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Decision
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Ottawa, 26 July 1989
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Decision CRTC 89-499
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Pathonic Network Inc.
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Quebec City, Rimouski and Gaspé-Nord, Quebec - 883383200 - 883386500883387300 - 883402000Pathonic Communications Inc.Sherbrooke and Trois-Rivières, Quebec - 883384000 - 883385700
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Following a Public Hearing in Quebec City on 13 March 1989, by majority decision, the Commission approves the applications for authority to transfer to Télé-Métropole Inc. (Télé-Métropole) all of the outstanding Class A subordinate shares of Pathonic Network Inc. (Pathonic), with the exception of the shares of this class already held by Télé-Métropole and the 100,000 Class B shares held by Mr. Pierre H. Lessard which have been converted into Class A subordinate shares, in accordance with Télé-Métropole's public offer dated 19 August 1988, as amended 30 August 1988.
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As a result of the present transaction, Télé-Métropole will now hold all of the Class A subordinate shares in Pathonic, each of which carries 1 vote. This represents 93.4% of the actual equity in Pathonic and, as a result, Télé-Métropole's portion of the voting rights attaching to all of Pathonic's issued shares increases from 8.1% to 41.5%. In addition, Pathonic Inc., a holding company controlled by Mr. Paul Vien, holds all of the Class B Pathonic shares, each of which has 20 votes, and its portion of the voting rights attaching to all of Pathonic's issued shares increases from 56.3% to 58.5%.
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Télé-Métropole's expenditures in respect of this transaction amount to approximately $56 million, a portion of which is covered by the company's cash reserves, with the major portion financed through a long-term loan. The Commission was provided with a letter from a financial institution attesting to the availability of the required funds.
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Parties to the Transaction
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Pathonic is the licensee of CFCM-TV Quebec City, CFER-TV Rimouski and CFER-TV-2 Gaspé-Nord, all of which are affiliated with the TVA network; it is also the licensee of the Pathonic network and of CKMI-TV Quebec City, a station affiliated with the CBC's English-language television service. For its part, Pathonic Communications Inc., which is a wholly-owned subsidiary of Pathonic, is the licensee of CHLT-TV Sherbrooke and CHEM-TV Trois-Rivières, which are also affiliated with the TVA network. Pathonic also owns a 45% interest in Télé Inter-Rives Ltée, which directly or indirectly controls the licensees of the three Rivière-du-Loup television stations, CIMT-TV (a TVA affiliate), CKRT-TV (an affiliate of the CBC's French-language television service), and CFTF-TV (an affiliate of the Quatre-Saisons network). As a consequence of the approval herein granted, Télé-Métropole will hold a more substantial indirect interest in these three stations (883388100 - 883401200 - 883411100). Télé-Métropole is the licensee of CFTM-TV Montreal, the flagship station of the TVA network. This television station is one of the ten largest in Canada in terms of gross revenue. Télé-Métropole is a founding member of the TVA network and owns 20% of the voting rights in the Réseau de Télévision TVA Inc. Télé-Métropole also owns 100% of C.J.P.M.-T.V. Inc., licensee of CJPM-TV Chicoutimi and of CJPM-TV-1 Chambord, both of which are also affiliated with the TVA network. Other significant wholly-owned subsidiaries of Télé-Métropole which are active in broadcasting-related fields include Paul L'Anglais Inc., J.P.L. Productions Inc., Sonolab Inc. and Publico Inc.
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Le Groupe Vidéotron Ltée (Vidéotron) owns 99.7% of the voting shares and 40.8% of all of the outstanding shares in Télé-Métropole. Vidéotron operates, directly or indirectly, a wide range of cable undertakings in Canada.
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Vidéotron owns 100% of Vidéotron Ltée which, with more than 800,000 subscribers, is the largest cable undertaking in the province of Quebec and the second largest in Canada. Vidéotron Ltée's cable undertakings currently serve approximately 150 communities in the province of Quebec and, through its wholly-owned subsidiary QCTV Ltd., more than 25 communities in Alberta.
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Context of the Present Applications
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The present transaction is the result of a series of offers and counteroffers made during the summer of 1988 by Télé-Métropole and another large Quebec-based broadcasting undertaking, Cogeco Inc. (Cogeco), in which both firms sought to acquire Pathonic's issued Class A subordinate shares. Cogeco has interests in radio, television, cable, and program production companies and in the print media. It operates, among others, television stations in Sherbrooke and Trois-Rivières that are affiliated with the CBC's French-language television service and with the Quatre Saisons network. Cogeco appeared at the public hearing to intervene against the present applications.
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This transaction is also to be seen in the context of the highly competitive situation in which the four French-language television networks in the province of Quebec, -- CBC, TVA, Quatre Saisons and Radio-Québec -- operate. This competition is all the more intense because the French-language market, which is limited in terms of both resources and population, consists essentially of two major markets, namely Montreal and Quebec City and the surrounding areas. Owing to the particular operational structure of the TVA network, CFTM-TV Montreal plays a dominant role in terms of the volume of program production and in terms of revenue; in 1988, CFTM-TV accounted for 53% of the combined revenue of all of the TVA affiliates. The 1988 revenues of CFTM-TV Montreal and that of Pathonic's flagship station, CFCM-TV Quebec City, together represented more than 70% of the combined revenues of all of the stations affiliated with the TVA network. Télé-Métropole contended that its application was essentially a defensive measure taken in reaction to a move by Cogeco, whose television stations are affiliated with networks that compete with TVA, and that its objective was to avoid isolating CFTM-TV and to maintain the integrity of the TVA network and allow it to compete on an equal footing with the other television networks in the province of Quebec. It pointed out in this regard that the CBC, Radio-Québec and Quatre Saisons now operate almost exclusively on a network basis, and that it should be able to function in the same way in respect of the acquisition of broadcast rights, major event coverage or the conducting of large promotional campaigns on behalf of national advertisers.
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In this regard, Télé-Métropole stated that, within the TVA network, [TRANSLATION] "Owing to its strategic position in the market, Pathonic is a more important player than the other members". Thus, the Pathonic stations account for about 40% of the total combined viewing time of all of the stations affialited with the TVA network, compared to the 45% achieved by CFTM-TV Montreal. According to BBM audience data for the fall of 1988, CFCM-TV Quebec City was the number one station in the market, with 36% of the total viewing hours. Télé-Métropole also pointed out Pathonic's active role within the TVA network, not only in terms of the productions it provides, but also its contributions in terms of the overall planning of the network schedule, as well as marketing, sales and promotional strategies.
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Ownership Considerations
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As the Commission has previously stated, it has chosen to consider each application for authority to transfer the ownership or effective control of broadcasting undertakings on its own merits and with regard to the particular circumstances.
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Among other things, the Notice of Public Hearing relating to these applications stated:
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Although this transaction would not mean the transfer of effective control of Pathonic, Télé-Métropole notified the Commission that it wanted to undergo an immediate auditing with regard to a takeover of Pathonic, even though Pathonic intends to show that Paul Vien still controls Pathonic through his family holding company, Pathonic Inc.
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In addition, Télé-Métropole asks the Commission, in its written statement, that [TRANSLATION]: "Should it render a favourable decision, it should also consider that the tests will have been previously passed successfully by Télé-Métropole, should it acquire control in the future".
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With regard to the issue of control, the applications indicate that, by virtue of the principal criterion through which effective control is determined, Pathonic Inc. retains its capacity to nominate the majority of the members of the board of directors of Pathonic since it holds 58.5% of the voting rights in the company, and by virtue of the terms of the shareholder agreement signed by the parties on 21 December 1988 whereby Télé-Métropole has the right to nominate only two of the twelve members of Pathonic's board of directors. This was corroborated at the public hearing by both Pathonic and Télé-Métropole. Pathonic stated [TRANSLATION]: "As majority shareholder, Pathonic intends to conserve in its entirety the integrity of the Réseau Pathonic, to maintain the management of the network, to continue to operate it in accordance with the mandate accorded it by the CRTC in Decision CRTC 86-976 dated 30 September 1986, and to preserve its regional character". For its part, Télé-Métropole stated [TRANSLATION]: "With regard to control, there is no question about it. Paul Vien continues to control Pathonic".
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Since it can be clearly determined in whose hands effective control of Pathonic resides, it seems clear that the transfer of effective control of Pathonic is not at issue in this transaction. As set out in the applications and as reaffirmed at the public hearing, Mr. Paul Vien, through Pathonic Inc., retains effective control of Pathonic. Accordingly, and in accordance with its past practice in respect of transactions that do not involve the transfer of effective control of broadcasting undertakings, the Commission considers that, at this time, it is not obligatory for the purchaser to demonstrate that the transaction yields significant and unequivocal benefits for the Canadian broadcasting system as a whole and, in particular, for the communities served.
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Notwithstanding the foregoing, the Commission is very aware that the present transaction contains a number of exceptional and unusual features:
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- the multiple-vote provision (20 votes per Class B share) apply at present only to Paul Vien, his spouse and heirs. If at any time Paul Vien et al cease to hold more than 50% of the voting rights pertaining to the outstanding shares of all classes, the Class A shares would automatically be converted to Class B shares with the multiple-vote provision;
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- Télé-Métropole is the sole minority shareholder, and holds a significant block -- 41.5% -- of the voting rights;
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- Télé-Métropole holds all of Pathonic's Class A shares, representing 93.4% of the equity in Pathonic;
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- under the shareholders agreement dated 21 December 1988, Télé-Métropole will exercise a significant influence over clearly defined aspects of the company's activities;
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- in certain circumstances, Télé-Métropole could gain effective control without acquiring any additional shares.
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As mentioned above, it is in this context that Télé-Métropole wished to undergo an immediate verification with regard to a change of control. It is for this reason, that, in addition to setting out the intangible benefits accruing from this transaction, which are primarily associated with protecting the integrity of the TVA network and maintaining the existing service, Télé-Métropole proposed a series of tangible benefits that are quantifiable in dollar terms and which represent an additional investment in the order of $5.4 million over five years. Given the circumstances, Télé-Métropole stated that it had decided to propose tangible benefits that it is offering on its own behalf. In order to ensure that these benefits would have a real and significant impact, it decided to place greater importance on the development of news and public affairs programming by concentrating the additional resources in this area. Télé-Métropole also specified that these new proposals are in addition to the commitments in this area made by Vidéotron at the time that it acquired control of Télé-Métropole in 1987 (Decision CRTC 87-62).
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Among the tangible benefits proposed, the Commission notes in particular a major project to establish in Montreal a documentation centre for print and video archival material which would also be used by journalists at the Pathonic stations in Quebec City, Sherbrooke, Trois-Rivières and Rimouski, as well as the journalists at CFTM-TV Montreal. Télé-Métropole also proposed to add two reporters and the related technical crews to provide, on a priority basis, better coverage of major stories of interest to people in the province of Quebec, and to purchase a new vehicle capable of transmitting on-location reports over-the-air, via satellite or via microwave. This vehicle would be available for special broadcasts event to stations affiliated with the TVA network.
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Following discussions at the public hearing with respect to the inadmissibility as benefits of the proposed financing and amortization costs of the proposed benefits, Télé-Métropole confirmed in a letter to the Commission dated 16 March 1989 that its proposals also include, at a value of $1 million over three years, the establishment of a program development fund for use by stations affiliated with the TVA network other than CFTM-TV. This initiative is intended to encourage the creation of regional programs by these affiliates for broadcast on the TVA network.
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In addition to the benefits noted above, Télé-Métropole also made a formal commitment to acquire at least 5 hours per week during the fall/winter season of programs produced by Pathonic for broadcast on the network. This represents an undertaking to spend at least $2.5 million over five years. When added to the other quantifiable benefits proposed in the applications, Télé-Métropole's total commitments amount to some $7.9 million. In addition, Télé-Métropole pledged to allow Pathonic access to all of its technical and computer data and to ensure that Pathonic's management would continue to operate autonomously. It also undertook to ensure that this transaction would not adversely affect its commitments relating to its existing licences, both in respect of CFTM-TV and the TVA network.
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With regard to the Commission's concerns relating to an increase in the concentration of ownership of broadcasting undertakings in the province of Quebec and the repercussions of cross-media ownership of broadcast and cable undertakings, Télé-Métropole maintained that the transaction would not present any disadvantages. It pointed out in particular that Mr. Paul Vien will continue to manage Pathonic, that the quantity of Télé-Métropole programs carried by stations affiliated with the TVA network will not be increased, and that there will not be a reduction in the number of voices in the market.
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For its part, Vidéotron reiterated the commitments it had made at the time it acquired control of Télé-Métropole in 1987 relating to equitable treatment of all broadcasters in the markets served by its cable undertakings. Further, it undertook to distribute any new service which the Commission may authorize. In addition, it committed to add two members to the outside control and equity committee that was established by Vidéotron following the issuance of Decision CRTC 87-62. One will be appointed from Quebec City and the other from Sherbrooke. Further in this respect Télé-Métropole indicated that, following the implementation of the measures taken to alleviate this concern, the committee that was established has received no complaints during the two years of its existence.
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Conclusion
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In assessing the present transaction, the Commission considered it necessary to examine as well the impact on the operation of the TVA network as it relates to Télé-Métropole, in view of the very particular operational structure of the network and its affiliated stations throughout the province of Quebec.
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The significance of Télé-Métropole is reflected not only in the corporate structure of the network but also, more particularly, by the province-wide exposure and reach of the programs produced by CFTM-TV Montreal. In addition to producing most of the programs broadcast by the TVA network, CFTM-TV makes its productions available to nine other member stations of the TVA network. For the most part, these productions represent the greater part of all of the programming broadcast by the other TVA affiliates throughout Quebec. CFTM-TV's programs are thus available to virtually 100% of the province's French-speaking viewers, and constitute the core of Quebec's second largest French-language television service.
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Having taken into consideration the unique operational characteristics of the TVA network and the distinctive features of the present transaction, the Commission considers that approval of the proposed transfer of Pathonic shares to Télé-Métropole is justified. The Commission is of the opinion that Télé-Métropole's expertise in the operation of CFTM-TV and the closer co-operation that will be established in future with Pathonic will mean that the two parties will be in a better position to meet the challenge of a more competitive environment and the increasing production costs of the television industry in the 1990s. This approval will also ensure that the integrity of the second-largest French-language television service, which has been in place for several years, is maintained and provide for the ordered development of the various television networks which serve the province of Quebec.
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The Commission has also taken into consideration the increased concentration of ownership in broadcasting which will result from the approval of this transaction. A majority of the Commission considers that the inherent benefits of the transaction, as stated in the preceding paragraph, and the guarantees provided by the control mechanisms that have been put in place, outweigh any potential disadvantage that could result from the increased concentration of ownership of broadcasting undertakings in the province of Quebec. Having considered all of the above, the Commission thus considers that approval of these applications is in the public interest.
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Concerning the specific benefits proposed in the context of the request for an advance ruling on the benefits of an eventual transfer of effective control of Pathonic to Télé-Métropole, the Commission will not at this time give its opinion as to the appropriateness or sufficiency of these benefits since it does not now have in hand such an application. The Commission is unable to base its decisions on hypothetical situations which may occur in the future since it would, in this manner, restrain its discretionary power to assess in full the applications submitted to it, as well as preclude an opportunity for members of the public to offer their observations with full knowledge of the matters before it.
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Nevertheless, the Commission has taken note of the statements made at the hearing by Mr. Serge Gouin, President and Chief Executive Officer of Télé-Métropole, to the effect that the proposed benefits would strengthen and enrich television programming in the province of Quebec. Mr. Gouin went on to say [TRANSLATION]:
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Our private French-language [television] system's needs are greater today than the resources that would normally be available to it. The system needs an extra shot in the arm. I believe that it is worth it at this time to make a special effort. The Commission concurs with Télé-Métropole's analysis of the situation, particularly the significance for the private, French-language television system of the infusion of the proposed benefits as described by Mr. Gouin. The Commission notes that the transaction herein approved will strengthen and enhance Télé-Métropole's position in the broadcasting industry in Quebec, thus providing Télé-Métropole with an improved capability to buttress that system. Given these factors, and Mr. Gouin's statement about the timeliness of this "special effort" to strengthen and enrich television programming in the province of Quebec, the Commission assumes that the benefits mentioned above will be implemented in accordance with the timetable set out in the applications. If at some future date the Commission receives an application for authority to transfer effective control of Pathonic to Télé-Métropole, it could, if it wishes, consider the benefits that will have been implemented in connection with this transaction as part of the overall benefits relating to any such future application.
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Should such a situation occur, the Commission will expect Télé-Métropole to act as applicant or co-applicant in order that, among other things, it can address the issue of benefits, even if Télé-Métropole is not a direct participant in the transaction that would give it effective control of Pathonic. The Commission would then have to take into account not only the size of the transaction in terms of its dollar value and the resources available to Télé-Métropole, but also its significance and the impact on the television industry at that time of the change of effective control of a broadcasting undertaking of the scale of Pathonic. The Commission would also be obliged to reassess the issue of concentration of ownership in the same context.
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Concerning the establishment of a program development fund for stations affiliated with the TVA network, the Commission reiterates that any program produced within the context of this initiative will only be considered a local program for the purposes of the Promise of Performance of the producing stations provided it meets the criteria set out in Public Notice CRTC 1989-27 dated 6 April 1989 entitled "Overview: Local Television for the 1990s", and as clarified in Circular No. 363 dated 13 July 1989.
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Interventions
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The Commission has taken into consideration the opposing interventions presented at the public hearing by Cogeco Inc., the Association des techniciens de Télé-Métropole, and Télévision de la Baie des Chaleurs Inc., licensee of CHAU-TV Carleton, Quebec, as well as the comments by the Association des réalisateurs de Télé-Métropole et al, and the seven other written interventions filed in respect of these applications, of which four were supportive. The Commission considers that Télé-Métropole has satisfactorily addressed the concerns expressed in the interventions in its detailed written reply and in its rebuttal at the public hearing.
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Fernand Bélisle
Secretary General
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Dissenting Opinion of Commissioners Rosalie Gower and Paul McRae
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Commissioners Gower and McRae are of the opinion that approval of the applications by Pathonic Network Inc. and its sudsidiary, Pathonic Communications Inc., to transfer all of the outstanding Pathonic Class "A" subordinate shares to Télé-Métropole is contrary to the public interest and, accordingly, the applications should be denied. The proposed transaction gives rise to serious issues of concentration of ownership and cross-media ownership within the Quebec broadcasting and cable industries. In our view, the approval of the share transaction could create a situation in which an excessive and undue degree of broadcast ownership would be concentrated in the hands of Télé-Métropole and its parent, Le Groupe Vidéotron Ltée (see description of ownership in the text of the majority decision).
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In arriving at this conclusion, we have taken into account the negotiated terms and conditions associated with the Pathonic share transaction, most notably the fact that control of Pathonic would continue to reside with Mr. Paul Vien through his ownership of all of the Class "B" shares, to which are attached 58.5% of the voting rights of the total shares issued by Pathonic. In the circumstances of this case, the fact that no immediate change of effective control of Pathonic would ensue if the applications were approved does little to mitigate our concerns regarding the further lessening of diversity of broadcast ownership in Quebec. To begin with, under the terms of the transaction, Télé-Métropole would acquire 93.4% of the voting equity of Pathonic to which, albeit, are attached only 41.5% of the voting rights. Furthermore, the Pathonic/ Télé-Métropole Shareholders' Agreement provides for various possible future transactions involving dispositions of Pathonic shares that would result in Télé-Métropole acquiring control of the company. Finally, an integral component of the applications is the request that Télé-Métropole undergo a benefits test at this time in connection with the acquisition of Pathonic, notwithstanding that Mr. Vien would continue to control Pathonic, and that the Commission forego a further benefits test should Télé-Métropole acquire control in the future. In our opinion, these factors certainly portend a future application before the Commission to transfer effective control of Pathonic to Télé-Métropole.
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Given that approval of the transaction will further diminish the level of existing competition in this broadcast market, and having regard for the already extensive Quebec cable television holdings of the Vidéotron group of companies, we consider that further consolidation of industry domination within the province and the threat of future loss of a significant market player are undesirable outcomes of this proceeding and ones that cannot be justified in the public interest.
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