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Ottawa, 15 August 1990
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Decision CRTC 90-744
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Cablenet Limited
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01 Cablesystems Inc.Numerous communities in Ontario, Saskatchewan, Alberta and British Columbia as listed in the appendices to this decision
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Following a Public Hearing in the National Capital Region beginning on 24 April 1990, a majority of the Commission approves the applications by Cablenet Limited (Cablenet) and 01 Cablesystems Limited (01) for authority to transfer effective control of Cablenet from Agra Industries Limited (Agra) to Cogeco Inc. (Cogeco).
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The Players
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Cablenet's parent company, Agra, is a publicly-traded company ultimately controlled by the Torchinsky family of Edmonton. Cablenet currently provides cable service to approximately 200,000 subscribers to systems in Ontario, Saskatchewan, Alberta and British Columbia noted in Appendix A to this decision. It also holds negative control of 01, licensee of several cable systems in Eastern Ontario listed in Appendices A and B. These 01 systems serve approximately 11,000 subscribers. In addition, Cablenet is a principal partner in the CKO Radio Partnership which, until recently, provided an all-news radio network service across the country. Events surrounding the recent closure of the CKO operation and the concerns raised thereby are addressed later in this decision.
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Cogeco, the purchaser, is a company controlled indirectly by Mr. Henri Audet of Montreal. Its operations are currently centred in Quebec where it owns four television and seven radio stations. Cogeco Telecom Inc., a wholly-owned subsidiary of Cogeco, operates several Quebec cable systems serving a total of approximately 184,000 subscribers. Cogeco also owns a 37% interest in Productions S.D.A. Limitée, a television production house, and, through another subsidiary, owns three Quebec-based companies which publish 33 weekly newspapers and have a total circulation of approximately 885,000.
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In September 1989, Cogeco purchased 100% of the shares of Cybermedix, a large medical research corporation. At the same time, Cogeco acquired an indirect majority equity interest in Cablenet consisting of 8,686,581 Class A common voting shares representing about 8% of the total vote and 8,686,581 Class C preferred non-voting shares, all held by Cogeco Acquisitions Financing Inc., Cogeco's wholly-owned subsidiary. Agra, however, retained voting control of Cablenet through the acquisition of 100 multiple voting shares representing 92% of the total vote. Under the proposed transaction, Cablenet will redeem the 100 multiple voting shares issued to Agra. As a consequence, Cogeco, through the Cablenet voting shares that it holds, will ultimately control 100% of Cablenet. Cogeco will also acquire Agra's position of negative control of 01. As a result of these transactions, Cogeco will become the fifth largest multiple system cable operator in the country.
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The Transfer
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Because the Commission does not solicit applications for authority to transfer effective control of broadcasting undertakings, the onus is on the applicant to demonstrate to the Commission that the application filed is the best possible under the circumstances, taking into account the Commission's general concerns with respect to transactions of this nature. As a first test, the applicant must demonstrate that the proposed transfer will yield significant and unequivocal benefits to the communities served by the broadcasting undertakings and to the Canadian broadcasting system as a whole, and that it is in the public interest.
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In particular, the Commission must be satisfied that the benefits, both those that can be quantified in monetary terms and others that may not easily be measured in terms of their dollar value, are commensurate with the size of the transaction and take into account the responsibilities to be assumed, the characteristics and viability of the broadcasting undertakings in question, and the scale of the programming, management, financial and technical resources available to the purchaser. The cost of the shares purchased, net of the divestitures of the non-broadcast operations, amounts to approximately $158 million. The Commission notes the purchaser's statement at the hearing that its rate of interest on its long-term debt will not fluctuate with the prime rate.
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Cogeco submitted at the hearing that approval of these applications will yield a number of intangible benefits, one of these being the availability of its professional management experience and resources. The Commission acknowledges the purchaser's extensive experience in bringing cable service to communities of various sizes in Quebec.
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At the same time, Cogeco stated that it would provide for continuity of local management and maintain diversity within the cable industry in keeping with Cogeco's management philosophy that 'attaches primary importance to retaining the local character and 'flavours' of the (cable) systems'. Moreover, Cogeco pointed out that it will be better able to 'make the investments and to absorb the business and financial risks inherent in the increasingly competitive domestic and global communications environments.'
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The Commission also notes Cogeco's statement that representation from Ontario, Western Canada and Quebec on the Board of Directors of Cablenet will provide for a 'national voice in the deliberations of the cable industry and in the development of national broadcasting policy', thus benefiting the Canadian broadcasting system as a whole. According to Cogeco, the transactions would also produce tangible, quantifiable benefits representing minimum direct expenditures by the purchaser of approximately $15,705,000 which could rise to a maximum of approximately $17,118,000. The Commission has examined the tangible benefits claimed by Cogeco against the background of Public Notice CRTC 1989-109 dated 28 September 1989 and entitled 'Elements Assessed by the Commission in Considering Applications for the Transfer of Ownership or Control of Broadcasting Undertakings'. In that Notice, the Commission stated, among other things, that benefits should be incremental and should not form part of the normal responsibilities of the existing licensee.
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As part of its quantifiable benefits package, Cogeco proposed a five-year subscriber rate discount to be applied against the basic monthly fees charged to all Cablenet subscribers. At the hearing, Cogeco described its proposed schedule for discounts totalling some approximately $5.4 million that would effectively reduce every subscriber fee each month by 35 cents in Cogeco's first year of ownership, 45 cents in the second year, 55 in the third, 45 in year four and 35 cents in the final year of the five-year rate discount.
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At the hearing, the Commission pointed out that the acceptable amount of this rate reduction benefit would be subject to the rate of subscriber growth in the area. Following a discussion in which the Commission sought to clarify the actual value of this benefit, Cogeco agreed that the $5.4 million amount would form the minimum rate reduction based upon existing subscriber levels. Depending on the rate of subscriber growth, this amount may be increased up to a maximum of $6.8 million.
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Particular interest was expressed at the hearing in the proposed benefit involving the creation of a fund for the development of television programming. As a separate foundation, the Cogeco Program Development Fund, as described at the hearing, will 'provide funding, particularly at the concept and script development stages, for independently-produced Canadian television programming, destined for airing on English and French stations, and ideally on both.' Cogeco noted that the actual decision regarding project funding would be taken by a body composed of an equal number of anglophones and francophones.
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The Commission notes that this fund will be managed by the same independent board of trustees as that managing an endowment fund established by Maclean Hunter Limited pursuant to its purchase of the broadcast holdings of Selkirk Limited in 1989 and that the related administrative expenses will be shared on a pro rata basis between the two funds. At the hearing, Cogeco stated that, while no exact figure has been determined, '...Cogeco would undertake to assume the administrative costs in such a way that the interest earned would flow in totality to grants. And Cogeco would assume those administrative costs up to a maximum of $10,000 per year for each of the five years.' The Commission expects the purchaser to allocate a significant amount of this fund each year for the development of original television programming concepts. As a separate benefit, Cogeco proposed to extend and improve community channel service available to subscribers of the various Cablenet systems, as well as to establish an inter-system exchange program between its cable systems. The Commission views with great interest this particular proposal which would make French- and English-language programming available to subscribers in five provinces. Such an inter-provincial exchange, the Commission notes, could play an important role in reflecting particular cultural or regional perspectives from one part of the country to another, thus enhancing regional understanding.
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As part of this proposed exchange benefit, the purchaser has allocated $180,000 over a five-year period for the salary of a community channel liaison officer. Based upon the discussion at the hearing, the Commission has determined that, while such a liaison position may facilitate the exchange of television programming, it would not contribute directly to the production of programming. The Commission is of the view that the $180,000 associated with the liaison position does not constitute a true incremental enhancement and, accordingly, has not been included in those benefits which have been accepted as quantifiable.
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In addition, it considers that the amount of $65,000 associated with office furniture and lease holdings or expenses which was claimed as part of the programming exchange, as well as another $50,000 included in the proposal for a program co-ordinator represent normal business expenditures. Accordingly, these expenses have not been considered as forming part of the acceptable quantifiable benefits package. To improve the technical reliability of the systems and ensure the early restoration of cable service following power outages, Cogeco made a commitment to provide for remote status monitoring of amplifiers and standby power supply units for each of Cablenet's cable undertakings. It also committed to ensure that these capital expenditures would not form part of any rate increase under subsection 18(6) or (8) of the Cable Television Regulations, 1986 (the regulations). In this respect, the Commission accepts only the capital component ($103,000) for the standby power supply units, these being the only items the cost of which would have been recoverable under subsection 18(6) of the regulations. The power supply monitoring system equipment as well as the operating costs in respect of either power system are considered part of the normal course of doing business and have not been considered as acceptable quantifiable benefits.
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Another benefit claimed by Cogeco was the provision of direct financial support to local community organizations. Upon questioning at the hearing, Cogeco acknowledged that, while there is a discernable benefit to the community, the support of non-profit groups does not relate directly to broadcasting. Because the Commission is unable to conclude that this commitment to spend $288,459 will benefit directly the cable subscribers to the systems in question, the cable industry in general or the broadcasting system as a whole, it has not accepted the amount associated with this monetary support. The Commission, however, has accepted as a quantifiable benefit, the proposed financial contribution of $500,000 allocated for the establishment of educational scholarships 'for post-graduate studies in communications at five Canadian universities' as it does in fact relate directly to the broadcasting industry.
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After careful examination, a package of tangible and quantifiable benefits representing a minimum direct expenditure by Cogeco of $14,313,000 to a maximum of $15,786,000 over a five-year period was found acceptable by the Commission. It is satisfied that the benefits package is clear and unequivocal, commensurate with the size and nature of the transaction involved and takes into account the various responsibilities to be assumed by the purchaser, the characteristics and viability of the cable undertakings concerned, and the management, financial and technical resources available to the parties.
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It also expects Cogeco to ensure that the proposed benefits package, ranging from a minimum expenditure of $15,705,000 to a maximum of $17,118,000, is made in accordance with the schedule outlined in the application. The Commission acknowledges the numerous interventions received in support of the proposed transfer.
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Prior to the Commission's consideration of this transfer application at the 24 April hearing, Cablenet, principal owner of the CKO Radio Partnership which is licensee of the CKO all-news radio network, had shut down that networks' operations located in major cities across the country. The Commission, concerned for the loss of this unique service, sought to be informed of the circumstances relating to the termination of operations at CKO stations. At this hearing, the Commission discussed the closure at some length and questioned the parties at the hearing with respect to their role in the closure decision.
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The Closure of CKO Radio
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CKO was licensed in 1976 (Decision CRTC 76-416) to provide a national news and information service on 11 FM radio frequencies across the country. In 1977, CKO added to these frequencies through its acquisition of an AM radio licence, whose frequency was allotted to the West Island of Montreal (CFOX Pointe-Claire).
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In the original licensing decision, the Commission acknowledged that the all-news format concept was unique and untried in Canada; it therefore stated that 'should the concept of all-news programming result in insufficient revenue to maintain the financial health of the service, the Commission expects the licences to be returned to the Commission rather than change programming in order to generate more revenue.'
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Notwithstanding the above, only eight of the proposed 12 stations were actually on the air at the time of the most recent licence renewal hearing in Toronto on 13 March 1989.
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At that hearing, the licensee stated unequivocally that the stations planned for Winnipeg and Regina would be on the air before 31 August 1989 and that the Saint John and St. John's stations would be built and in operation by 31 August 1990.
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None of the CKO stations at any point during its existence has enjoyed a large audience share of its respective market. The Commission notes that the audience shares remained low for 1989, ranging from 2% to 4% of each market's listening audience. Further with regard to CKO's financial status, Agra claims that losses over the thirteen-year period total some $55 million. The Commission notes that while there was some improvement, the stations were still operating in a loss position in 1989.
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The Commission issued a one-year renewal of the CKO licences in August 1989 (Decision CRTC 89-637) and, concerned for the future of the service, stressed that if the undertakings became the subject of an application for the transfer of ownership or control, it would want to be informed of the transaction's effect on the all-news network. The Commission also stated that 'any subsequent licence renewal applications or applications related to the ownership or control of the licensee should contain a detailed business plan and clearly address the implementation of the coast-to-coast network.'
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A month following that decision, Cogeco acquired all the shares of Cybermedix and an indirect minority voting interest in Cablenet. As noted above, however, Agra retained voting control of Cablenet. No business plan in respect of CKO was submitted to the Commission.
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Subsequently, Cablenet shut down the operations of the CKO network, citing as its reasons severe financial losses and the lack of any serious offer to purchase the assets of the operation. The closure occurred with very little advance warning to the Commission, and was particularly unexpected given the apparent enthusiasm and optimism for the network's future expressed by Cablenet only eight months earlier at the 13 March hearing in Toronto. At the more recent 24 April hearing, the Commission inquired as to any role Cogeco might have played in the closure of CKO's operations. The Commission notes that Cogeco, while maintaining that voting control of the CKO operation remained with Agra, had borne the cost and expended effort to hire consulting firms to study the viability of CKO. Cogeco stated that:
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... we asked them to review the major locations in which CKO operated and to report to us on the state of all aspects of these operating stations, either on the management, sales, marketing or programming aspects, to review the facilities and the personnel. Their conclusion was that Cogeco ... could not turn the situation around ...
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Cogeco further stated that, after it had received the results of these studies,
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Agra informed us ... of the worsening results and asked us whether we had any solution, any magical solution as to what could be done to turn the stations around. At that point we told them, 'No, we don't'.
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Cablenet stated at the hearing that it then hired a company to canvass the industry in search of buyers for the CKO assets. According to Cablenet, no formal offers were submitted. Consequently, Cablenet's Board of Directors met, the decision to close CKO was 'fully discussed and spelled out' and a vote in respect of the closure was registered. At the hearing, the Commission requested from Cablenet the minutes pertaining to that meeting of 2 November 1989.
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Questions and concerns surrounding the closure of the CKO stations were raised in several written and oral interventions. In a written submission, a group of former CKO employees opposed the applications for transfer. The intervener argued that 'Cogeco purchased control of Cybermedix and exerted that control to effect the closure of CKO, without having first obtained a transfer of ownership or control of the CKO licences.' Also, former employees appeared at the hearing to express opposition to the proposed transfer and the subsequent CKO closure. One oral intervention claimed that 'the members of the Commission have been misinformed of the untimely demise of CKO ... the deaths cannot be explained away by claims of lost millions, supported by a few financial documents carefully selected by the petitioners.'
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The Commission has carefully examined all of the evidence before it to determine the extent of any involvement by Cogeco in the decision taken by Cablenet's Board of Directors to bring the operations of CKO to an end. After examining the minutes of the 2 November 1989 meeting, the Commission agrees with the parties that Cogeco did not participate directly in the decision to close CKO, since its two nominees on Cablenet's seven-member Board of Directors abstained from the actual vote on the matter. At the same time, the Commission rejects the view that Cogeco did not participate at all in this decision. The Commission considers that the silence of this partner which held in this case essentially 100% of the equity of the licensee, would likely have been construed by Agra as Cogeco's consent to the closure.
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The Commission, however, is unable to conclude that CKO would have continued to function in the absence of Cogeco's actions.
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The Commission further notes that Agra maintained voting control of Cablenet in the absence of Commission approval of the transfer of control which is required under existing Commission policies and regulations. A majority of the Commission has therefore concluded that Cogeco's actions with respect to CKO would not lead it to modify its decision that this transfer should be approved. On the basis of this conclusion, the Commission has considered the applications for the transfer of control on their merits and has accepted the surrendered CKO licences.
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While the Commission is not convinced that Cogeco's actions are sufficient reason to deny these applications for transfer of control, the events surrounding the closure of CKO operations have raised several questions with respect to the Commission's current approach to the circumstances in which approval is required to transfer ownership or effective control of a broadcasting undertaking.
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Specifically, the Commission has several concerns in respect of applications which raise the question of where control of the licensee will reside as a result of the transfers of publicly-traded shares, and, in particular, those transfers where the participating equity of the broadcasting undertaking is no longer controlled by the authorized licensee.
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In this respect, the Commission will examine possible amendments to the regulations in respect of effective control and ownership of broadcasting undertakings and, in Public Notice CRTC 1990-81 of today's date, is inviting the public to comment on this matter.
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Until this review is completed, the Commission stated in that Notice that it is not disposed to consider further applications for approval of legal control where a significant change in equity has taken place without affecting the legal control of the licensee.
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The CKO Frequencies
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The decision revoking the licences issued to the CKO Radio Partnership for use of the CKO frequencies is also released today (Decision CRTC - 90-745).
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This revocation effectively makes available for use 11 FM frequencies and one AM frequency in major cities across the country. The Commission notes that these frequencies constitute a scarce resource and that all possible options must be considered to ensure the best and optimum use for each frequency.
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The Commission has noted the differing views expressed and the various options with respect to the use of these frequencies as described in certain of the interventions. Some interveners, acknowledging the programming difficulties inherent in the non-music, all-news radio format, suggested different options that might allow for more flexibility in the provision of a national news radio service. Another oral intervention expressed particular concern for the loss of CKO service provided to listeners in Montreal, and suggested that the local service provided on that particular frequency prior to the CKO all-news programming be restored.
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At this time, however, the Commission is not prepared to issue a call for any applications in respect of the CKO frequencies. Before making such a call, the Commission wishes to receive public comments on the utilization of these scarce public resources and accordingly, today, is issuing Public Notice CRTC 1990-80.
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Alain-F. Desfossés
Secretary General
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Appendix A/Annexe A
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Application No./
Licensee/Titulaire Location/Endroit N° de demande
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Cablenet Limited Burlington and/et Oakville 894629500
Kingston, Ontario 894628700
Estevan 894625300
Weyburn, Saskatchewan 894627900
Lethbridge, Alberta 894626100
Chilliwack 894622000
Courtenay 894623800
Kamloops, British Columbia/ 894624600
(Colombie-Britannique)
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01 Cablesystems Inc. Ailsa Craig 894630300
Arkona 894631100
Athens 894632900
Bath 894633700
Bethany 894635200
Bewdley 894636000
Blackstock 894637800
Bothwell 894638600
Caesarea 894640200
Cannington 894641000
Cardinal 894642800
Chesterville 894643600
Courtland 894644400
Courtright/Mooretown 894645100
Embro 894646900
Forest 894649300
Glencoe 894650100
Harrowsmith 894651900
Hastings 894652700
Havelock 894653500
Ilderton 894654300
Iroquois 894655000
Langton 894656800
Marmora 894657600
Merrickville 894658400
Morrisburg 894659200
Mount Brydges 894660000
Northbrook 894661800
Norwood 894662600
Omemee 894663400
Parkhill 894664200
Pleasant Point 894666700
Port Burwell 894667500
Smithville 894669100
Straffordville 894672500
Sunderland 894673300
Sydenham 894674100
Tamworth 894675800
Thedford 894676600
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Application No./
Licensee/Titulaire Location/Endroit N° de demande
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01 Cablesystems Inc. Verona 894678200
(Cont'd/suite) Wardsville 894679000
Watford 894680800
Westport/Newboro 894681600
Winchester 894682400
Woodville, Ontario 894683200
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APPENDIX B/ANNEXE B
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Following the issuance of the Notice of Public Hearing CRTC 1990-4 dated 23 February 1990, the Commission approved (Decisions CRTC 90-328 and -329 dated 30 March 1990) the applications by 01 Cablesystems Inc. to operate cable sytems in the Ontario communities listed below:
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Locations/Endroits
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Alton
Alvinston
Amherst Point/Lakewood/Willow Beaches
Bellecreft/McCarthy/Crystal/One Stop/Good
Brigden
Cedar Beach/Cedarhurst/Cedar Island/Maple Grove/
Waters Beach/Linden Beach
Colchester/Clarke Beach/Blue Water, etc./Westchester/
Star/Marsden Beach
Comber
Cooks Mills
Cottam/North Ridge
Douglastown/Black Creek/Stevensville
Errol/Eton Crt./Camlachie
Featherstone
Harrow
HWY 40 West of Wallaceburg/Rte 40 à l'ouest de Wallaceburg
Lighthouse Cove Area/Région de Lighthouse Cove
Long Point
Lynden
McGregor/Paquette Corner
Merlin
Mono Mills
Oil City/Oil Springs
Pine Grove/Bill's Corner/Greens Corner/Blaney
Port Lambton/Sombra/Whitebread Beach/Ecart Marina
Port Rowan
Princeton
Puce/Emeryville/Elmstead/Lesperance Road South of
HWY 2/Chemin Lesperance au sud de la route 2
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LOCATIONS/ENDROITS
(Cont'd/suite)
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Selkirk
South Woodslee/North Woodslee
St. Williams/Booth's Harbour
St. Joachim/DeerBrook/Stoney Point and/et Beaches
Turkey Point
Wheatley/Wheatley Harbour
Greenbank
Greenhurst-Thurstonia/Dunsford
Janetville
Keene
Lakeview Estates
Linwood
Lisle
Pontypool
Seagrave/Robin Glade Estates
Thorndale
Viewlake
Warkworth/Norham
Zephyr
Avonmore
Crysler
Delta/Philipsville
Elgin
Finch
Glen Robertson
Hammond
Lansdowne
Moose Creek
Morewood
Newburgh/Camden East/Yarker/Colebrook
Portland
Seeley's Bay
Spencerville
St. Albert
St. Eugene
Vernon
Wendover
Thedford
Port Burwell
Marmora
Wardsville
Williamsbury/Boucks
Ceasarea
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Dissenting Opinion of Commissioner Paul E. McRae
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For the second time in less than two years, I have found it necessary to write a dissent on a transfer of ownership, where in the course of the transaction, a National Network has disappeared. The CKO Network, linking major cities of Canada, with its skilled and dedicated workforce and extensive audience, is no more. The optimism which attended the network renewal hearing in 1989 seems short-lived -- by November the network was dead.
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Canada, a very large nation with strong regions, cannot afford the loss of communications networks like CKO and Selkirk, which provided necessary links between these regions.
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I find it impossible, therefore, to add my approval to these applications.
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