CHUM deal with Quebecor likely to aid CRTC approval of Craig purchase

CHUM Ltd. has overcome a major hurdle in receiving CRTC approval for the acquisition of Craig Media with its announcement last week that it had reached an agreement to sell recently launched conventional station Toronto 1 to Quebecor Media. In agreeing to purchase financially strapped Craig Media for $265 million in cash, CHUM has always maintained that it would hold Toronto 1 in trust until another buyer could be found. Maintaining Toronto 1 would be next-to-impossible for CHUM, which already owns over-the-air TV stations in Toronto and nearby Barrie ON, due to broadcast regulations that prevent multi-station ownership in a market. In interrogatories in conjunction with CHUM’s application for approval to acquire the Craig Media properties, the CRTC asks the Toronto-based broadcaster if it would be prepared to continue with the application in the event that the commission were to deny the transfer of Toronto 1 and/or Craig Media’s digital specialty TV channels to CHUM. "CHUM does not consider the parts of the application relating to Toronto 1 or the digital specialty services to be severable," responds CHUM VP of planning and regulatory affairs Peter Miller to the CRTC questioning. "In CHUM’s view, such a determination would be prejudicial to both Craig and CHUM, would be detrimental to the health of the Canadian broadcasting system and is not in the public interest." That potential disagreement between CHUM and the commission appears to be settled with the Quebecor deal. TVA Group Inc. and Sun Media Corp., two subsidiaries of Quebecor Media, have agreed to pay $46 million to buy Toronto 1. Under the deal, TVA would pay $34.5 million in cash to CHUM for 75% ownership in the station. Sun Media would acquire the remaining 25% stake in return for giving CHUM $3.5 million in cash and its 29.9% interest in the CablePulse 24 news channel, valued at $8 million. TVA and Sun Media state that they will file an application for transfer of ownership and control of Toronto 1 with the CRTC by September 2. The $46-million price tag is significantly lower than the $64 million amount Toronto 1 has been valued at by TD Securities in the CHUM application. TD Securities determined the station value was in the range of $50 million to $70 million. In questioning, the CRTC asks CHUM, given that Toronto 1 is currently operating at a massive loss and has not yet had the time to develop goodwill, why the value of Toronto 1 shouldn’t be closer to the low end of the range. CHUM responds that "pinpointing the exact value of each of the Craig assets is difficult, and to a certain extent, arbitrary, given the fact that CHUM agreed to purchase all of Craig." It further notes that assigning the Toronto station a value of $64 million was appropriate given that it "roughly equates to the total costs that have been incurred and will be incurred by Craig to launch and operate the station for the period prior to closing." The value was assigned to Toronto 1 because CHUM used the $64 million figure to lower the amount of its benefits package. In proposing a benefits package in conjunction with the Craig Media acquisition, CHUM subtracted $64 million from the $265 million price tag as it planned to divest itself of the Toronto station, and the $9 million attributed as the value of Craig’s Category 2 digital specialty TV channels MTV2, TV Land and others not yet-launched. CHUM tells the commission that the value of the Category 2 channels should be omitted because they do not have genre protection and are not guaranteed distribution. "CHUM notes that when the commission introduced competition to the distribution section, the requirement to pay benefits on transactions involving broadcasting distribution undertakings was removed. Based on the same reasoning, CHUM submits that it is appropriate not to require the payment of benefits on transactions involving Category 2 digital specialty services…There is simply no public policy rationale for requiring benefits of Category 2 digital specialty services while not requiring them of BDUs (broadcast distribution undertakings)." But CHUM does say that it would allocate an additional $900,000 in benefits should the CRTC determine benefits are payable with respect to the Category 2 channels. In its application, CHUM uses $192 million on which it calculates its benefits package. By tradition, the CRTC expects benefits packages to amount to about 10% of the purchase price of broadcast properties. CHUM is proposing a benefits package amounting to $20 million over seven years, which CHUM calculates amounts to 10.41% of the value of the transaction after appropriate deductions for Toronto 1 and the Category 2 diginets. CHUM also pledged to continue, as an intangible benefit, a number of initiatives started by Craig, including expenditures on programming totaling almost $15 million. The benefits include $9 million in additional funding for priority programming, $1 million for script and concept development, and $4.2 million for storefront bureaus in Lethbridge and Red Deer AB. The new bureaus would each be staffed by four full-time employees and would be operational by the September following CRTC approval of the acquisition. With the acquisition of Craig Media’s assets, CHUM’s reach will extend to 85% of English Canadians from its current 67% of the conventional TV market. CHUM notes that even with the acquisition of Craig Media’s assets, it will remain third behind CTV Inc. and CanWest Global in terms of national audience reach, and revenue share. The CRTC, however, appears concerned that the acquisition of Craig’s assets, including its digital specialty channels, could lead to a situation where CHUM has "an unreasonable level of concentration of ownership in the specialty TV sector." CHUM responds that it ranked second in English-language specialty TV service revenues, behind CTV/Bell Globemedia in 2003. CHUM stresses that it was a distant second, with a 14.5% share of revenue compared to CTV/Bell Globemedia’s 27.1% share that year. "With the addition of the Craig specialty services, CHUM’s share would have risen only slightly to 15.3%. With such a minor change (less than one percentage point), it is clear that the CHUM combination with Craig Media’s specialty services does not raise any issues of concentration," CHUM states in response to CRTC interrogatories. The CRTC notes that CHUM is attempting to acquire two music-driven digital channels, MTV Canada and MTV2, from Craig when it already owns and operates 18 specialty channels, including a number of music channels such as MuchMoreMusic, MuchMusic, MuchLoud, MuchMoreRetro, and others. However, CHUM responds that MTV Canada is not a music service, but Craig’s rebranded youth channel aimed at 12 to 24 year olds. "Given the fact that MTV Canada is very different from CHUM’s existing services, and that CHUM does not intend to substantially change the service, we are confident that it will continue to complement CHUM’s existing services and provide a distinct voice for Canadian youth," CHUM tells the CRTC. "With respect to MTV2, this service is a videoflow service. CHUM does not operate a pop music videoflow. Therefore, MTV2 will also continue to provide a distinct voice." Under the agreement with Craig Media, CHUM will acquire the conventional TV stations CKAL-TV Calgary, CKEM-TV Edmonton, CHMI-TV Portage La Prairie/Winnipeg, CKX-TV Brandon, Toronto 1 and three launched digital specialty TV channels.

CHUM deal with Quebecor likely to aid CRTC approval of Craig purchase

Broadcast | August 27, 2004

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