ARCHIVED - Broadcasting Notice of Consultation CRTC 2013-558

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Additional reference: 2013-558-1 and 2013-558-2

Ottawa, 21 October 2013

Call for comments on the Commission’s approach to tangible benefits and determining the value of the transaction

In this notice of consultation, the Commission calls for comments on various aspects of its approach to tangible benefits.

Among other things, the Commission seeks comment on its preliminary view that at least 80% of tangible benefits for television services should be allocated to specific third-party funds and that the allocation of no more than 20% of tangible benefits should be left to  the discretion of the purchaser. The Commission further seeks comment on its preliminary view that tangible benefits should generally be provided as part of the transfer of ownership or control of all radio and television programming services.

The Commission also calls for comments on the appropriateness of its current method for calculating the value of the transaction and how to clarify and codify its practices in this regard. Finally, the Commission seeks suggestions on alternate methods to allocate the value of the transaction among the various assets so that the process can be made simpler, consistent and predictable.

The deadline for the receipt of comments is 5 December 2013 and the deadline for the receipt of replies is 20 December 2013.

Introduction

1. Since the Commission does not solicit competitive applications to transfer the ownership or change the effective control of broadcasting undertakings, the onus is on the applicant to demonstrate that approval is in the public interest. As one way of ensuring that the public interest is met, the Commission expects applicants to propose financial contributions proportionate to the value of the transaction, referred to as tangible benefits, that will yield measurable improvements to the communities served by the broadcasting undertaking and to the Canadian broadcasting system as a whole. In order to determine the amount of tangible benefits, it is first necessary to calculate the value of the transaction. Further, since requirements for tangible benefits vary for different types of broadcasting undertakings, it is necessary to allocate the value of the transaction among the various assets that are part of the transaction. Currently, the Commission only requires tangible benefits for radio and television assets, and not for other assets including broadcasting distribution undertakings such as cable and satellite distributors.

2. In Broadcasting Decision 2012-574, the Commission indicated that it intended to review its tangible benefits policy. This review was included in the Commission’s three-year plan for 2013-2016.

3. The purpose of the review initiated by this Notice of Consultation is to:

streamline the Commission’s approach to tangible benefits;

Tangible benefits

Background

4. Since transfers of ownership or changes in control of broadcasting undertakings are not subject to a competitive process, they are first negotiated between parties which then apply to the Commission for permission to complete the transfer. The requirement to provide tangible benefits is a way to ensure that the transfer is in the public interest.

5. Initiatives that are part of tangible benefits packages must be incremental in that they must not be part of the normal costs of doing business. In addition, the initiatives must be possible to implement only if the transaction is approved and not be tied to the consideration of some future application.

6. Tangible benefits are generally directed to the production of Canadian programming, which serves the public interest in two main ways. First, viewers or listeners benefit directly through an increase in the quantity and quality of Canadian programming. Second, creators benefit by receiving increased support for the creation, distribution and promotion of Canadian programming.

Television

Current framework

7. As set out in Public Notice 1999-97, for transfers of ownership or control involving television programming undertakings, the Commission generally expects applicants to make clear and unequivocal commitments to provide tangible benefits. For television programming undertakings, including conventional, pay and specialty undertakings, the Commission generally expects the contributions proposed to represent 10% of the value of the transaction as determined by the Commission (see Public Notice 1999-97 and Broadcasting Public Notice 2007-53). In addition, the Commission’s general approach provides that the majority (approximately 85%) of the benefits should result in on-screen programming, the remaining 15% being allocated to social benefits.

Challenges

8. The Commission is of the view that the current expectation that tangible benefits amount to 10% of the value of the transaction for transfer of ownership or control of television undertakings remains appropriate. However, the Commission is concerned that the implementation of its policies and practices may not have been as successful as possible.

9. First, the current case-by-case approach allows applicants to propose a wide variety of initiatives. While the Commission acknowledges that many of the initiatives that have been proposed in the past have provided incremental benefits to the broadcasting system, it is concerned that over time some have deviated from the desired outcomes of the policy. For example, some initiatives have involved capital or technological improvements while others have been difficult to separate from ongoing programming costs. In such cases, the determination of incrementality can often involve complex analysis, calculations and ongoing monitoring.

10. Second, the Commission is of the view that its analysis should focus on the overall public interest of a transaction rather than an extensive examination of a complex list of initiatives that may or may not qualify as tangible benefits. The time required to analyse and explore these initiatives diverts time and focus at public hearings to arguments over the eligibility of initiatives.

11. Third, broadcasters are often required to submit reports on the implementation of the initiatives that form part of their tangible benefits. These reports are not provided in a standard format and can be difficult to understand. The preparation of these reports requires considerable resources on the part of licensees. Moreover, since it is not feasible to provide an initiative-by-initiative breakdown in the Commission’s Communications Monitoring Reports, the public must consult a variety of sources to obtain a clear picture on the implementation of approved tangible benefits.

Proposed approach

12. The tangible benefits policy should continue to further the policy objectives of the Broadcasting Act, in particular section 3(1)(e) regarding the creation and presentation of Canadian programming as well as section 3(1)(f) regarding the maximum and no less than predominant use of Canadian creative and other resources. In doing so, the Commission considers that the policy should continue to ensure that transactions provide clear and unequivocal benefits to the broadcasting system as a whole and to the communities served by the undertakings to be acquired. The Commission is also of the view that its general approach, whereby the majority of tangible benefits should result in on-screen programming with the remaining allocated to social benefits, remains appropriate.

13. The Commission is also of the view that its tangible benefits policy should continue to address the needs of those who create content in both French and English and support local, regional and national production. In addition, the Commission seeks to ensure that Canadian productions are adequately promoted both nationally and internationally.

14. As well, the Commission considers that its revised approach to tangible benefits should eliminate self-serving initiatives and ensure that the tangible benefits policy is administered in a clear, predictable and transparent manner.

A focus on funds

15. In light of the above, the Commission is of the preliminary view that tangible benefits related to television should flow primarily to established third-party funds including the Canada Media Fund (CMF) and the various certified independent production funds (CIPFs). The Commission proposes that contributions be made according to the following formula:

16. The CMF and CIPFs are established third-party funds that support creators of a variety of programming and other content. These funds help ensure that creators have access to financial and other support, including support for national and international promotion, across all audiovisual platforms. The CMF in particular is well established and has mechanisms in place to ensure that funds are spent in various regions across Canada for programming in both official languages. CIPFs are certified by the Commission according to criteria announced in Public Notice 1999-29. They operate in a complementary manner, with each having a distinct mandate and expertise in the type of content that they produce.

17. The Commission is of the view that the proposed formula would serve to ensure that tangible benefits continue to meet the basic principles outlined above. Directing a majority of contributions to well-established and independently governed funds would ensure that the funds that are expended are truly incremental to the costs normally incurred by purchasers and that these contributions would not be self-serving. Moreover, a focus on contributions to funds rather than to a potentially large number of complex initiatives that require equally complex reporting would reduce the reporting requirements on the industry and enable the Commission to better communicate to Canadians the manner in which money associated with benefits is spent. In particular, the Commission is of the view that reporting on tangible benefits under its proposed approach could be consolidated through annual returns and efficiently communicated to Canadians through the Commission’s annual Communications Monitoring Report.

18. The contributions to the CMF would benefit creators since the CMF supports the production of a variety of programming and other content across all audiovisual media platforms. Additional funds to the CMF would also ensure support for programming that reflects Canadians, and that this programming is promoted both domestically and abroad.

19. CIPFs are certified as independent according to criteria as set out in Public Notice 1999-29. There are currently 11 CIPFs. Each CIPF is a permanent fund with its own administration that is distinct from the entities that support it, such as various broadcasting distribution undertakings. CIPFs are based across the country and operate in a complementary manner, with each having a distinct mandate and expertise.

20. As with contributions to the CMF, the Commission views contributions to CIPFs as incremental and not self-serving.

21. The Commission invites responses to the following questions relating to its proposed approach to tangible benefits for television:

Q.1  Is it appropriate to require purchasers to direct a percentage of tangible benefits to the CMF and CIPFs as set out in the Commission’s proposal? If not, what other approach would be appropriate?

Q2.  Is the proposed allocation of funds between the CMF and CIPFs appropriate? If not, what allocation would be appropriate?

Q3.  Would reporting on the implementation of tangible benefits through the Commission’s Communications Monitoring Report be appropriate and adequate?

Criteria for discretionary initiatives

22.  As indicated above, no more than 20% of the tangible benefits would be left to the discretion of the purchaser. In addition, discretionary initiatives would have to be incremental, not self-serving and yield measurable improvements to the communities served by the undertakings to be acquired or to the Canadian broadcasting system as a whole. This is consistent with the Commission’s current expectations for tangible benefits, and the Commission considers it appropriate to clarify and codify its expectations regarding such initiatives.

23.  When proposing discretionary initiatives as a part of tangible benefits, the onus would be on the applicant to demonstrate to the Commission, at the time of filing its application, that its proposals are not self-serving. For the purposes of clarity and transparency, the Commission sets out the following criteria for defining a self-serving initiative:

24. In addition to clearly demonstrating that the proposed initiative is not in any way self-serving as described above, the Commission would expect applicants to demonstrate in their applications that the proposed discretionary initiatives are concrete measures that enhance the broadcasting system as a whole or the communities that are served by the undertakings to be purchased. Such initiatives could be drawn from the following list:

25. In light of the above, the Commission invites responses to the following questions related to discretionary initiatives:

Q.4  Is the proportion of tangible benefits that may be allocated to discretionary initiatives appropriate? If not, what proportion would be appropriate, and why?

Q.5  Do the criteria set out above ensure that the discretionary initiatives  proposed by applicants will not be self-serving? If not, what other criteria would be appropriate?

Q.6  Is the proposed list of discretionary initiatives sufficient? If not, what additions should be made and why?

Radio

26.  Tangible benefits related to the transfer of commercial radio undertakings must amount to at least 6% of the value of transaction. Tangible benefits must be allocated as follows:

27. The Commission considers that the current tangible benefits framework for radio is clear, and has been successful in yielding meaningful and complementary benefits to the radio broadcasting system. The Commission is of the preliminary view that the current minimum required contribution of 6% remains appropriate and notes that it may be adjusted, as it has been in the past, on a case-by-case basis.

28. However, the current proceeding affords an opportunity to seek comments on whether the current proportional allocation of contributions to the funds as well as the proportion for discretionary initiatives remains appropriate.

29. In light of the above, the Commission invites responses to the following question related to tangible benefits for radio:

Q.7  Does the current approach for the allocation of tangible benefits for radio undertakings remain appropriate? If not, what changes should be made?

Exemptions from the requirement to provide tangible benefits

Current approach

30. The Commission currently does not generally require tangible benefits for:

31. The Commission has also stated its willingness to accept a benefits package that consists solely of intangible benefits, that is, benefits that do not involve new expenditures, when survival of the service is at stake.

Challenges

32. The Commission is of the view that the requirement to provide tangible benefits should apply to all applicants seeking approval for transfers of ownership or control of broadcasting undertakings. It considers that this requirement is a key component in the determination of whether a proposed transaction is in the public interest. The Commission is therefore concerned about continuing to exempt the purchase of certain undertakings from tangible benefits in the manner discussed above.

33. Commercial programming undertakings will, in most cases, only be purchased if the purchaser considers that it can ultimately profit from the acquisition. The purchase of an unprofitable undertaking, even if its survival is at stake, may not be sufficient to satisfy the public interest in the absence of tangible benefits.

34. The Commission further notes that the $10 million dollar threshold for exempting television programming undertakings from the requirement to provide tangible benefits was initiated to recognize the financial difficulties of smaller undertakings and independent broadcasters. However, this exemption, as currently framed, facilitates the acquisition of smaller television undertakings by any party, small or large, and may no longer be appropriate.

35. In the case of radio, the Commission considers that it may be appropriate to consider market size and type of station rather than profitability when considering exemptions from the requirement to provide tangible benefits.

Proposed approach

36. The Commission is of the preliminary view that the requirement to provide tangible benefits should generally apply to all transactions involving the transfer of ownership or control of television or radio programming undertakings. The Commission is further of the view that the current criteria for determining when exemptions from the requirement to provide tangible benefits are allowed may no longer be relevant. The Commission acknowledges, however, that under certain specific and exceptional circumstances, an exemption from the requirement to provide tangible benefits may be appropriate provided that the public interest is served. In order to ensure that its policy is as predictable, transparent and efficient as possible, exemptions should be granted only in specific and well-defined circumstances.

37. In light of the above, the Commission invites responses to the following questions:

Q.8  Should tangible benefits generally be provided as part of the transfer of ownership or control of all radio or television programming undertakings? What are the advantages and disadvantages to such an approach?

Q.9  Under what specific circumstances should the requirement to provide tangible benefits not apply?

Schedule for the payment of tangible benefits

38. When television undertakings are purchased, the schedule for the payment of tangible benefits is decided on a case-by-case basis. The period for the payment of tangible benefits has ranged from 5 to 10 consecutive broadcast years. When radio undertakings are purchased, the Commission generally expects payments to be made over seven consecutive broadcast years.

39. For both television and radio, there is no current requirement for tangible benefits to be fully paid before the service is sold to another party.

40. The Commission is concerned that, under the current approach, tangible benefits may not be expended as efficiently as possible. As well, the complexity of reporting, especially for television, makes it difficult for the Commission to track tangible benefits over long periods of time. As a result, it is sometimes hard to monitor the implementation of tangible benefits and inform Canadians about the allocation of contributions. As well, certain funds may benefit from an earlier infusion of contributions that they can expend over time in order to provide certainty in their revenues and expenses.

41. Moreover, the Canadian broadcasting system has seen increased consolidation. An effect of this consolidation is that, in certain instances, television and radio undertakings have once again changed ownership or control before tangible benefits from a previous transfer have been completely expended. In order to properly monitor and report on the expenditure of tangible benefits, case-by-case discussions with purchasers on the public record are required to determine the manner in which these unfulfilled tangible benefits will be paid.

42. In light of the above, the Commission invites responses to the following questions:

Q.10  Should the Commission ensure that all expenditures on tangible benefits are made in advance of the closing of the transaction as a means to ensure that initiatives are funded and for ease of administration? If not, why would such an approach not be desirable?

Q.11  When a programming undertaking changes ownership, should the Commission ensure that all outstanding tangible benefits from a previous purchase be expended in advance of the new transaction?

Value of the transaction

Background

43. In Broadcasting Public Notice 2007-139, the Commission called for comments on ways to streamline the allocation of the value of the transaction among various assets. As a result of this process, the Commission issued Broadcasting Public Notice 2008-57, which provided information on the method used to calculate the value of the transaction and allocate it among various assets. Such allocation is required when a transaction includes assets with different tangible benefits requirements, i.e., 10% for television, a minimum of 6% for radio and 0% for other assets.

44. In the ensuing time, the broadcast industry has expressed concern regarding the administrative burden and consistency of application of this method. It has been suggested that the Commission initiate a public process to consider what should be included in the calculation of the value of the transaction, and how that value should be allocated among various assets.

45. The Commission agrees that the analysis regarding the allocation of the value of the transaction is complex, costly and time consuming for the Commission, the public and the industry. Accordingly, the Commission considers that it is appropriate to seek the views of the broadcasting industry, other stakeholders and Canadians in general with respect to the calculation of the value of the transaction and its allocation among various assets.

Calculation of the value of the transaction

46. In Broadcasting Public Notice 2008-57, the Commission stated that its definition of the value of the transaction is consistent with the International Business Brokers Association’s definition of transaction value, which reads as follows:

The total of all considerations passed at any time between the buyer and seller for an ownership interest in a business enterprise, and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment and/or consultation agreements, licences, customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemption, real estate, leases, royalties, earn-outs and future considerations.[1]

47. In applying this definition, the Commission generally includes the negotiated purchase price as well as the following liabilities and commitments in the value of the transaction:

48. However, the Commission excludes liabilities such as deferred income taxes and minority interests, where, as of the date of the transaction, the payment date of the liability is unknown.

49. In share transactions, the Commission determines the value of the transaction based on the economic interest acquired and adds elements such as assumed debt to this value in the same proportion as the economic interest. On the other hand, elements that are solely to the benefit of the purchaser, such as purchase or control premiums and break-up fees, are allocated in their entirety to the value of the transaction.

50. The amounts for the elements added generally reflect their value either at the date of the transaction or as disclosed in financial statements prepared at a date that is close to the date of the transaction.

Allocation of the value of the transaction

51. In Broadcasting Public Notice 2008-57, the Commission adopted the discounted cash flow (DCF) method as the preferred method for the allocation of the value of the transaction.

52. However, the Commission recognized in Broadcasting Public Notice 2008-57 that there may be circumstances where the preparation of a DCF valuation report may cause an undue financial hardship on an applicant. In these cases, an applicant has the option of using a different method where it can convince the Commission that using the DCF method would cause an undue financial hardship and that the method chosen stands the test of reasonableness, is consistent, and is the most appropriate under the circumstances.

53. Since the issuance of Broadcasting Public Notice 2008-57 there have been twelve transactions that required an allocation of the value of the transaction. Of the twelve, eight filed a valuation report based on the DCF method. The other four proposed alternate methods that the Commission accepted.

54. Many broadcasting undertakings now also distribute their services on platforms other than the linear service. Given these additional methods of distribution, the Commission is now considering the allocation to the value of the licensed service the value of distribution on other platforms. For example, the value of online distribution of a radio station would be allocated and combined with the value of its licensed service.

55. The Commission wishes to adopt an allocation method that would provide a simpler, consistent and predicable allocation and provides, as examples, the two following methods. The Commission is seeking comment on these methods and suggestions on other acceptable methods of allocation that, preferably, would not require valuation methods.

56. The first method is an allocation made in accordance with the proportion that each asset’s respective past earnings before interest, taxes, depreciation and amortization (EBITDA) represents of the aggregate historical EBITDA of the enterprise as a whole. Under this method, EBITDA would be derived from the financial statements for the most recently completed fiscal year and may be adjusted to take into account operations after the end of the fiscal year up to the date of the transaction, as necessary.

57. The second method involves adjusting past EBITDA to take into account expected synergies and projected EBITDA for services once they reach maturity. Past EBITDA would be determined as stated in the previous paragraph. Synergies and EBITDA at maturity would be based on assumptions on markets and growth. The values to be added to the past EBITDA could be determined without any discounting to determine the appropriate percentages for the allocation of the value of the transaction.

58. In light of the above, the Commission invites responses to the following questions on ways to clarify and codify the calculation of the value of the transaction and simplify its allocation among various assets.

Q.12  Should the Commission maintain or modify its approach used to calculate the value of the transaction?

Q.13  How could the Commission clarify and codify its practice with respect to the calculation of the value of the transaction?

Q.14  What allocation method would most effectively provide for a simpler, consistent and predictable allocation of the value of the transaction?

Q. 15  What other steps might be taken to simplify the current process, which is iterative in nature?

Q.16  What other elements of the method related to calculation of the value of the transaction and its allocation should the Commission consider?

Procedure

59. The Canadian Radio-television and Telecommunications Commission Rules of Practice and Procedure, SOR/2010-277 (the Rules of Procedure), set out, among other things, the rules for content, format, filing and service of interventions, the procedure for filing confidential information and requesting its disclosure, and the conduct of the public hearing. Accordingly, the procedure set out below must be read in conjunction with the Rules of Procedure and its accompanying documents, which can be found on the Commission’s website under “CRTC Rules of Practice and Procedure.”

60. The Commission invites interventions that address the issues and questions set out above, and related matters. The Commission will accept interventions that it receives on or before 5 December 2013. Only parties that file interventions may file a reply to matters raised during the intervention phase. The deadline for the filing of replies is 20 December 2013.

61. The Commission will not formally acknowledge comments. It will, however, fully consider all comments and they will form part of the public record of the proceeding, provided that the procedure for filing set out below has been followed.

62. In accordance with the Rules of Procedure, a document must be filed with, not merely sent to, the Commission by 5 p.m. Vancouver time (8 p.m. Ottawa time) on the date it is due. The Commission takes no responsibility for postal delays and will not notify a party whose submission is received after the deadline date. Late submissions will not be considered by the Commission and will not be made part of the public file.

63. Submissions must be filed by sending them to the Secretary General of the Commission by only one of the following means:

by using the
[Intervention/comment/answer form]

or

by mail to
CRTC, Ottawa, Ontario K1A 0N2

or

by fax at
819-994-0218

64. Submissions longer than five pages should include a summary.

65. Each paragraph of the submission should be numbered. In addition, where the intervention is filed by electronic means, the line ***End of document*** should be entered following the last paragraph of the document, as an indication that the document has not been altered during electronic transmission.

Important notice

66. All information that parties provide as part of this public process, except information designated confidential, whether sent by postal mail, facsimile, e-mail or through the Commission’s website at www.crtc.gc.ca, becomes part of a publicly accessible file and will be posted on the Commission’s website. This information includes personal information, such as full names, e-mail addresses, postal/street addresses, telephone and facsimile numbers, and any other personal information parties provide.

67. The personal information that parties provide will be used and may be disclosed for the purpose for which the information was obtained or compiled by the Commission, or for a use consistent with that purpose.

68. Documents received electronically or otherwise will be put on the Commission’s website in their entirety exactly as received, including any personal information contained therein, in the official language and format in which they are received. Documents not received electronically will be available in PDF format.

69. The information that parties provide to the Commission as part of this public process is entered into an unsearchable database dedicated to this specific public process. This database is accessible only from the web page of this particular public process. As a result, a general search of the Commission’s website with the help of either its own search engine or a third-party search engine will not provide access to the information that was provided as part of this public process.

70. The Commission encourages parties and interested persons to monitor the record of the proceeding, available on the Commission’s website, for additional information that they may find useful when preparing their submissions.

Examination of documents

71. A list of all interventions will also be available on the Commission’s website. The list is accessible by selecting “View all proceedings open for comment” from the “Public Proceedings” section of the Commission’s website and clicking on the “Interventions/Answers” link associated with this notice.

72. The public may examine public interventions and related documents at the following Commission offices during normal business hours.

Location of Commission offices

Toll-free telephone: 1-877-249-2782
Toll-free TDD: 1-877-909-2782

Les Terrasses de la Chaudière
Central Building
1 Promenade du Portage, Room 206
Gatineau, Quebec
J8X 4B1
Tel.: 819-997-2429
Fax: 819-994-0218

Regional offices

Nova Scotia

Metropolitan Place
99 Wyse Road
Suite 1410
Dartmouth, Nova Scotia
B3A 4S5
Tel.: 902-426-7997
Fax: 902-426-2721

Quebec

205 Viger Avenue West
Suite 504
Montréal, Quebec
H2Z 1G2
Tel.: 514-283-6607

Ontario

55 St. Clair Avenue East
Suite 624
Toronto, Ontario
M4T 1M2
Tel.: 416-952-9096

Manitoba

360 Main Street
Suite 970
Winnipeg, Manitoba
R3C 3Z3
Tel.: 204-983-6306
Fax: 204-983-6317

Saskatchewan

2220 – 12th Avenue
Suite 620
Regina, Saskatchewan
S4P 0M8
Tel.: 306-780-3422

Alberta

100 – 4th Avenue South-West
Suite 403
Calgary, Alberta
T2P 3N2
Tel.: 403-292-6660
Fax: 403-292-6686

British Columbia

858 Beatty Street
Suite 290
Vancouver, British Columbia
V6B 1C1
Tel.: 604-666-2111
Fax: 604-666-8322

Secretary General

Related documents

Footnote

[1] Broadcasting Public Notice 2008-57, paragraph 4

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