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Ottawa, 4 November 1994
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Telecom Public Notice CRTC 94-53
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BELL CANADA/BELL SYGMA RESTRUCTURING AND RELATED TRANSACTIONS
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I BACKGROUND
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On 19 November 1992, Bell Canada (Bell) filed with the Commission documents regarding proposed transactions whereby Bell would transfer the assets, personnel and activities associated with the company's Operations Development department to three new subsidiaries, Bell Sygma Inc. (BSI), Bell Sygma Systems Management Inc. (BSSM) and Bell Sygma Telecom Solutions Inc. (BSTS) (collectively, the Sygma companies).
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Under the proposed restructuring, BSSM would provide data processing and computer network management services to Bell and to third parties. BSTS would be responsible for systems development and integration services provided to Bell and to third parties, and would also license Bell intellectual property to third parties. BSI was to serve primarily as the holding company for the other two subsidiaries and was to undertake certain support functions on their behalf. In addition, BSI was to acquire from Bell the real estate interests associated with Bell's two data centres located in North York, Ontario, and Dorval, Quebec. BSI, in turn, was to lease space in these data centres to BSSM, BSTS and Bell itself.
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On 30 December 1992, the Commission granted interim approval to the sale by Bell of the assets in question, pursuant to subsection 11(2) of the Bell Canada Act.
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In Bell Canada - Proposed Transfer of Assets to Bell Sygma Subsidiaries and Related Transactions, Telecom Public Notice CRTC 93-10, 25 January 1993 (Public Notice 93-10), the Commission initiated a proceeding to consider: (1) whether the proposed asset disposition was in the public interest and, if so, under what terms and conditions, if any, final approval should be granted, and (2) whether, as a result of the proposed asset sale and related transactions, adjustments were necessary for revenue requirement purposes. In Bell Canada - Amended Procedures re Proposed Transfer of Assets to Bell Sygma Subsidiaries and Related Transactions, Telecom Public Notice CRTC 93-29, 8 March 1993, the Commission stated that it would consider the application in the proceeding then underway with respect to Bell's revenue requirements for 1993 and 1994.
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On 15 March 1993, various agreements between Bell and the Sygma companies were filed with the Commission and served on interested parties. These agreements, which took effect on 1 February 1993, related to the transfer of assets and personnel from Bell and the ongoing provision of services between the companies (the Sygma transactions).
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During oral reply argument in the revenue requirement proceeding, counsel for Bell stated that, "if the proposed intercorporate transactions for WorldLinx and Sygma are not acceptable to the Commission as proposed,... the company will not carry on with the proposed transactions, and I am requesting that the revenue requirement and rates for Bell Canada be set accordingly. In such an event, the company may consider its options and determine if it can subsequently structure viable transactions, which would then be submitted for Commission review, as required, in accordance with the Commission's directions."
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In Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993 (Decision 93-12), the Commission stated that, although it supported the concept of Sygma in principle, it was not persuaded that Bell had demonstrated that the proposed transactions, in the aggregate, reflected either fair market value or a reasonable proxy therefor. In light of Bell's statement in reply argument, cited above, and the fact that the Commission would have found it necessary to make regulatory adjustments in order to find the Sygma transactions acceptable, the Commission did not grant final approval. Rather, as requested by the company, the Commission assessed Bell's revenue requirements on the assumption that the company would not be proceeding with the Sygma transactions. The Commission added that, if Bell were to proceed with any similar transactions, the company was to file all related agreements with the Commission, as well as an assessment of the revenue requirement impact for the ensuing ten-year period. The company was also to provide the Commission with:
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(1) an independent third party appraisal, showing that the business, as a going concern, was being transferred at fair market value (this appraisal was to consider factors such as the value of transferred employees and the value of royalties to be derived from the licensing of Bell intellectual property); and
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(2) formal studies comparing the cost of providing a service "in house" with the cost of outsourcing such a service.
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On 4 March 1994, Unitel Communications Inc. (Unitel) requested that the Commission initiate a proceeding to examine, among other things, the issues identified in Public Notice 93-10 and the Sygma-related matters discussed in Decision 93-12. Unitel contended that, notwithstanding Bell's statement in the revenue requirement proceeding, the company had completed the Sygma transactions.
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In a letter dated 25 March 1994, McMillan Binch, on behalf of CGI Information and Management Consultants Inc. (CGI), requested that the Commission order Bell, among other things, to comply forthwith with the requirements of Decision 93-12.
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Bell responded to the issues raised by Unitel and CGI in a letter to the Commission dated 7 April 1994. In that letter, Bell confirmed that the Sygma transactions that took effect on 1 February 1993 had never been undone and that the Sygma companies were currently active. Bell stated that, given that the costs of establishing Sygma and making it operational had already been incurred, it was unreasonable for Unitel to suggest that, subsequent to Decision 93-12 and pending the internal review of alternatives, the company should have incurred the additional structural costs of disbanding the Sygma organization, repatriating employees and transferring assets back to Bell. In Bell's view, until the company had concluded its internal review of various alternatives, any public process would have been premature and purely academic. Bell added that subscribers were not adversely affected, in that the company was continuing to report monthly financial results to the Commission on a basis consistent with not having proceeded with the Sygma transactions.
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Noting that Decision 93-12 had been issued more than eight months previously, on 5 May 1994, the Commission directed Bell to file the information required by Decision 93-12.
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II BELL'S FILING OF 13 JUNE 1994
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On 13 June 1994, Bell filed with the Commission in confidence (1) comments setting out, among other things, the revenue requirement impact of the Sygma transactions, (2) an independent appraisal of BSI by Burns Fry Limited, (3) a formal cost study by the Yankee Group with respect to services provided to Bell by BSTS, (4) a formal cost study by Real Decisions Corporation (Real Decisions) with respect to services provided to Bell by BSSM, (5) a report by San Francisco Consulting Group (SFCG) regarding royalty arrangements between Bell and BSTS, (6) copies of the license agreements originally filed in response to interrogatory Bell(CRTC)21Jan93-101 SYGMA, and (7) copies of the agreements entered into by Bell and the Sygma companies, effective 1 February 1993, and of amendments to certain of those agreements (collectively, the filing of 13 June 1994).
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Bell also served abridged copies on the following: Association of Competitive Telecommunications Suppliers, CGI, Canadian Business Telecommunications Alliance, Consumers' Association of Canada, McMillan Binch, National Anti-Poverty Organization, Government of Ontario, Government of Quebec and Unitel.
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III SCOPE OF THE PROCEEDING
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The Commission hereby initiates a public proceeding to consider matters related to the Sygma transactions and Bell's filing of 13 June 1994, including:
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(1) the reasonableness of the reports of the Yankee Group, Real Decisions and SFCG, and in particular whether the interests of subscribers are adequately protected with respect to the BSSM Data Processing Services Agreement and the BSTS License and Development Services Agreement;
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(2) the appropriate basis of valuation for the transfer of the business;
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(3) the overall conclusions of the Burns Fry Appraisal and its appropriateness as a measure of fair market value, taking into consideration such factors as sources, methodology, assumptions, the value of transferred employees and the value of third party business in the total fair market value;
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(4) the regulatory treatment to be accorded to any capital gain or loss associated with the asset transfer, including the relevant period(s) for the accounting of any such gain or loss;
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(5) the applicability of section 33 of the Telecommunications Act; and
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(6) ongoing intercorporate transactions reporting requirements.
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IV PROCEDURE
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1. The mailing addresses to be used in this proceeding are:
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Mr. Allan J. Darling
Secretary General
CRTC
Ottawa, Ontario
K1A 0N2
Fax: 819-953-0795
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Mr. B.A. Courtois
Vice-President
Corporate & Legal Affairs
Bell Canada
105 Hôtel-de-ville Street
6th Floor
Hull, Quebec
J8X 4H7
Fax: 819-778-3437
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2. Persons wishing to participate in this proceeding (interveners) must file a notice of intention to participate with the Commission, serving a copy on Bell, by 23 November 1994.
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3. Bell is to serve abridged copies of its filing of 13 June 1994 on interveners by 28 November 1994.
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4. Requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for the disclosure, must be filed with the Commission and served on Bell by 5 December 1994.
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5. Bell's responses to requests for public disclosure must be filed with the Commission and served on interveners by 12 December 1994.
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6. The Commission will issue a determination with respect to any such requests as soon as possible. The Commission intends to direct that any information to be released pursuant to its determination be filed with the Commission and served on interveners by 22 December 1994.
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7. Interveners may address interrogatories to Bell. Any such interrogatories must be filed with the Commission and served on Bell by 18 January 1995.
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8. Bell is to file responses to interrogatories, serving copies on interveners, by 15 February 1995.
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9. Requests by interveners for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, must be filed with the Commission and served on Bell by 24 February 1995.
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10. Bell's reply to requests for further responses and to requests for public disclosure must be filed with the Commission and served on interveners by 6 March 1995.
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11. The Commission will issue a determination with respect to any such requests as soon as possible. The Commission intends to direct that any material required by that determination be filed with the Commission and served on interveners by 16 March 1995.
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12. Interveners may file comments with the Commission, serving copies on Bell, by 30 March 1995.
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13. Bell may file a reply to any comments, serving copies on interveners, by 13 April 1995.
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14. Where a document is to be filed or served by a specific time, the document must be actually received, not merely mailed, by that time.
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Allan J. Darling
Secretary General
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