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Decision
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Ottawa, 19 October 1990
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Decision CRTC 90-1072
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Kenwal Communications (Partnership)
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Hamilton, London and Wingham, Ontario - 900382300 - 900383100- 900384900
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At a Public Hearing commencing 13 June 1990 in Hamilton, the Commission heard applications by Kenwal Communications (Kenwal), a partnership of Maclean Hunter Limited (MHL) and The Blackburn Group Inc. (Blackburn), for authority to acquire the assets and for licences to continue the operation of the three independent television stations: CHCH-TV Hamilton, CFPL-TV London and CKNX-TV Wingham. These applications are denied.
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Under these proposals, MHL was to hold a majority 65% interest in the partnership, while Blackburn was to hold the remaining 35% interest. MHL currently holds 100% of Niagara Television Limited (CHCH-TV) indirectly, and Blackburn directly holds 100% of CFPL Broadcasting Limited (CFPL-TV) and CKNX Broadcasting Limited (CKNX-TV).
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Ownership of the London and Wingham stations has, for many years, resided with Blackburn. In the case of CHCH-TV, MHL acquired ownership of the Hamilton television station as part of a much larger transactionapproved on 28 September 1989, whereby ownership of the various broadcast undertakings owned by Selkirk Communications Limited was transferred indirectly to MHL (see Decision CRTC 89-766). Under that larger 1989 transaction, MHL sought to transfer ownership of certain of the former Selkirk properties immediately from MHL to third parties. In most cases, the applications pertaining to these third-party transfers were approved by the Commission. In some instances, however, and for various reasons, the applications were denied.
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Included among those applications denied by the Commission in September 1989 was a request for authority to transfer effective control of Niagara Television Limited, licensee of ZCHCH-TV, from MHL to Blackburn's subsidiary, CFPL Broadcasting Limited (Decision CRTC 89-768). In its decision, the Commission noted that, as an independent station operating in the country's largest market, CHCH-TV's potential to attract audiences and revenues is exceeded by few other stations. Of concern to the Commission was the failure of the station to achieve its full potential under the ownership and direction of Selkirk, and the fact that the financial projections of CFPL Broadcasting Limited indicated that there would be no significant improvement for a period of at least five years:
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Specifically, the applicant failed to convince the Commission that it has developed dynamic strategies and an effective business plan that will be necessary if CHCH-TV's financial performance in its market is to improve. As a consequence of the Commission's denial, control of CHCH-TV continued to reside with MHL through its subsidiary, MH Acquisitions Inc. (MHA). The Commission directed MHA to submit, within six months of the decision, either its own proposals for a benefits package and a business plan for the Hamilton station or, in keeping with a commitment it had given the Commission, to return with a new application for authority to transfer control of the licensee company to a third party. The Commission noted that it had been MHA's undertaking to ensure that, in either event, the level of the benefits proposed would be at least equal to those put forward in the application by CFPL Broadcasting Limited to acquire ownership of CHCH-TV.
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The present application relating to CHCH-TV was submitted in response to the Commission's direction set out in Decision CRTC 89-768. It represents, in effect, a continuation of the process initiated by MHL's bid for ownership of the broadcast holdings of Selkirk Communications Limited, and has thus been examined against the backdrop of that much larger transaction, with particular reference to the commitments made and the benefits promised at that time by the parties concerned. The overall transaction involving the three stations has also been assessed by the Commission, taking into account any outstanding conditions, expectations and commitments pertaining to the television undertakings, and bearing in mind as well the relevant concerns expressed in Decision CRTC 89-768.
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In all of this, it was the applicant's task to demonstrate to the Commission that the applications represent the best possible proposal under the circumstances, taking into account the Commission's general concerns with respect to transactions of this nature. Specifically, Kenwal was required to satisfy the Commission that the benefits to be realized under the transaction are significant and unequivocal, commensurate with the size and nature of the transaction, and that they take into account the responsibilities to be assumed by the proposed partnership, the characteristics and viability of the broadcasting undertakings concerned, and the scale of the programming, management, financial and technical resources available to the partnership.
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The proposed benefits package put forward by Kenwal respecting the three applications represents direct, incremental expenditures of $11,109,000 over five years. Approximately one third of this amount is allocated to the establishment of a two-way microwave link between the three stations and the purchase of a new mobile uplink vehicle. Almost all of the remaining expenditures relate directly to new programming initiatives in the under-represented categories of drama, music and children's programming.
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The Commission has assessed the benefits and is satisfied that they are, individually and collectively, significant and unequivocal. At issue, however, is whether they are indeed commensurate with the size and nature of the transaction, take adequately into account the characteristics and viability of the undertakings, or are reflective of the responsibilities and resources of the partnership, particularly when balanced against the serious concerns addressed below. As with the earlier application by CFPL Broadcasting Limited for authority to acquire control of CHCH-TV, the Commission is concerned that the business plan put forward by the applicant lacks the vision and commitment that would be expected of Kenwal in light of its proposed status as owner of three television stations in Canada's richest market, and given the controlling interest to have been held in the partnership by MHL, one of Canada's largest broadcasters. In the year following the Commission's denial of that earlier application, MHL appears to have done little to overcome what it described at the 1989 hearing as being a serious impediment to its long-term ownership of CHCH-TV, namely its unfamiliarity with the independent television industry.
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In the Commission's view, the business plan put forward by the partnership is very short-term and uncertain in its outlook, and adopts a tentative approach in its projections of future revenues and expenses. Moreover, the Commission considers that any confidence in the accuracy of the applicant's projections must be tempered by the fact that they are based on a program strategy that was substantially revised by the applicant only days prior to the hearing.
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Kenwal's business plan is also predicated on a significant decrease in the operating costs of all three stations. This was to be accomplished, in substantial measure, through reductions in its Canadian and non-Canadian programming expenditures. According to the applicant's projections, spending on Canadian programming by the three stations would total $108.2 million over five years. The Canadian program expenditures of the Hamilton and London stations, however, like those of all large private stations in Canada, are currently tied to a formula based on station revenues. Adherence to the formula was imposed by the Commission as a condition of licence at the time the licences for these stations were last renewed in the spring of 1989. In the case of the Wingham station, attaining the levels of Canadian program expenditures established by the formula was imposed on CKNX-TV as an expectation by the Commission, rather than as a condition of licence, in recognition of that station's smaller advertising revenues.
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At the hearing, the applicant requested that the Commission permit a lowering of the base dollar figure for Canadian program expenditures from the level required or expected of the three stations under the formula. It argued that the formula creates particular problems when applied to these undertakings, given the decreases in revenues they have experienced in recent years, and that these financial circumstances warrant special consideration by the Commission:
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What we are suggesting is that we need to go through a one-time adjustment to reflect those percentage decreases in revenue and establish the base.
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The applicant's request for relief from the Canadian program expenditure requirements prescribed by the formula was opposed in an intervention by Global Communications Limited. The intervenor, with specific reference to CHCH-TV's performance under Selkirk's ownership and management, made the following statement: Maclean Hunter bought CHCH as part of a much larger media buy, many of the parts of which were highly profitable, with the full knowledge that these unfortunate management decisions were made. We believe that the economic situation these applicants find themselves in is entirely self-induced.... If these stations are granted the right to cut back on their Canadian spending and promises, you'll be sending a message...to other licensees not doing so well economically...to come back to the Commission and get their Canadian production commitments reduced by a like percentage.
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The Commission notes that application of the formula to the projected revenues of the stations as set out in the current applications results in expenditures on Canadian programming by the three stations in excess of $126.7 million over a five-year period, or approximately $18.5 million more than the amount the applicant proposed to spend. In fact, were the Commission to approve these applications, even when Kenwal's full benefits package of $11.1 million in expenditures is factored in, there would still be a net reduction of $7.4 million in benefits to the Canadian broadcasting system. Given the particular circumstances leading to the present application for authority to transfer the assets of CHCH-TV to the partnership, and taking into account the resources available to MHL and the nature of the markets served by the three television stations, the Commission considers any such net reduction in benefits to the Canadian broadcasting system to be uncceptable.
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In light of the above, and given the Commission's serious concerns regarding the adequacy of the applicant's business plan in general, the Commission is unable to conclude that these applications represent the best possible proposal under the circumstances or that their approval would be in the public interest.
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At the hearing, MHL confirmed that, should the current applications be denied, it would return to the Commission by itself or with another proposed purchaser of CHCH-TV and, in either event, with a package of benefits having a value at least equivalent to that contained in the application denied in Decision CRTC 89-768. MHL mentioned that it had investigated the possible sale of CHCH-TV to other parties prior to reaching its decision to enter into a partnership with Blackburn. In view of the length of time that the matter of CHCH-TV's ownership has remained unsettled, and in order to ensure no further undue delay in putting into place a business plan and a package of benefits of an order and magnitude matching that which could reasonably be expected to flow from the sale of a station of such importance, the Commission directs MHL to ensure that another application for authority to transfer control of Niagara Television Limited to a third party is filed with the Commission within six months of the date of this decision, complete with an acceptable business plan, and a benefits package at least equal in size to that put forward in the 1989 application by CFPL Broadcasting Limited for authority to acquire control of CHCH-TV. Alternatively, should MHL wish to retain effective control of the Hamilton television station, the Commission directs MHL to submit for the Commission's approval, within six months of today's date, its own proposals for a business plan for CHCH-TV and a benefits package, again at least equal in size to that proposed previously by CFPL Broadcasting Limited.
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Alain-F. Desfossés
Secretary General
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