Canada: CRTC Approval Of BCE’s Acquisition Of Astral 2013 - Why This Time?

Last Updated: July 19 2013
Article by Scott M. Prescott and Yael Wexler

On June 27, 2013, the Canadian Radio-television and Telecommunications Commission (CRTC) issued its decision approving the acquisition of Astral Media Inc (Astral) by BCE Inc (BCE)[1].  Since then, we have reflected on that application to better understand why BCE's second proposal to acquire Astral was deemed to further the public interest, while the previous application was not[2]. What changed the CRTC's mind this time around? By considering the two decisions side by side, perhaps there are lessons that future applicants can learn so that they may avoid the eight-month delay BCE endured to receive CRTC approval of its acquisition of Canada's last major independent broadcaster.

In Broadcasting Decision CRTC 2012-574 (Decision 2012-574), the CRTC examined a variety of issues relating to the proposed acquisition that had been raised by interveners. It then concluded "that the concerns related to competition, ownership concentration in television and radio, vertical integration and the exercise of market power are very substantial and fatal to the application" and found "that BCE has not discharged its burden and demonstrated that, on balance, this transaction is in the public interest."

In Broadcasting Decision CRTC 2013-310 (Decision 2013-310), the CRTC reached the opposite conclusion and approved the application on the basis that the transaction, as modified by the CRTC, "is in the public interest and advances the objectives set out for the Canadian broadcasting system in the Broadcasting Act."

In this Bulletin, we review a number of the key concerns the CRTC identified in Decision 2012-574 and consider how they were addressed both by BCE and Astral in the second application and by the CRTC in Decision 2013-310. We then provide a plausible explanation for the CRTC's change of heart and a lesson for future applicants to consider.

Share of French-language discretionary revenues

In Decision 2012-574, the Commission highlighted the fact that a combined BCE/Astral would control more than 63% of revenues from French-language discretionary services. In the second application (and taking into account the revenues from the five French-language specialty services that the applicant agreed to divest) BCE/Astral's share of the revenues of the French-language discretionary market would decline modestly to 56%[3]. While a 7% decline in market share is material, maintaining a 56% share of the market is still substantial (three times that of the next closest competitor) and it is unlikely to have been sufficient, on its own, to have changed the CRTC's mind.

Share of total television viewing

The original application would have resulted in a combined BCE/Astral enjoying significant total television viewing shares – 42.7% in the English-language market and 33.1% in the French-language market. In Decision 2013-310, the CRTC notes that following the proposed divestiture of 10 pay and specialty services, the combined viewing of BCE/Astral services would fall to 35.8% in the English-language market and to 22.6% in the French-language market. Given that the proposed divestitures would primarily involve the sale of partial interests in joint ventures and given that a combined BCE/Astral would continue to exceed the 35% viewing threshold in the English-language television market as delineated in the Diversity of Voices Policy[4], again it is fair to conclude that, by itself, this concession would not have been sufficient to change the CRTC's mind.

Presence in most attractive genres

The CRTC expressed concern in Decision 2012-574 that the acquisition of Astral would "add popular and successful discretionary television services, resulting in an increased presence by BCE in the most attractive genres – movies, sports and premium content – that drive a significant component of demand for Canadian television services." The combined BCE/Astral presence in these premium genres did not change as a result of the second application.

The CRTC appeared, however, to try to address this concern in Decision 2013-310 by establishing a number of "safeguards" that were designed to prevent BCE's ability to give itself a preference or to subject a party to an undue disadvantage regarding premium programming. These included the following: adherence to the provisions of the Code of Conduct for Commercial Arrangements and Interactions[5] (VI Code) as conditions of licence; a prohibition on tied selling; a requirement to negotiate non-linear rights at the same time as linear rights; a 90-day notice of the impending launch of a new service; a requirement to provide commercially reasonable access to advertising opportunities on BCE's radio stations; a requirement to file all of its affiliation agreements; and a new dispute resolution process if an affiliation agreement is not reached 120 days before the expiry date of the existing agreement.

If these safeguards had been proposed as part of the original application, would they have been sufficient to persuade the CRTC to approve the first application?  We believe it is unlikely. At the first hearing in September 2012, BCE had accepted a condition of licence that would have resulted in parts of the VI Code being applied to its broadcasting undertakings. Some interveners had even proposed additional safeguards as an alternative to denial[6]. Also, the CRTC could have imposed the same or similar types of safeguards on BCE after the first hearing that it established in Decision 2013-310. Indeed, the CRTC has imposed safeguards on purchasers in the past when concerns were raised about market power and vertical integration. The moratorium on the acquisition of exclusive program rights, which was outlined in the decision approving BCE's acquisition of CTV in 2011, is a prime example of the CRTC establishing a strong safeguard in response to concerns about undue preference or disadvantage[7].

Moreover, in Decision 2012-574, the CRTC specifically rejected the curative approach of adding safeguards, stating that "the significance and breadth of the broadcasting assets of a combined BCE/Astral are such that safeguards to properly supervise this level of market power would be extensive and unduly burdensome." In view of the fact that BCE indicated a willingness to accept some safeguards during the 2012 hearing, that interveners proposed several safeguards in that proceeding as an alternative to divestiture, that the CRTC concluded such safeguards would be unduly burdensome and that the CRTC has a history of imposing safeguards when it feels they are necessary to further the public interest, it is fair to say that the CRTC would probably have still denied the first application in October 2012 even if BCE had proposed a set of safeguards that would have been comparable to those established in Decision 2013-310.

A quarter of all commercial radio revenues

A concern about the sheer size of a combined BCE/Astral share of commercial radio revenues was also highlighted by the CRTC in Decision 2012-574. This concern does not appear to have been addressed at all in respect of the second application. The transaction still resulted in the combination of the largest and fourth largest radio broadcasters in Canada and BCE controls close to a quarter of all commercial radio revenues in Canada.

A radio divestiture plan

Another key issue of concern noted in Decision 2012-574 was the limited details BCE provided for its proposed divesture of radio stations in order to ensure compliance with the CRTC's common ownership policy. While BCE provided a proposal for divestiture that included identifying the specific stations in its second application, the impact of the divestiture proposal was otherwise mostly unchanged. The same number of stations would be acquired by BCE. The CRTC accepted the plan in Decision 2013-310, noting that it "finds that the proposed divestiture plan provides assurance that there is a diversity of voices at the local level." Given that this plan was similar to the one proposed in the 2012 application, it is unlikely that naming the radio stations alone would have persuaded the CRTC to approve the initial application.

Value of the transaction and tangible benefits package

The value of a transaction is always a key issue for the CRTC when assessing a transfer of control application. The transaction value forms the basis for determining the amount of tangible benefits that the purchaser will have to contribute in order to demonstrate that the transaction would yield significant and unequivocal benefits for the Canadian broadcasting system. The CRTC's policy requires parties seeking to acquire television broadcasters to commit to a benefits package representing 10% of the value of the transaction[8] and requires those acquiring radio broadcasters to make commitments to the development of Canadian talent in the form of tangible benefits of no less than 6% of the value of the transaction[9]

In assessing a given transaction, the CRTC has frequently increased the value initially established by the purchaser by adding to it the additional value of things like long-term debt and leases[10]. The CRTC did that in this case and, as a result, increased the value of the transaction accordingly. In addition, the CRTC increased the amount that BCE is required to contribute in respect of the radio acquisition to 7%. The fact that the overall value of the BCE/Astral transaction increased in Decision 2013-310 was not unexpected. However, the CRTC's decision to enhance the specific value of the radio benefits to 7% was a bit of a surprise. That said, given the size and nature of the transaction, accepting such a value was not something that was unprecedented[11]. In view of the large number of precedents where the CRTC has adjusted the value attributed to a transaction, it is unlikely that concerns about the value of the transaction or of the benefits package would have, on their own, prevented the CRTC from approving the first application filed by BCE in 2012.

Allocation of tangible benefits

BCE's first application to acquire Astral included a tangible benefits package that contained a number of items that the CRTC found in Decision 2012-574 to "fall outside the guidelines established in Commission policy and general practice." These included proposals to fund broadband expansion by Northwestel (a subsidiary of BCE), to launch a new Category C news service, and to produce programming for Canada's 150th anniversary celebration. The second application did not raise the same concerns. The new tangible benefits package proposed by BCE/Astral, which was largely accepted in Decision 2013-310 (with a few modifications), responded to the CRTC's earlier concerns.

Had BCE/Astral proposed a tangible benefits package in 2012 that was more consistent with CRTC policies, would that have been sufficient to have compelled the CRTC to approve the first application?  Again, it is unlikely. The CRTC has on numerous occasions rejected certain aspects of a proposed tangible benefits package and required the applicant, as a condition of approval, to file a more acceptable package[12]. Even in Decision 2013-310, the CRTC did not accept all of the benefit allocations proposed by BCE/Astral, and the applicants have been directed to file new proposals. The CRTC could have chosen to do the same thing in 2012.

Lessons Learned

Looking at these key issues and how they were addressed by the CRTC in the two decisions, it would appear that the fatal flaw that the CRTC found in the first application was just that there were too many deficiencies. In other words, it was a death by a thousand cuts. There was no single change to that first application or any one concession that BCE/Astral could have made that would have been sufficient to convince the CRTC to approve the first application in October 2012. One gets the impression from reading the two decisions and considering the CRTC's past treatment of transfer of ownership applications, that if BCE had further compromised on a few additional items or issues of contention, it might have avoided the need to re-apply to acquire Astral.

If BCE had, for example, fine-tuned its tangible benefits package by ensuring that most of the money would be devoted to on-screen initiatives designed to benefit third parties, identified the specific radio stations that it intended to sell to comply with the common ownership policy and agreed to divest of a few of Astral's pay and specialty services, it is quite likely that the CRTC would have approved the transaction in October 2012 (with a few additional modifications) and BCE and Astral would have avoided the cost of the second proceeding.

Perhaps the lesson for future applicants that might be confronted with similar issues is to try to craft an application hearing strategy that does not "sweat the small stuff." Compromise on issues that do not affect the core strategic rationale for the transaction and avoid suggesting that every concern raised is not valid or an insignificant concern. Focus instead on the reasons why the proposed transaction was pursued in the first place and recognize that by giving a little, you are more likely to get a lot. 

[1] Broadcasting Decision CRTC 2013-310, June 27, 2013 (Decision 2013-310).

[2] Broadcasting Decision CRTC 2012-574, October 18, 2012 (Decision 2012-574).

[3] Intervention #816, dated April 5, 2013 at para. 33.

[4] Broadcasting Public Notice CRTC 2008-4.

[5] Appendix 1 to Broadcasting Regulatory Policy CRTC 2011-601.

[6] See, for example, Intervention #1675, dated August 9, 2012 at para. 128.

[7] Broadcasting Decision CRTC 2011-163.

[8] See Public Notice CRTC 1999-97 and Broadcasting Public Notice CRTC 2007-53.

[9] Broadcasting Regulatory Policy CRTC 2010-499.

[10] See, for example, Broadcasting Decision CRTC 2012-443.

[11] See, for example, Broadcasting Decision CRTC 2010-942.

[12] See, for example, Decision CRTC 2001-621 (where more than 90% of the value of the applicant's benefits package was rejected).

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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