Canada: Eastlink And Bruce Telecom Abandon $26.5M Merger Amid Competition Bureau Concerns

On August 15, 2014, the Competition Bureau (the Bureau) announced that Bragg Communications Inc. (Eastlink) and Bruce Telecom had terminated an announced merger, which would have resulted in the acquisition of Bruce Telecom (the incumbent telecommunications provider for a large portion of Bruce County, Ontario) by Eastlink (a privately-held company that owns and operates cable systems across Canada), for a purchase price of C$26.5 million.

Eastlink's decision to terminate followed a review by the Bureau's Mergers Branch, pursuant to which the Bureau concluded that the acquisition would likely have resulted in a substantial lessening or prevention of competition in the towns of Port Elgin and Paisley, Ontario, where Eastlink and Bruce Telecom are the only current providers of wireline telecommunications services. Although the merger did not meet the thresholds for notification to the Bureau, it was brought to the Bureau's attention as a result of several consumer complaints.

Both Eastlink and Bruce Telecom are facilities-based providers of wireline telephone, broadband internet, and television services in Bruce County, who also offer bundles of telephone, television and/or wireline broadband internet services. Eastlink owns and operates more than 500 cable systems across Canada, and was a successful participant in Industry Canada's 700MHz spectrum auction, which took place earlier this year. Bruce Telecom is a small operator owned by the Municipality of Kincardine and has been providing telecommunications services for a large portion of Bruce County for over 100 years.

In response to the Bureau's announcement, the Municipality of Kincardine immediately issued a statement contesting that the agreement had been terminated and seeking a correction from the Bureau. The Municipality stated that it had not decided to abandon the transaction, nor had it been notified or consulted in connection with the Bureau's announcement.

Prior to issuing a Position Statement on August 19, 2014, Bureau spokesperson Phil Norris indicated that the Bureau would not be issuing a correction as it had been advised by Eastlink that Eastlink had decided to abandon the deal. On August 14, 2014, just prior to the Bureau's initial announcement, the Municipality of Kincardine had issued a public statement contesting the findings of an investigator to whom it had referred a complaint regarding certain closed meetings held in connection with the proposed sale; a public meeting planned for August 27 to address potential public concerns arising from those closed meetings was ultimately cancelled.

In the Bureau's August 15 announcement, the Commissioner of Competition, John Pecman, said of the Bureau's review: "[...] Eastlink's acquisition of Bruce Telecom would have likely resulted in higher prices and fewer choices for the supply of telecommunications services to the residents of the towns of Port Elgin and Paisley. In the absence of the dynamic rivalry that exists between Eastlink and Bruce Telecom, customers would also have been deprived of the benefits of innovation in their telecommunications services."

As described in the Bureau's Position Statement, in considering whether the transaction would be likely to lead to a substantial lessening of competition, the Bureau's analysis focused on two relevant product markets: a market for wireline broadband internet services; and a market for bundles. The Bureau found that there were no close substitutes for the unique consumer benefits offered by bundling services. With respect to substitutes for wireline broadband internet services, wireless telecommunications services were found not to offer a close substitute for several reasons, including cost and speed differences. Although the Bureau considered the potential for entry by other competitors, it concluded that new entry would be unlikely due to the high costs of establishing a presence in the business and the low population densities of the areas in question.

The decision comes amid a time of regulatory uncertainty for telecommunications providers. In recent years, the Canadian Radio-television and Telecommunications Commission ("CRTC") has been hesitant to take steps to curb or regulate the rapid evolution of "new media", spurred by the growth of the mobile television broadcasting industry and by a desire among consumers for greater choice in television services. These changes resulted in the launch of the CRTC's "Let's Talk TV" campaign, a consultation process through which the CRTC has sought input from Canadians in connection with a formal review of the Canadian television broadcasting system. The CRTC is also currently undertaking two related proceedings examining the level of competition for wholesale mobile wireless services and the potential for regulatory reform. A public hearing in connection with the CRTC's wholesale mobile wireless services review is scheduled for September 29, 2014.

Almost one year ago, on September 23, 2013, the Bureau entered into a Letter of Agreement with the Chairman and Chief Executive Officer of the CRTC, seeking to establish a framework for cooperation in the delivery of the organizations' respective mandates.  More recently, in its first ever Annual Plan, released on May 5, 2014, the Bureau identified among its priorities for 2014 and 2015 the encouragement of competition in regulated sectors and the continuation of its advocacy efforts on telecommunications and wireless issues. In pursuing these goals, the Bureau noted that it would engage in strategic interventions and make submissions to the CRTC, as appropriate, over the year to come. In fact, the Bureau had already made four submissions to the CRTC between February 2013 and the release of its 2014-2015 Annual Plan and has since made additional four submissions, demonstrating its commitment to these advocacy goals. According to the Bureau website, prior to February 2013, the Bureau had not made public submissions to any regulator since 2008.

In light of the above, telecommunications companies considering mergers or acquisitions, regardless of size, or other activities of potential interest to the Bureau, should be aware that the Bureau will likely continue to take an active role in the regulation of the telecommunications sector and that increased cooperation between the CRTC and Bureau is to be expected.

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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