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Ottawa, 6 July 1992
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Decision CRTC 92-453
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Pelmorex Weather Network Inc.
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Montréal, Quebec - 911681500
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Following a Public Hearing commencing 23 March 1992 in Montréal and Quebec City, the Commission denies the application by Pelmorex Weather Network Inc. (Pelmorex) for authority to acquire the assets of the national specialty programming undertaking (Weather Now), owned by MétéoMédia Inc., and for a broadcasting licence to continue operation of this undertaking. The application was conditional on a wholesale rate increase to $0.24 for the first year (currently $0.23) increasing to $0.30 by the seventh year of the proposed licence term. All other conditions would remain the same as those set out in the current licence.
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Pelmorex is a wholly-owned subsidiary of Pelmorex Communications Inc. and is indirectly controlled by Mr. Pierre L. Morrisette. Mr. Morrisette also holds indirect control of Pelmorex Broadcasting Inc., licensee of a number of AM and FM radio stations in Ontario.
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MétéoMédia Inc. is a wholly-owned subsidiary of Lavalin Communications Inc. (Lavalin), which is controlled by Lavalin Ltd. of Montréal. The Commission originally licensed Weather Now in November 1987 (Decision CRTC 87-899), and it commenced operations in September 1988, providing a weather information service that is transmitted via satellite to cable, on an optional basis, for distribution by cable television affiliates to their subscribers as part of the basic service. The service consists of a French-language version (Météo-Instant) and an English-language version (Weather Now). More than six million Canadian households receive this service. The current licence expires on 31 August 1993.
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In Public Notice CRTC 1989-109 dated 28 September 1989, the Commission outlined the elements it assesses in considering applications for the transfer of ownership or control of broadcasting undertakings. The Commission reiterated that, because it does not solicit such applications and because there is, thus, only one proposal presented to the Commission, the onus is on the applicant to demonstrate to the Commission that the application filed is the best possible proposal under the circumstances, taking into account the Commission's general concerns with respect to transactions of this nature.
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With regard to these concerns, the Commission stated in particular that the applicant must satisfy the Commission that approval of the proposed transaction would neither result in a reduction in the existing level of service nor create a financial burden that could impair the ability of the licensee to provide quality service and to meet its obligations under the Broadcasting Act. In the case of subscription-based undertakings such as Weather Now, as is the case for cable undertakings, the Commission noted that it would want to be assured that the cost of financing the purchase would not result in subsequent applications for rate increases.
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Further, as noted by the Commission at the hearing, because this application for the transfer of MétéoMédia's assets was made during the first licence term and since such a transfer would require the issuance of a new licence, the Commission examined the application as it would an application for licence renewal and in accordance with Public Notice CRTC 1991-23. In this notice, the Commission stated that it intended to examine carefully the wholesale rates of specialty programming undertakings at the time of licence renewals to ensure that the rates in effect remain appropriate in light of the contribution made by these undertakings to the Canadian broadcasting system and taking into account the Commission's concerns regarding the affordability of basic cable service.
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The financial performance of MétéoMédia during its first years of operation far exceeded its initial projections. For the first year of operation, the licensee had projected $4.9 million in revenues; the actual figure was $11.8 million. For the third year of operation, 1991, it forecast revenues of $8.6 million, compared to the actual revenues of $16.4 million earned that year. As noted at the hearing, these revenues, much higher than those originally projected, have resulted in very enviable net profits, averaging approximately $1.2 million per year for three years, after write-off adjustements made in respect of affiliated companies.
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In its assessment of the proposed rate schedule, the Commission also reviewed MétéoMédia's achievements during its first years of operation, as well as the proposals submitted by Pelmorex for improvements in the service offered to subscribers.
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In a short period of time, a great many Canadians have come to regard Weather Now as a useful weather information service, due to its frequent forecast updates covering all regions of the country. As for its investment in or acquisition of Canadian programming, the licensee invested more over the first three years of operation than was required by condition of licence. It also exceeded its commitments in terms of broadcasting hours, with 16 hours of live programming during the first year (as compared with the 8 promised) and 20 hours currently (as compared with the 14 hours forecast for its fourth and fifth years of operation).
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In its assessment of the rate schedule proposed by Pelmorex for Weather Now's next licence term, the Commission took into consideration the undertaking's high profitability, as well as its achievements, during the first years of operation. The Commission has also considered the improvements planned by Pelmorex, but excluding those projects proposed as the specific benefits of the transaction. The Commission notes that the cost of such benefits are to be borne by the purchaser, and thus cannot be considered for the purpose of setting rates. The Commission also noted that, in addition to its income from subscribers, Weather Now has access to a second source of income in the form of advertising revenues. Even though advertising revenues have been relatively limited to date, Pelmorex stated at the hearing that it plans to maximize these in the future. Having considered all of these factors, and in light of its objective to ensure the maintenance of reasonable cable fees, the Commission has determined that the current monthly rate per subscriber of $0.23 remains an appropriate rate for the Weather Now service.
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Morover, after examining this application, the Commission has concluded that the proposal, as filed, does not satisfy its criteria for assessing applications involving ownership transfers, specifically with respect to the high cost of financing the transaction, and its impact on the undertaking's future financial requirements and profitability.
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Pelmorex had agreed to pay $32.5 million to acquire Weather Now, subject to adjustments. The proposed financial arrangements represent $35 million, consisting of $22.5 million in the form of a revolving bank credit and $12.5 in equity financing.
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In view of the heavy financial burden represented by the high level of proposed debt financing, the Commission sought to determine whether the applicant would be able to meet all of its obligations without the proposed wholesale fee increases. To this end, the Commission assessed the financial projections submitted by the applicant for the first five years of operation, making adjustments on the basis of the current wholesale rate of $0.23 and the planned percentage of investment in programming.
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Given these assumptions, it is the Commission's conclusion that the proposal would not be financially viable, i.e. that the cash flow in each of the first five years of operation would not be sufficient to enable the applicant to meet its financial obligations. In fact, based on these assumptions, the Commission estimates that, by the end of this five-year period, the applicant would have incurred a cumulative deficit of more than $5.5 million. In order for the applicant to reach the break-even point by the end of this period, while at the same time meeting its financial obligations, the Commission calculates that the applicant would have to raise the fee by at least $0.01 in each of the first two years of operation, or by more than 4% a year. This would be the absolute minimum required to ensure profitability, provided that all other revenue projections are realized and that expenditures are kept to the forecast levels.
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The Commission notes that the applicant proposed to re-evaluate Weather Now's tangible assets so as to reflect their market value more accurately. Although this procedure may be acceptable for preparing financial statements, the Commission is of the view that, for the purpose of annual reports and rate regulation, the assets of specialty programming services should be allocated on the basis of their historical cost; this is particularly the case with undertakings such as Weather Now whose revenues are, for the most part, derived from subscriber fees.
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The Commission also assessed this application from the standpoint of the transaction's potential benefits, and has concluded that the proposed tangible and intangible benefits, together, are commensurate with the size and nature of the transaction. Because the transaction was proposed during Weather Now's first term of licence, the Commission also examined the reasons underlying the proposed sale. Based on the statements at the hearing by the spokesperson for Lavalin, as well as the information contained in the application, the Commission has determined that the proposed sale is a direct consequence of Lavalin's financial situation.
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Despite those aspects of the application that are acceptable under the criteria set out in Public Notice CRTC 1989-109, the Commission is not satisfied that this application is the best possible proposal under the circumstances. As noted above, the financial burden resulting from the $32.5 million purchase price for this transaction would be such that, if the applicant maintained the currently authorized fee of $0.23, it would be unable to meet its obligations and simultaneously maintain its profitability without also increasing its wholesale rate. In this regard, the Commission reiterates its longstanding policy that subscribers should not have to pay higher fees simply because the ownership or control of a subscription-based broadcasting undertaking changes hands. Accordingly, the Commission has decided to deny Pelmorex's application for authority to acquire the assets of Weather Now. The Commission acknowledges the many interventions submitted in respect of this application, most of which, while supporting the application, expressed particular concern about the proposed fee increases.
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Allan J. Darling
Secretary General
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