ARCHIVED - Decision CRTC 2001-752

Decision CRTC 2001-752

See also: 2001-752-1

Ottawa, 13 December 2001

Alliance Atlantis Communications Inc.
Across Canada 2001-0747-6, 2001-0549-6

Applications processed by
Public Notice CRTC 2001-86
dated 26 July 2001

Transfer of control of the category 1 digital specialty service Independent Film Channel Canada (IFCC), and of 20 other category 2 digital specialty services, through acquisition of all the shares of Salter Street Broadcasting Limited

Introduction

1.

The Commission approves the applications by Alliance Atlantis Communications Inc. (Alliance Atlantis) for authority to acquire effective control (95%) of The Independent Film Channel Canada Incorporated (licensee of IFCC), and 100% ownership of 3779718 Canada Limited (licensee of 20 other digital specialty services - see Appendix). Alliance Atlantis will obtain effective control through its acquisition of all of the issued and outstanding voting shares of Salter Street Broadcasting Limited (Salter Street), which is the parent of the two licensee companies.

2.

Alliance Atlantis is a leading creator and distributor of television and film entertainment in Canada. It has also become an important presence in the Canadian broadcasting industry through its existing holdings in two video-on-demand services and eight analog specialty services, as well as in 3 category 1 and 22 category 2 specialty services authorized for digital distribution.By audience share, Alliance Atlantis currently ranks slightly ahead of the CHUM group in the specialty services sector, but behind Bell Globemedia, Astral and Corus.

3.

Salter Street, an established production company based in Halifax, has produced a number of popular, high-quality television programs over the years. The digital specialty services that are the subject of these applications are the company's only regulated broadcasting interests. None of these services, all licensed on 24 November 2000, is yet in operation.

4.

In Decision CRTC 2000-459, which set out the licence terms and conditions for IFCC, the Commission gave particular emphasis to the fact that this was to be the first specialty service based in Atlantic Canada. The Commission stated in the decision's conclusion:

The approval of this application brings a strong and experienced voice from Atlantic Canada to further enhance the ownership diversity in the Canadian specialty service landscape, and will provide an important new venue for the work of young and emerging Canadian film makers as well as more established film makers.

5.

Alliance Atlantis placed a value of $6.4 million on the regulated assets involved in this transaction, or less than 10% of the total amount that the Commission estimates will be paid by Alliance Atlantis for the shares of Salter Street (approximately $78 million). Very little of the $6.4 million is in respect of the 20 category 2 services owned by 3779718 Canada Limited. They are not guaranteed carriage by distribution undertakings, nor are they protected from the possibility of competition from other category 2 services that could be authorized to operate in similar formats. For these reasons, and given the consequent uncertainty surrounding their business plans, the applicant assigned only a nominal value to them. Most of the $6.4 million is thus attached to the category 1 service, IFCC. Unlike category 2 services, category 1 specialty services do have access rights to digital distribution.

6.

According to the television policy set out in Public Notice CRTC 1999-97, an applicant who seeks to acquire ownership of any television broadcasting undertaking, including a specialty service television undertaking, must make commitments to clear and unequivocal tangible benefits representing a financial contribution of a minimum of 10% of the transaction's value, as accepted by the Commission. In this case, Alliance Atlantis proposed to expend a minimum of $1.25 million on benefits, or approximately 19.5 % of the applicant's valuation of the regulated broadcasting assets.

7.

Some 38 interventions were filed with respect to these applications. Most interveners, including the Premiers of Nova Scotia and Prince Edward Island, expressed unqualified support for approval. The Mayor of the Halifax Regional Municipality specifically identified as a vital aspect of this transaction the benefits put forward by the applicant of a continued Halifax presence and Atlantic involvement. Although no intervener opposed the transaction, support was sometimes qualified, and certain concerns were raised. Among these were questions regarding the value assigned to the transaction by the purchaser and the consequent adequacy of the benefits package. Interveners also noted the importance of Salter Street to the program production industry in the Atlantic region, and expressed concern that its sale to Alliance Atlantis could mean that no regionally-based specialty service would be established. Other comments addressed the issue of trafficking, asking for example whether it is appropriate that ownership of broadcast holdings should change hands within a year of their first being licensed, before the undertakings have commenced operation. These concerns are discussed in the sections that follow.

Value of the transaction

8.

In its intervention to these applications, the Nova Scotia Film and Television Producers Association suggested that the applicant's valuation was low. It argued that the calculation should have taken account of the fact that the broadcast arm of Alliance Atlantis "has the highest profits for the lowest amount of investment". The intervener also asked why little or no value should attach to the category 2 specialty services, given that there had been, in the intervener's view, such strong competition among applicants for the licences that were awarded last year.

9.

The Commission does not consider that the financial performance of a purchaser should be a factor in the Commission's assessment of the value of broadcasting assets involved in a transaction. Moreover, because the 20 category 2 specialty services are not yet in operation and have no access rights or format protection, and given the consequent uncertainty surrounding their business plans, the Commission also considers it unreasonable to assign other than a nominal value to these services.

10.

Nevertheless, the Commission considers that the methodology employed by Alliance Atlantis in calculating a value for the category 1 specialty service IFCC gives rise to two questions. Firstly, although the application contains reference to Salter Street's long term debt, no portion of that debt appears to have been allocated to IFCC. Secondly, the valuation of IFCC does not include any allocation attributable to the value of employment contracts that exist between Salter Street and two of that company's senior executives. In the Commission's view, a valuation of IFCC should, in respect of both of these items, include allocations that are appropriate and commensurate with the fair market value of Salter Street's shares.

11.

Based on the evidence available to it, the Commission has determined that an appropriate valuation of the transaction, as adjusted, would lie within a range of $9.6 million to $11.6 million. The Commission notes that the proposed tangible benefits package of $1.25 million still exceeds 10% of the Commission's adjusted valuation, even at the upper extent of its range. The Commission is therefore satisfied that the dollar amount of proposed benefits is acceptable and consistent with the television policy set out in PN 1999-97.

Benefits, including retention of a regional voice and presence

12.

As noted above, in deciding to license IFCC, the Commission placed considerable importance on the contribution that it would make as the first specialty service to be based in Atlantic Canada. This is why the Commission, in deciding to approve the current application for authority to transfer control of IFCC, attaches equivalent importance to the commitment, offered by Alliance Atlantis as a non-quantifiable benefit
of this transaction, to locate and maintain the offices of IFCC in Halifax. The applicant also stated that it would ensure that the production activities of Salter Street continue under the direction of that company's existing team of senior executive and creative officers.

13.

Further, the Commission notes the applicant's confirmation that its proposed tangible benefits package of a minimum of $1.25 million is incremental to all expenditures that will be made under IFCC's existing commitments and licence conditions. Further, all of the proposed initiatives will be directed to the benefit of the broadcasting system in Atlantic Canada.

14.

Among these incremental benefits is the contribution of $700,000 over seven years to establish a program, in partnership with the post-secondary schools in Halifax, to provide training for film makers. Alliance Atlantis also committed to contribute $500,000 over three years to a new IFCC Canadian Programming Fund. The fund is to support the development and production of new Canadian films or documentaries by independent filmmakers from or in Atlantic Canada. The applicant explained that the fund will benefit only filmmakers who operate at arm's length from Alliance Atlantis, meaning those in which "neither Alliance Atlantis nor any of its subsidiaries have any shares - voting or non-voting". As a further benefit, the applicant made a commitment to allocate $50,000 over five years to the Atlantic Film Festival.

15.

The Commission requires Alliance Atlantis to adhere to each of these commitments, in particular its promise to locate and maintain the offices of IFCC in Halifax.

Implications of the transaction for the licensing process

16.

The Commission acknowledges the concerns of interveners regarding the very brief period of time that elapsed between the licensing of the specialty services involved in this transaction and conclusion of the agreement for the sale of Salter Street to Alliance Atlantis. The Commission notes, however, that the adjusted value it has assigned to these regulated assets is a relatively small portion of the overall purchase price for the shares of Salter Street. In the circumstances, the Commission considers it unreasonable to infer that the primary motivation of Salter Street's owners in selling the company's shares was to divest themselves of the regulated assets of IFFC and the other specialty services. This is particularly the case given that none of these services has commenced operation, and the consequent difficulty in arriving at any clear, confident assessment of how they will eventually perform financially.

17.

Although the Commission is thus unable to conclude that this particular transaction constitutes an inappropriate sale of broadcasting assets, it remains very much concerned by what it sees as an increasing incidence of business dealings involving the sale of new or recently licensed broadcasting properties such as these. The Commission will therefore continue to review and rule on all such transactions on a case-by-case basis, with a view to making certain that the integrity of the licensing process is maintained.

Secretary General

This decision is to be appended to the licence. It is available in alternative format upon request, and may also be examined at the following Internet site: www.crtc.gc.ca