Source : Globe & Mail

CRTC hearing begins today on network's bid

by Susanne Craig

Some of the most powerful figures in Canadian sports and entertainment are backing CTV Inc.'s acquisition of NetStar Communications Inc., but starting today the network must convince the federal broadcast regulator to bless the deal.

The Canadian Radio-television and Telecommunications Commission hearing will pit those who feel CTV's acquisition of Netstar, and its specialty channel The Sports Network (TSN), will give the broadcaster a near monopoly on the sports market against others who argue that CTV's ownership of Netstar will increase television exposure for Canadian sports.

CTV already controls the country's only other all-sports network Sportsnet, French-language RDS and the Outdoor Life Network.

"At the end of the day, the ultimate winner will be the Canadian hockey fan," sports legend Wayne Gretzky said in a letter to the CRTC regarding the $394-million deal announced in February.

The stakes for CTV are high. Earlier this year, CTV trumped an offer by rival CanWest Global Communications Corp. for Netstar, the country's largest specialty channel company. CTV's 68-per-cent share of Netstar, analysts say, is worth about $465-million.

For now, this stake has been placed in trust.

The company's remaining 32 per cent is owned by ESPN Inc., a unit of Burbank, Calif.-based Walt Disney Co.

If the CRTC throws a wrench into the deal, either by forcing CTV to sell one of the sports networks or by piling onerous conditions on the deal, shareholders will almost certainly end up on the losing side.

The worst-case scenario for CTV would be if the CRTC forced the company to sell one of the two sports channels, a move some analysts predict could shave between $3 and $5 off the broadcaster's share price in the short term. CTV's shares closed Friday on the Toronto Stock Exchange at $21.55, down 45 cents.

In addition, one of the franchises, likely The Sports Network, would no doubt end up in the hands of a rival, such as CanWest.

"The hearings are a very important event for the company," said Scotia Capital Markets analyst Andrew Mitchell.

"It gives them a lot of leverage to a higher-growth segment of the marketplace [specialty television]. The other side of it is [that] CTV ends up well positioned in terms of sports in Canada and sports is the best way to access the male demographic from an advertising point of view."

If the CRTC does force the sale of one of the two sports channels, CTV will still end up with Netstar's other assets, which include Dome Productions, 80 per cent of Discovery Channel Canada, and 25 per cent of Viewer's Choice Canada. However, the crown jewel is clearly TSN.

The other option for the CRTC, and many insiders say the most likely, is that the regulator will approve the CTV/Netstar deal but place conditions on it.

Two likely scenarios are being discussed. One is that the CRTC will let the deal go through but ask for guarantees from CTV that it will, for example, increase its coverage of junior hockey. A second possibility is that the CRTC could insist on a review in a year or two to ensure that the deal does not lessen competition.

CTV, which declined to comment, clearly has its ducks in a row heading into today's hearing. The CRTC has logged 187 letters in favour of its bid. It would not say how many came down on the other side.

Letters favouring the CTV application come from all corners. In addition to Mr. Gretzky, former Olympic skier and CTV freelance commentator Ken Read has written in. The Bowling Proprietors Association and Canada's Sports Hall of Fame have also offered supportive opinions.

Even Joyce Milgaard, mother of wrongly convicted David Milgaard, has weighed in: "A stronger CTV, resulting from the approval of this application, will be better positioned to continue its role in serving Canadian viewers." CTV, she noted, was "supportive and fair" in its presentation of her son's story.

But there also are powerful voices on the other side of the table, most notably groups such as Friends of Canadian Broadcasting and the Office of the Commissioner of Baseball.

"The proposed acquisition will create a 'merger to monopoly,' leaving CTV in control of the only three speciality sports networks in Canada, TSN, RDS and Sportsnet," the Office of the Commissioner wrote.

By buying Netstar, the office argued, CTV will have the market power to depress prices for sports broadcast rights below competitive levels, which will lead to lower-quality Canadian sports products for Canadian consumers, as well as a likely increase in ticket prices.

As well, the office argued, the acquisition would inhibit the type of broadcasting innovation that normally flows from a competitive marketplace.

In a letter to the commission, Friends laid out its case. It has concerns not only about the level of concentration that would result from CTV's proposed acquisition, but also the level of foreign influence that would exist because of ESPN's stake in Netstar.

The monopoly issue is of particular concern. Friends argues that by owning both TSN and Sportsnet, CTV would have monopoly power in the English-language specialty sports market.

"Friends concludes that permitting TSN and Sportsnet to operate under one roof would turn back the clock to the benefit of CTV shareholders, at the expense of viewers, rights holders and other broadcasters," Friends spokesman Ian Morrison wrote in a letter to the commission.

In an interview, Mr. Morrison said that while his organization has recommended approval of the Netstar/CTV deal only on condition that CTV sells one of the sports channels, he knows that is unlikely to happen.

"I think it is unlikely they will let them have everything and I think it is unlikely they will simply say you can't have Sportsnet. I think something in between is the most likely outcome," he said.

The CRTC hearings are expected to wrap up tomorrow, but it could be months before a ruling on the transaction. As well, the federal Competition Bureau must rule on the deal.

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