On January 3, 2013 the Competition Bureau issued a No-Action Letter in respect of the acquisition by Canadian film distributor Entertainment One Ltd. (eOne) of its competitor, Alliance Films Holdings Inc. (Alliance), indicating that the Commissioner does not, at this time, intend to challenge the proposed acquisition pursuant to section 92 of the Competition Act.
In its statement concerning the proposed acquisition of Alliance by eOne, the Bureau indicated that the parties are significant competitors for film distribution in Canada but that the distribution of Canadian films constitutes a distinct product market due to various government cultural initiatives and funding programs. In particular, in order to qualify for government funding available for Canadian productions (a significant source of total funding), the producer must use a Canadian distributor, and government funding requirements limit the ability of the distributor to lower minimum guarantees or increase distribution fees. Notwithstanding the substantial share of the combined companies in that market, therefore, the Bureau concluded that the government policies in place would render a substantial lessening or prevention of competition unlikely and that in any event, there was effective remaining competition for the distribution of non-Canadian films.
The Bureau's decision not to challenge the merger is all the more interesting in light of its finding that the Canadian films distributed by eOne and Alliance account for the vast majority of the revenues generated by Canadian films. With respect to high budget Canadian films, the Bureau found that eOne and Alliance faced limited competition as there are few competitors able to offer the minimum guarantee required to secure government funding for these films. Accordingly, the Bureau was initially concerned that the merged entity would be capable of implementing more restrictive distribution terms to producers by increasing distribution fees and/or reducing the minimum guarantee.
Following its review, however, the Bureau concluded that government funding programs would prevent the implementation of more restrictive terms on producers by the merged entity. In particular, in order to trigger funding, distributors are typically required to commit a minimum guarantee to the producer as evidence that they are committed to the film's success. Furthermore, distribution fees tend to be standardized and capped by funding requirements.
Finally, in its review, the Bureau expressed concern that the merged entity might distribute fewer Canadian films. It concluded, however, that certain smaller Canadian distributors see the proposed acquisition as an opportunity to expand and distribute more films, and are poised to expand should the combined entity pull back. Furthermore, due to the very low volume of sales associated with some films, the Bureau concluded that the anti-competitive effects of the proposed transaction (if any) would likely be very small relative to the efficiency gains.
The Bureau's conclusions in this case appear to indicate a willingness to recognize the practical implications for many businesses of a relatively thin and regulated Canadian market, and the efficiencies that can sometimes be gained from consolidation.
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