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CRTC chairman Jean Pierre Blais comments Thursday after the regulator blocked the BCE-Astral merger. (Dave Chan for The Globe and Mail)
CRTC chairman Jean Pierre Blais comments Thursday after the regulator blocked the BCE-Astral merger. (Dave Chan for The Globe and Mail)

CRTC pulls the plug on BCE’s national strategy Add to ...

The federal broadcast regulator is forcing BCE Inc. to go back to the drawing board on its media strategy in Quebec.

Astral Media Inc. was considered the linchpin in BCE’s battle for the province against rival Quebecor Inc. and the remaining leg in its larger ambition to create a telecom and media powerhouse of truly national scope.

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After betting on a series of blockbuster acquisitions in recent years, including broadcaster CTV and sports giant Maple Leaf Sports and Entertainment Ltd., cracking the French-language market was considered the next natural step in BCE’s quest to provide a pan-Canadian platform for its bounty of content and give advertisers the ability to buy nationally.

Now those dreams are dashed. The Canadian Radio-television and Telecommunications Commission’s surprise decision to kill the $3-billion acquisition of Astral sparked a furious reaction from BCE, showing how badly it wanted the deal to go ahead.

In a statement, BCE said it is “appalled” by the CRTC’s decision, and vowed to appeal it to the federal cabinet. The company argued the regulator’s ruling “contravenes its own policy and is tainted by behind-the-scenes lobbying by Bell’s cable rivals.” BCE alleged CRTC officials met privately with key competitors ahead of public hearings on the deal, and denied Bell the same opportunity, “calling into question the impartiality of the entire process.”

“This is a decision that should not stand. Canadian consumers were told today by the CRTC that they don’t deserve more – more choice, more competition, more Canadian content funding – all of which Bell and Astral committed to with this transaction,” said George Cope, president and CEO of Bell Canada and BCE.

Now, as it mounts a fight for Astral by seeking an appeal, BCE is still left to sketch out a contingency plan for Quebec in an era when other industry players are also making big bets on interactive content. (Bell Canada owns 15 per cent of The Globe and Mail.)

But the company’s plan to appeal to cabinet may not be realistic, according to analysts and legal experts.

Dvai Ghose, an analyst at Canaccord Genuity, called the CRTC’s decision a “major surprise,” noting that most stakeholders had largely expected the regulator to approve the deal after imposing certain conditions.

“However, we understand that BCE can appeal to the Federal Court of Appeal. We also assume that BCE could return to the CRTC with a different proposal that addresses the regulator’s concerns,” Mr. Ghose wrote in a research note to clients.

“We understand that it cannot directly appeal to Cabinet as the CRTC ruling did not involve the issuance of a licence.”

BCE is widely expected to conduct a throughout review of its legal options in this case. Even so, legal experts have suggested that court appeals of CRTC decisions have faced an 85 per cent failure rate since 1968 -- making BCE’s chances of success fairly slim.

If it chooses to pursue an appeal, the courts would use a “reasonableness test” in weighing the merits of the case. To the extent that the CRTC’s decision is considered “reasonable,” the courts would likely let it stand. In order for an appeal to be successful there would have to be a major error of law or jurisdiction, according to legal experts.

There is already speculation that one legal argument that BCE could try to pursue is that the CRTC somehow strayed from the legal framework of the Broadcasting Act with its decision. In doing so, BCE could attempt to argue that the consumer is not the main focus of the Broadcasting Act. Instead, the crux of that legislation is on the Canadian broadcasting system, including Canadian content and a variety of stakeholders such as producers, artists and companies.

Still, an appeal predicated on the argument that the CRTC’s decision was not properly grounded in the wording of the legislation would be a tough sell, legal experts say.

If BCE simply walks away at this point, it has to pay Astral a $150 million break fee. That might be a realistic option when considering the time and expense of pursing a legal appeal in this case.

Moreover, experts note that while the CRTC’s decision delivers a blow to BCE’s media strategy in the Quebec market (particularly as it competes against Quebecor Inc.), it is likely only a “bump in the road” in the English-language market considering its already bountiful bevy of media assets and key content such as sports.

“While we assume that BCE is extremely disappointed, we actually believe that a deal break could be fundamentally positive for BCE,” added Mr. Ghose. “We never understood the strategic rationale behind the deal for BCE.”

That partly because “connectivity providers that do not own content have generally reported better results than those who do,” he said in reference to rival Telus Corp. Moreover, he noted that “we view Astral as an increasingly legacy asset, which is exposed to OTT (over-the-top) substitution and is showing signs of maturation, especially in the pay TV segment.”

Greg MacDonald, an analyst with Macquarie Securities, said the CRTC’s decision sends the market a “confusing message” about future policy. In particular, it remains unclear whether the regulator’s main concern is that BCE has become too big or that vertical integration has gone too far, he said.

“It is very very surprising, especially in light of the fact that vertical integration has already reached an unprecedented level,” said Mr. MacDonald, noting that some 90 per cent of TV revenues are already controlled by cable or telecom companies.

“To stop at that point, is confusing to me. Presumably, if they were worried about vertical integration, they should have stopped sooner.”

Read the CRTC's decision here.

With files from reporter Jacquie McNish

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The players

Ian Greenberg

It looked as if Astral Media Inc.’s founder and his family might waltz out door with $50-million for their special shares in the company, but in the end it didn’t happen. Astral’s strength in Quebec, as well as specialty offerings such as HBO Canada and The Movie Network, were enough to entice Bell to agree to a $3-billion deal in April. But thanks to the CRTC, Mr. Greenberg will maintain his ownership in the 51-year-old company.

Jean-Pierre Blais

In his first major decision as chairman of the Canadian Radio-television and Telecommunications Commission, Mr. Blais proved he wasn’t afraid to flex the regulator’s muscle. He argued that “robust” competition in broadcasting simply would not have been possible with so much power in the hands of one media titan.

George Cope

The president and CEO of BCE Inc. was served his first major defeat since he took the helm four years ago, as the CRTC stuck a knife in what he said was a key digital strategy. Mr. Cope said BCE needed Astral to offer content that could compete with Netflix, but instead his company will have to cough up $150-million in fees to Astral for walking away from the deal.

Pierre Karl Péladeau

Quebecor Inc.’s chief executive officer came out the big winner after seven months of campaigning to destroy his major competitor’s chance to acquire Astral. At one time, he said the proposed merger would create a “monster.” Mr. Péladeau had been an ever-present voice in the hearings and conversations leading up to the CRTC decision, saying that even if the regulator tried to impose restrictions, BCE would snake around them.

Jacqueline Nelson

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