Radio / Television News

Chairman’s Banff speech doesn’t bode well for Bell-Astral, says research co.; decision imminent


TORONTO – Veritas Investment Research says the speech by CRTC chairman Jean-Pierre Blais to the 2013 Banff World Media Fest last week appears to foreshadow a negative ruling for Bell/Astral II and that investors should pay heed.

In a research note to clients last week, Veritas noted that investors are betting that the answer from the CRTC will be affirmative, and not negative like the first go-around in October of 2012. It’s not a safe bet, says the company. “Astral Media Inc.’s class A shares are trading at approximately $48.50, compared to BCE Inc.’s offer price of $50 per share,” reads the research published June 13. “At the current stock price, Astral’s investors can expect to profit by 3% if the (CRTC) rules favorably. However, if the transaction is rejected and the stock of Astral falls to $40 again, shareholders could see downside of 18% – a highly asymmetrical payoff. On that basis, it seems that investors are ascribing an 85% chance of success and a 15% chance of failure to the transaction. Are those odds reasonable? Not in our view."

The Veritas paper notes Bell’s very negative public reaction to the October denial of the transaction by the CRTC and outlines the fact that it was denied because CRTC chairman Jean-Pierre Blais is applying a different standard to judge such mergers than in the past, noting his speech to Banff delegates specifically referenced how the Commission is “applying a more rigorous public interest test” for ownership changes. Back in October, Bell’s executives to called the decision “absurd” and then appealed to the federal cabinet to issue a policy directive to the CRTC on the matter.

However, Blais’s Banff 2013 speech, in the minds of the researchers, “is a direct response to Bell’s avowed exhortations to the federal Cabinet – ‘our decision last fall sent a clear signal that the public interest is paramount. It is the lens that Parliament has entrusted to us, under legislation, and we fully intend to carry out that public trust’,” said the Veritas researchers, quoting Blais.

“In our view, this doesn’t bode well for the revised BCE-Astral merger, especially given that Bell is wrestling with questions of ‘market-share’ in an era where the emergence of non-linear i.e. multiplatform delivery of content is forcing CRTC to take a view on ‘market power’ as well.”

While Bell spent much time during the hearing, leading up to it and since, focused on specific market share figures and how its new levels of audience and revenue shares shouldn’t really be a concern to many, Veritas again worries about what the CRTC chairman is saying. “Once again, we quote the Chairman who is apparently trying to send a message to Bell by saying that ‘it’s time to ask: do the assumptions that lie beneath our current regulatory policies still hold true?’ The Chairman then outlined that, ‘We need to shift our focus from constraint to choice and from scheduled to on-demand amongst other things.’”

The research company also notes that Blais used Banff to announce a brand new, all-encompassing review of the Canadian television system. Could it be counterintuitive to approve such a large, meaningful transaction in light of that impending process, slated to begin this fall? “(T)he Chairman stated that regulation with television has become a ‘complex framework’ and ominously that ‘broadcasting as we once knew it, is no longer – and will never again – be the same’,” reads the paper. “We believe that from the regulator’s standpoint, less market power implying structural barriers will improve access and communication, and not increased vertical integration.”

So what does that all mean? Well, Veritas is an investment research company and so it means it is advising current Astral shareholders to sell. “(G)iven these risks, current Astral shareholders are better off selling their shares than holding out for an incremental 3% gain. With respect to BCE, the company’s share price has fallen approximately 9%, from $48.35 on May 14, 2013 (52 week high of $48.90), when we downgraded all the wireless incumbents to SELL, due to rising regulatory risks,” says Veritas. “During that same time, Astral’s shares have been flat. We infer that the lack of share price movement for Astral implies that BCE’s share price declines have been due to wireless regulatory risks and that the risk of a failed Astral bid is not priced in (we estimate -2% to -3%), but clearly the downside risk is more significant for Astral.”

While we find this report quite interesting, no one yet knows what the decision will be. However, Cartt.ca has confirmed that the CRTC is planning to announce it prior to June 29th. That is the last day at the Commission for Quebec regional commissioner Suzanne Lamarre. The federal government has officially listed her position open, meaning she will not be retained beyond the end of her five-year tenure – and because she was on the panel of commissioners charged with deciding the fate of the new deal, the decision is being worked on so that it comes out prior to her departure.

– Greg O’Brien