRTC is the federal gate keeper responsible for ensuring that mergers in the broadcasting sector accord with the objectives of the Broadcasting Act (Canada). This is a challenging mantle to wear in an industry marked by rapid technological innovation in content delivery methodologies, high infrastructure costs that create barriers to market entry, and a borderless Internet/social media environment that makes domestic enforcement difficult. In addition, the CRTC recognizes, and BCE and Astral make the case, given the reality of current market conditions, that consolidation and getting "big is better", to ensure a Canadian competitive presence in an increasingly borderless broadcasting industry.

Effectively the CRTC seems to be taking the view that, allowing a degree of consolidation in the industry is required to ensure that Canadian broadcasters are able to compete with new distribution technologies and over-the-top foreign broadcasters. This may ensure that a healthy Canadian presence is maintained and that a diversity of voices in content and program delivery offerings remain available to all Canadians.

At the same time, the CRTC recognizes that allowing too much concentration in an industry characterized by high barriers to entry, is a recipe for static and uncompetitive market for Canadian consumers. Accordingly, the CRTC's mandate includes ensuring that Canadians are afforded a wide range of programming that reflects Canadian views, attitudes, opinions, ideas, values and artistic creativity, as well as programming that provides an outlet for Canadian talent. In its role as a consumer advocate, the CRTC must balance the benefits and opportunities of consolidation with the reality that some assurances are required from the merging licensees that appropriate steps will be taken to ensure that the marketplace remains dynamic and that Canadian audiences also benefit from the objectives of the proposed consolidation.

Astral and BCE were unsuccessful in their first attempt to obtain CRTC approval of their proposed transaction (in October 2012, the CRTC turned down the proposed merger following a vigorous public intervention and hearing process stating that BCE failed to discharge its burden to demonstrate that, on balance, the transaction was in the public interest). At that juncture the CRTC felt that the "tangible public benefits" proposed by BCE would primarily benefit BCE and its services. The CRTC was not persuaded that the transaction provided significant and unequivocal benefits to the Canadian broadcasting system and to Canadians that outweighed the CRTC's concerns about the merged entity's effect on the marketplace. In the first hearing process, the CRTC made it clear that it was prepared to break new ground and place additional or different regulatory behavioral conditions/restrictions upon entities it perceived as dominant market players, that were not applicable to smaller competitors.

To their credit, Astral and BCE went back to the drawing board and returned to the CRTC in 2013 with a slightly smaller transaction. Taking the words of the CRTC to heart, a more expansive tangible benefits package was offered in addition to proposed divestitures and behavioral undertakings, to ensure that the marketplace would remain dynamic and that Canadian consumers will reap the benefits of the opportunities claimed by the merging parties. These remedies were offered despite the possibility BCE might find itself at a competitive disadvantage relative to other industry players because it has to play by a slightly different set of rules.

Notwithstanding a similarly involved public intervention and public hearing process, Astral and BCE were able to allay the CRTC's fears in the course of their second application hearing with the result that the CRTC approved the transaction, and accepted most of the proposed divestitures and behavioral remedies offered by BCE, while modifying and adding others. The CRTC's decisions (Broadcasting Decisions CRTC 2013-208, 209 and 310) are extensive and copies can be found here.

Of immediate significance, the CRTC has mandated the following in order to maintain a dynamic Canadian broadcasting system that affords Canadians the best opportunity to reap the benefits of scale that the merger proposes:

1. Divestitures.  BCE must divest 12 English and French-language specialty television channels (including Disney HD, Teletoon and The Family Channel, but may retain the highly valued The Movie Network) and 10 English-language radio stations.  This essentially replicates the divestitures already agreed to by BCE to secure the approval from the Competition Bureau under the Canadian Competition Act. Upon completion of the divestitures, it is anticipated that BCE will possess 22.6% of the French-language television market and 35.8% of the English-language television market, thus placing it below the threshold for examination so far as French-language television is concerned and within the range of careful examination so far as English-language television is concerned, under the CRTC's Diversity of Voices regulatory policy (Public Broadcasting Notice CRTC 2008-4).

2. Mandatory Retentions to Ensure Access to Local Programming.  Apart from specific divestitures, BCE must continue operations for a stated list of 30 English-language conventional local market television stations, and maintain current levels of local programming on those stations, until at least 2017.

3. Tangible Benefits.  While not tinkering significantly with the general formulae applied by the CRTC to determine tangible financial benefits, this decision is notable in that:

(a) The CRTC increased the value of the transaction from the $3.4 billion commercial purchase price quoted by Astral and BCE to $4.1 billion by factoring in the value of net debt and leases assumed as part of the transaction.  Since the tangible benefit formulae for both television and radio is a percentage calculation based upon the transaction value, this increases the anticipated tangible benefits by some $72 million dollars;

(b) While confirming that it is not the CRTC's practice to exact tangible benefits on assets to be divested, in this case the CRTC is directing that BCE pay tangible benefits on any shortfall arising on the divestiture of those assets; and

(c)  Given the sheer size of the transaction, the tangible benefits package is in the neighbourhood of $246.9 million over the next seven years. Of this sum approximately $175.4 million (i.e., 10% of the value of the Astral television services) is to be earmarked for initiatives related to the television sector, and $71.5 million (i.e., 7% of the value of the Astral radio services) is to be allocated to the radio sector. These funds should offer a boost to the creation of original Canadian dramas, comedies, documentaries and award shows as well as youth programs and Canadian programming content intended for multiple platforms.  In the music sector these allocated funds are intended to assist in the development of the Canadian music industry, to propel the careers of emerging artists and to provide assistance to campus and community radio.

4. CRTC Abuse of Dominance Provisions.  While traditionally the domain of competition law regulators, the CRTC has mandated a number of behavioural conditions of license to guard against anti-competitive conduct in consequence of the concentration of market power in the merged BCE entity:

(a) BCE, as a condition of license, must comply with the CRTC's Code of Conduct for Commercial Arrangements and Interactions (Appendix 1 to Broadcast Regulatory Policy CRTC 2011-601 Regulatory Framework Relating to Vertical Integration).  While this is only a voluntary Code that may be followed (or not) by other industry players, it is now mandatory that BCE adhere to its provisions, including those that prohibit BCE from charging an unreasonable rate for content (i.e., a rate not based upon fair market value), or from exacting commercially unreasonable terms, or from engaging in tied selling (i.e., demanding that a distributor purchase from BCE one service in order to purchase another service);

(b) BCE many not unduly withhold non-linear rights (for example, video-on demand) from competing distributors, even if BCE may not be exploiting those rights itself;

(c)  BCE must provide reasonable access to advertising opportunities on its radio stations to all competitors;

(d) BCE must file with the CRTC copies of the affiliation agreements it enters into with programming services and television distributors.  Query, what level of contract monitoring and review will the CRTC independently initiate; and

(e) BCE must enter into a CRTC-supervised dispute resolution process if a new affiliation agreement is not reached within 120 days before the expiration of the then existing affiliation agreement.

As reported in the press today, BCE and Astral intend to close the transaction on July 5, 2013, now that CRTC approval is in hand. However, a number of the conditions of license imposed by the CRTC require a response and action plan from BCE for CRTC approval by specific deadlines (i.e., July 29, 2013, in most cases). Look for our further reports on significant developments with this transaction and license implementation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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