Source : Globe & Mail

How's this for a biz plan? Bid for broadcasting licence in a rich market. Obtain licence after making lofty financial and content projections. Use new licence to boost company value. Slap company on auction block. Wait for bids. Retire rich.

Is this what Craig Media had in mind? The broadcaster is on the auction block. The sale's effort came only a few months after the debut of Toronto 1, the money-losing, though coveted, conventional-broadcasting newcomer in the Toronto market. (unconventional, that is digital, TV licences are next to worthless). There is a huge amount of interest in Craig Media because of the Toronto 1 licence, with Quebecor Media and CHUM thought to be among the lead contenders. Craig Media will get sold and the Craig lads -- CEO Drew and brothers Boyd and Miles -- stand to reap somewhere between $200-million and $400-million for their empire. They own 81.1 per cent of the company. Do the math. The boys won't be hurting.

Here's another reality. The CRTC -- the Canadian Radio-television and Telecommunications Commission -- is making it easier for the Craigs to cash out.

Craig Media is the country's biggest private broadcaster. Born in Brandon as a radio company, 56 years ago, it now has TV stations in Calgary and Edmonton and two in Manitoba. It has a slew of digital TV channels, including MTV Canada, and a telecommunications arm. The missing element was a presence in Southern Ontario, the dominant advertising market. Enter the CRTC. It agreed to license a couple of new local programming stations, one English and one multicultural, in Toronto.

The English channel would be the first new Toronto licence of its kind in decades, and the competition was intense. Alliance Atlantis, Torstar and CanWest Global, all substantially bigger and better capitalized than Craig Media, made pitches. So did little Craig Media. As the bidding war heated up, the promises made to the CRTC on local content spending, of course, rose. Craig Media won. With Toronto 1 at its side, the company broke out of the western box. It could claim its broadcasting services reached 40 per cent of the English-speaking population, making it a national player.

In Canada, licences are not auctioned to the highest bidder. They are given free to the broadcaster, so long as the broadcaster is Canadian-controlled. They can be taken away if programming commitments are violated, although this has never happened. The licence is a monopoly, in the sense that no other broadcaster can zap its signal on that particular bit of the spectrum. The licences are renewed every seven years without competitive bidding. When the company that owns the licence is sold, the licence goes to the new owner.

This is why snagging a licence is like hitting the lottery every year for the rest of your life. Vast family fortunes have been made on them. When the CRTC gave its blessing to Craig Media in April, 2002, the losers went berserk. They said the award was politically motivated, that it was given to Craig Media to prop up a small western broadcaster. They may have been right.

The licence proved its worth well before Toronto 1 went on air. To help finance the launch, Craig Media sought a new investor and recruited Providence Equity Partners of Rhode Island. It pumped $110-million into the company, giving it a 19.9-per-cent equity stake. Another $35-million came from RBC Dominion Securities and BMO Nesbitt Burns in the form of senior debt. The terms of the Providence deal weren't disclosed to the CRTC. Why? Because the investment was under the 20-per-cent review threshold. The CRTC was not even informed the investment was to be made. At 20 per cent, the Providence investment might have been illegal if the CRTC deemed it to be Craig Media's control block. Remember, foreigners are not allowed to own broadcast licences. What level of control 19.9 per cent, as opposed to 20 per cent, gives Providence may never be known.

Meanwhile, things have turned ugly at Toronto 1, whose original audience and ad numbers look decidedly ambitious. Sources say the channel will be lucky to have first-year ad sales of $17-million, only about half of the projected $35-million or so. How could this happen? It's the CRTC's duty to evaluate the "financial stamina," as it says, of the short-listed bidder before the licence is awarded. After that, the regulator pretty much bows out. In other words, overly ambitious projections are not its concern so long at they don't put the licence holder into financial distress. This seems like an invitation to exaggerate.

To Craig Media, it probably doesn't matter that Toronto 1 is hurting. The channel's losses are probably more than offset by the potential rise in Craig Media's value because it owns the channel. In the end, Craig Media will be a winner because the rarity value of a conventional licence -- Toronto 1 -- in Canada's biggest market makes the company an appetizing takeover target.

Let's not forget Providence. The CRTC doesn't like foreigners. In this case, it is virtually guaranteeing that a foreign investor will make a buck from a licence it awarded less than two years ago.

The CRTC's licence award system is open to potential abuse. The whole process should be reviewed to prevent what looks like trafficking in a highly valuable commodity. Shouldn't more due diligence be done on the projections used to win the licence? Should licences automatically get transferred to new owners? Why shouldn't licences come up for competitive bidding every few years, as they do in other countries? The system stinks. Time to fix it.

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