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In order to meet some of the requirements under this Act, the Commission's transcripts will therefore be bilingual as to their covers, the listing of CRTC members and staff attending the hearings, and the table of contents.
However, the aforementioned publication is the recorded verbatim transcript and, as such, is transcribed in either of the official languages, depending on the language spoken by the participant at the hearing.
TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
CanWest MediaWorks Inc. (CanWest), on behalf of Alliance
Atlantis Communications Inc. (Alliance Atlantis) /
CanWest MediaWorks Inc. (CanWest), au nom d'Alliance Atlantis
Communications Inc. (Alliance Atlantis)
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
November 19, 2007 Le 19 novembre 2007
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Conseil de la radiodiffusion et des
Transcript / Transcription
CanWest MediaWorks Inc. (CanWest), on behalf of Alliance
Atlantis Communications Inc. (Alliance Atlantis) /
CanWest MediaWorks Inc. (CanWest), au nom d'Alliance Atlantis
Communications Inc. (Alliance Atlantis)
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Elizabeth Duncan Commissioner / Conseillère
Len Katz Commissioner / Conseiller
Michel Arpin Commissioner / Conseiller
ALSO PRESENT / AUSSI PRÉSENTS:
Jade Roy Secretary / Secrétaire
Lyne Renaud Hearing Managers /
Rachel Marleau Gérantes de l'audience
James Wilson Legal Counsel /
Neil Campbell Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
November 19, 2007 Le 19 novembre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
PRESENTATION BY / PRÉSENTATION PAR:
CanWest MediaWorks 4 / 20
INTERVENTION BY / INTERVENTION PAR:
Council of Canadians 176 / 1061
Canadian Conference of the Arts 192 / 1144
Directors Guild of Canada 219 / 1289
Communications, Energy and 246 / 1433
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
CRTC-1 Document entitled "Reference 3 / 17
materials for the CRTC hearing
regarding control and fact issues
on CanWest, Goldman Sachs,
Gatineau, Quebec / Gatineau, Québec
‑‑‑ Upon commencing on Monday, November 19, 2007
at 0930 / L'audience débute le lundi
19 novembre 2007 à 0930
LISTNUM 1 \l 11 THE SECRETARY: Please be seated. We are about to start.
LISTNUM 1 \l 12 THE CHAIRPERSON: Good morning, ladies and gentlemen.
LISTNUM 1 \l 13 This is a hearing on CanWest's acquisition of Alliance Atlantis.
LISTNUM 1 \l 14 The panel today consists of my colleagues, Michel Arpin, Vice‑Chairman of Broadcasting; Len Katz, Vice‑Chairman of Telecommunications; Elizabeth Duncan, Commissioner of the Atlantic Region; and myself, Konrad von Finckenstein, as Chairman.
LISTNUM 1 \l 15 The Commission team assisting us today includes: Hearing Managers Lyne Renaud, Director of Ownership, and Rachel Marleau, Senior Corporate Analyst; Legal Counsel, James Wilson and Neil Campbell; and Jade Roy, our Hearing Secretary.
LISTNUM 1 \l 16 I think you all know what it is about, so without further ado, let's get down to business.
LISTNUM 1 \l 17 Madame Roy.
LISTNUM 1 \l 18 THE SECRETARY: Thank you, Mr. Chairman. Bonjour à tous.
LISTNUM 1 \l 19 First, I would ask that when you are in the hearing room please turn off your cell phones, beepers and BlackBerrys. We would appreciate your cooperation in this regard throughout the hearing.
LISTNUM 1 \l 110 Please note that the Commission members may ask questions in either English or French. You can obtain an interpretation receiver from the commissionaire sitting at the entrance of the conference centre.
LISTNUM 1 \l 111 Le service d'interprétation simultanée est disponible durant cette audience. L'interprétation anglaise se trouve au canal 7, et l'interprétation française au canal 8.
LISTNUM 1 \l 112 We expect the hearing to be completed within the next two to three days. We will begin tomorrow morning at 8:30 a.m. and adjourn each afternoon at approximately 4:30 p.m. We will take one hour for lunch and a break in the morning and in the afternoon.
LISTNUM 1 \l 113 There is a verbatim transcript of this hearing being taken by the court reporter sitting at the table on my right. If you have any questions on how to obtain all or part of this transcript, please approach the court reporter during a break.
LISTNUM 1 \l 114 Please note that the full transcript will be made available on the Commission's website shortly after the conclusion of the hearing.
LISTNUM 1 \l 115 Pendant toute la durée de l'audience, vous pourrez consulter les documents qui font partie du dossier public de cette audience dans la salle d'examen qui se trouve dans la salle Papineau, située à l'extérieur de cette salle, à votre droite.
LISTNUM 1 \l 116 During its questioning of the Applicant CanWest MediaWorks Inc., the panel will be referring to the document entitled "Reference materials for the CRTC hearing regarding control and fact issues on CanWest, Goldman Sachs, Alliance Atlantis."
LISTNUM 1 \l 117 The Commission will therefore enter this document into the record as Commission Exhibit CRTC‑1. Copies are available in the examination room.
EXHIBIT NO. CRTC‑1: Document entitled "Reference materials for the CRTC hearing regarding control and fact issues on CanWest, Goldman Sachs, Alliance Atlantis."
LISTNUM 1 \l 118 THE SECRETARY: Now, Mr. Chairman, we will proceed with the presentation by the Applicant CanWest MediaWorks Inc. Appearing for the Applicant is Leonard Asper.
LISTNUM 1 \l 119 Please introduce your colleagues and you will then have 20 minutes to make your presentation. Thank you.
PRESENTATION / PRÉSENTATION
LISTNUM 1 \l 120 MR. ASPER: Thank you very much.
LISTNUM 1 \l 121 Good morning, Chairman, commissioners and Commission staff.
LISTNUM 1 \l 122 My name is Leonard Asper and I am President and CEO of CanWest Global Communications Corp.
LISTNUM 1 \l 123 We are pleased to appear before you today to discuss our acquisition of the Alliance Atlantis Specialty Services.
LISTNUM 1 \l 124 I would like to begin our presentation today by introducing the members of our panel and also acknowledging the presence of a number of important people who are with us in the audience today.
LISTNUM 1 \l 125 First and foremost, seated in the front row is Michael MacMillan ‑‑ that is the front row behind me ‑‑ the former Chairman and co‑founder of Alliance Atlantis Communications. Next to him is Phyllis Yaffe, the CEO of Alliance Atlantis.
LISTNUM 1 \l 126 As you know, it is through the leadership and the vision of both Michael and Phyllis and the many people who worked alongside them over the years that Alliance Atlantis has become a true Canadian success story.
LISTNUM 1 \l 127 I would also like to acknowledge the presence of the Chairman of the Board of CanWest Global Communications, Derek Burney, who is there in the front row as well; Peter Viner, beside him, the former CEO of CanWest Global Communications and also a director on the CW Media board; as well as Jim Macdonald, the independent trustee of the Alliance Atlantis Services.
LISTNUM 1 \l 128 Also with us today is Tim Hodgson, the CEO of Goldman Sachs Canada.
LISTNUM 1 \l 129 Now in the front row of our panel, seated to my immediate left, is Tom Strike, who is the President of Strategy and Implementation for CanWest.
LISTNUM 1 \l 130 Next to him is Richard Leipsic, the Senior Vice‑President and General Counsel.
LISTNUM 1 \l 131 Next to him is John Maguire, Chief Financial Officer of CanWest Global.
LISTNUM 1 \l 132 To my immediate right is Charlotte Bell, the Vice‑President of Regulatory Affairs.
LISTNUM 1 \l 133 Seated next to her is Kathy Dore, President of Television, CanWest MediaWorks.
LISTNUM 1 \l 134 Next to Kathy is Barbara Williams, our Senior Vice‑President of Programming, as well as Christine Shipton, Vice‑President of Original Programming.
LISTNUM 1 \l 135 Next to Christine is Walter Levitt, Senior Vice‑President of Marketing.
LISTNUM 1 \l 136 In the row behind me, starting from the left is Marlene Lock, the Vice‑President of Finance of CanWest Global.
LISTNUM 1 \l 137 Next to her is Colin O'Leary, a partner in the Valuation Services Group of Ernst & Young LLP, our independent valuators.
LISTNUM 1 \l 138 Next to him is Grant Buchanan, General Counsel at McCarthy Tétrault, who is acting as General Counsel for Goldman Sachs.
LISTNUM 1 \l 139 Seated next to him is Gerry Cardinale, Managing Director at Goldman Sachs.
LISTNUM 1 \l 140 Seated next to him is Ante Vucic, who is also Counsel for Goldman Sachs.
LISTNUM 1 \l 141 Next to him is Christine Cook, the Vice‑President of Finance for CanWest MediaWorks.
LISTNUM 1 \l 142 Next to her is Kathy Gardner, Senior Vice‑President, Research and Promotions for CanWest Media Sales.
LISTNUM 1 \l 143 Finally, next to Kathy is Steve Wyatt, Senior Vice‑President of News Information for CanWest.
LISTNUM 1 \l 144 Commissioners, this transaction represents an exciting and important phase in the history of CanWest. It is the culmination of more than 30 years of building a company and bringing it to the next logical stage of growth so we can move forward and compete effectively in a rapidly changing media world.
LISTNUM 1 \l 145 When my father founded CanWest three decades ago, he moved a small TV station from North Dakota cross the border to Winnipeg to establish CKND, the first private local television station in that market. Well, we have come a long way since then.
LISTNUM 1 \l 146 Over the years, through a series of acquisitions and start‑ups, we have created two strong conventional television brands: first, the Global Television Network which is now available in 95 percent of Canadian homes, and more recently, a newly rebranded network of stations now known as E.
LISTNUM 1 \l 147 In the last decade we also entered the specialty television world and now operate a number of digital specialty services as well as one analog specialty service, TVTropolis.
LISTNUM 1 \l 148 Our core business is conventional television, which has matured and now faces many challenges due to several structural and technological factors, and while conventional television remains the cornerstone of the broadcasting system, it now has to compete within a sea of viewing choices, including a number of content providers that are new, both foreign and domestic, some of which are less regulated and many of which are not regulated at all.
LISTNUM 1 \l 149 Today, more than 95 percent of our broadcast revenues come from advertising. However, in recent years, the largest revenue stream in the Canadian broadcasting system has shifted to subscription and up to this point CanWest has been largely absent in that area.
LISTNUM 1 \l 150 Advertising dollars continue to migrate to the specialty sector and the internet at the expense of conventional television. In fact, virtually all of the growth in television ad spending has been and will continue to be in the specialty sector.
LISTNUM 1 \l 151 For CanWest to be competitive in this changing world, we need to diversity our revenue sources and reaggregate some of that audience lost to specialty by having a more prominent presence in that arena.
LISTNUM 1 \l 152 Commissioners, this transaction will allow us to achieve both of these goals and represents a necessary next step for both CanWest and Alliance Atlantis.
LISTNUM 1 \l 153 Collectively, we have created a world‑class television station group and specialty networks providing high quality information and entertainment programming to Canadian audiences from coast to coast. In an ever‑changing and increasingly competitive media environment, both CanWest and Alliance Atlantis knew that the status quo was no option.
LISTNUM 1 \l 154 Last December, the owners of Alliance Atlantis and a special committee of their board of directors announced their intention to explore strategic alternatives for the company. Following this review, the board of directors determined that the best way to grow the business was to sell the company.
LISTNUM 1 \l 155 For CanWest, this represented an opportunity to meet our long‑term business and strategic goals by expanding our presence in the growing specialty sector. However, the combined assets of Alliance Atlantis also included the highly successful CSI franchise as well as the motion picture distribution business.
LISTNUM 1 \l 156 Our challenge therefore was twofold. We had to find someone who would be willing to support our investment in the broadcasting assets of Alliance Atlantis while at the same time being prepared to acquire the remaining non‑broadcasting assets of the company.
LISTNUM 1 \l 157 We approached a number of financial institutions and eventually found the right financial backer in Goldman Sachs.
LISTNUM 1 \l 158 I am pleased that Gerry Cardinale of Goldman Sachs is with us today and I would like to ask him now to tell you about his company and their role in this transaction.
LISTNUM 1 \l 159 MR. CARDINALE: Thank you, Leonard.
LISTNUM 1 \l 160 Commissioners, I am here today representing Goldman Sachs and I would like to take a few minutes to tell you about our company and our investment philosophy.
LISTNUM 1 \l 161 Goldman Sachs is a global investment banking firm. Since 1986, we have invested over $23 billion of equity in companies around the world representing a wide range of industries.
LISTNUM 1 \l 162 Unlike other investment firms, we do not specialize in any one sector. In fact, our investments in media companies worldwide represent under 8 percent of our overall portfolio.
LISTNUM 1 \l 163 As such, we do not see ourselves as a strategic investor in these broadcast assets but rather a financial backer supporting CanWest.
LISTNUM 1 \l 164 This is consistent with our overall investment philosophy in which we invest capital to help support clients like CanWest achieve their corporate objectives. We have no intention of changing our approach with this particular transaction.
LISTNUM 1 \l 165 Our flexibility and partnership approach make us an ideal investor for private or public companies seeking additional capital to fund further growth either through acquisition or expansion. Typically, we invest in companies that have a proven track record, an experienced management team and attractive growth prospects and this is certainly the case here.
LISTNUM 1 \l 166 Our investments are designed to support the long‑term goals of the companies in which we invest and to build value. We believe that management is most qualified to run the day‑to‑day business and we assist by participating on the board of directors of companies we invest in. We are not television operators nor do we wish to be.
LISTNUM 1 \l 167 We recognize the talent and expertise of this team of executives under the leadership of Leonard Asper and Kathy Dore and we are confident that they will run this business in such a way as to meet their regulatory obligations as well as their financial goals and ours.
LISTNUM 1 \l 168 Now let me turn to the issue of Canadian control, which we know is of interest to the Commission.
LISTNUM 1 \l 169 I want to assure you that Goldman Sachs does not wish to control any Alliance Atlantis or CanWest broadcasting entity. This transaction has been designed so that CanWest is in control. CanWest has the skill and the resources to manage this business.
LISTNUM 1 \l 170 We understood the regulatory need for Canadian control and we fully accepted that when we entered into our agreement with CanWest.
LISTNUM 1 \l 171 I will be pleased to answer any questions you may have when we get to that portion of this proceeding. Thank you.
LISTNUM 1 \l 172 MR. ASPER: Thank you, Gerry.
LISTNUM 1 \l 173 Commissioners, Canada needs strong integrated media companies to assert a Canadian presence on an ever‑evolving media platform.
LISTNUM 1 \l 174 The CRTC has recognized and accommodated this need through a series of policies and decisions that over time have enabled broadcasters to grow through necessity. These decisions have been wise in acknowledging the importance of consolidation to the ongoing health and strength of the Canadian broadcasting system.
LISTNUM 1 \l 175 We believe that this proposed transaction meets the test of being the best possible under the circumstances and will lead to a strengthened and conventional television business for CanWest.
LISTNUM 1 \l 176 I would now like to turn this over to Kathy Dore and members of our operating team to speak to the specifics of our application.
LISTNUM 1 \l 177 MS DORE: Thank you, Leonard.
LISTNUM 1 \l 178 Commissioners, beyond the many ways in which this transaction will help strengthen our ability to contribute to the system, our proposed benefits package is significant and unequivocal.
LISTNUM 1 \l 179 In fact, it will inject almost $137 million of new investment into the Canadian broadcasting system. Of this, 90 percent or $123 million of the total package will be committed to programming initiatives that will result in many new hours of original Canadian programming.
LISTNUM 1 \l 180 We set out to develop a holistic production strategy that would maximize the potential of those benefit dollars and ensure adequate funds for development, production, promotion and new media content.
LISTNUM 1 \l 181 This is why we have proposed a spending formula that would extend to 10 years for our primetime programming initiatives in order to allow for adequate time to properly develop and test programming before beginning production.
LISTNUM 1 \l 182 We are proposing that the remaining 10 percent of the benefits package be targeted towards two key priority areas for CanWest: training and diversity initiatives.
LISTNUM 1 \l 183 Our training initiatives will give new emerging talent an opportunity to refine their skills and learn from the best and will meet the needs of an oversubscribed market.
LISTNUM 1 \l 184 Our diversity initiatives will target a number of organizations, including the Innoversity Creative Summit, the National Aboriginal Achievement Foundation and the Canadian Council for Aboriginal Business.
LISTNUM 1 \l 185 We will also establish two training programs that we will run in‑house, one for a broadcast diversity journalism training program and the other for a CanWest internship for persons with disabilities.
LISTNUM 1 \l 186 We propose to allocate just over $2 million to support a variety of festivals celebrating Canada's diversity and creative talent across Canada.
LISTNUM 1 \l 187 Finally, as media literacy is also an important priority for CanWest, we have set aside funding to support three organizations that stand out in their efforts to promote media literacy in Canada: the Media Awareness Network, Learning Through the Arts as well as Concerned Children's Advertisers.
LISTNUM 1 \l 188 I would now like to ask Barb Williams to tell you more about the ways in which this transaction will help enhance Canadian programming.
LISTNUM 1 \l 189 MS WILLIAMS: Thanks, Kathy.
LISTNUM 1 \l 190 Commissioners, this transaction represents for us an exciting opportunity to combine the well‑defined and powerful specialty brands of Alliance Atlantis with the wide reach and mass appeal of our Global and E conventional television networks.
LISTNUM 1 \l 191 Bringing together distinct yet complementary television services under one roof will allow us to maximize our ability to commission, acquire, promote and broadcast quality Canadian programming across multiple platforms, including our print and web assets, in order to increase audiences. Simply put, it will help us to build hits.
LISTNUM 1 \l 192 Three key reasons underscore this opportunity.
LISTNUM 1 \l 193 First, we will be able to expose bigger audiences to shows that have mass audience potential but have lacked the wide access to be as successful as possible.
LISTNUM 1 \l 194 Second, we will bring together the combined expertise from two of the strongest and most experienced programming teams in the country to ensure that the best ideas are coming in the door and that we are helping to make them the best they can be.
LISTNUM 1 \l 195 Third, understanding the role that foreign programming plays in supporting the budgets of our Canadian programming, this transaction strengthens our position with our foreign program distribution partners, allowing us to maximize the value foreign acquisitions bring to the Canadian equation.
LISTNUM 1 \l 196 Frankly, it allows us to get the greatest impact possible out of the hundreds of millions of dollars spent on Canadian programming each year with both our viewers and our advertisers.
LISTNUM 1 \l 197 It allows us to combine the strengths and reach of both our companies in order to maximize the potential of our respective program schedules and at its very core enhances our capacity to continue to meet the important cultural and public policy objectives of the Broadcasting Act.
LISTNUM 1 \l 198 The combined power of conventional and specialty television has already been proven. One of the most evident successes is "Corner Gas," which was actually developed at Comedy Network and then moved to CTV when it became clear there was mass hit potential.
LISTNUM 1 \l 199 That same potential can be envisioned when one looks at the properties of Alliance Atlantis. For example, "Slings and Arrows", the biggest winner at this year's Gemini Awards. Imagine giving all of Canada a chance to enjoy that show on Global's prime time.
LISTNUM 1 \l 1100 Or from History Television, the opportunity to share a few of their spectacular documentaries that have been produced to commemorate our country's history, be they about Vimy Ridge or Remembrance Day.
LISTNUM 1 \l 1101 And it can work both ways. Remember that a huge hit on conventional television delivers upwards of about 3 million people, but that is only 10 per cent of Canadians. So think of our new hit Canadian comedy "DA Kink In My Hair" having another chance to be enjoyed by even more people on Showcase.
LISTNUM 1 \l 1102 We are acquiring channels that have delivered a full spectrum of quality programming in a variety of genres and, when used as strategically and selectively by aligning our programming commitments and expertise, we can ensure that Canadian shows are seen by more people, thereby growing ratings, increasing the likelihood of renewals and, hence, the building of long‑term hits. And long‑term hits built on ratings success drives revenue which goes directly back into the Canadian production community. Everybody wins.
LISTNUM 1 \l 1103 Walter.
LISTNUM 1 \l 1104 MR. LEVITT: Thanks, Barb.
LISTNUM 1 \l 1105 Commissioners, as you know, the role of marketing and promotion is to take programs we have produced or acquired and turn them into hits.
LISTNUM 1 \l 1106 At CanWest we are fortunate to have a unique and powerful mix of media assets that would be the envy of any marketer. Whenever we set out to launch a new Canadian program we have the ability to tap into these media assets to ensure our shows become hits.
LISTNUM 1 \l 1107 For example, we run ads in our CanWest newspapers across the country; we promote our shows on our popular websites, including Canada.com generating over 4 million unique visitors each month; we work closely with our colleagues at Entertainment Tonight Canada who always support our original Canadian productions; and perhaps most importantly, we strategically use our own content platforms including Global and "E" to aggressively promote our new programs.
LISTNUM 1 \l 1108 Because of the reach of our two conventional networks we can ensure our program launch messages reach millions of Canadians from coast‑to‑coast.
LISTNUM 1 \l 1109 Commissioners, before joining CanWest two years ago I spent eight years leading the marketing team at Alliance Atlantis. I was fortunate to have the opportunity to launch numerous successful Canadian programs, including "Trailer Park Boys" on Showcase, "Pioneer Quest" on History Television and "Holmes on Homes" on HGTV.
LISTNUM 1 \l 1110 During my years at Alliance Atlantis, I can remember sitting in numerous meetings with the marketing team brainstorming the most effective ways to market our original Canadian programming. No matter what the campaign, we always seem to face the same challenge: there never seemed to be quite enough money or quite enough reach on our own specialty networks to effectively promote our new shows.
LISTNUM 1 \l 1111 I remember that in almost every discussion one theme always seem to emerge: If we only had access to conventional TV airtime or newspaper space we could really make an impact with all of our new Canadian program launches.
LISTNUM 1 \l 1112 This proposed transaction will finally provide Alliance Atlantis with the reach, resources and impact to ensure more of its Canadian programs are hits. If the 13 Alliance Atlantis networks were to join the CanWest family, the value we would bring to the marketing of their original Canadian productions would be without compare anywhere in this country. Simply put, CanWest is the only company that can bring this kind of weight and exposure to these programs and networks.
LISTNUM 1 \l 1113 As an example, last year Showcase launched a terrific Canadian drama, "Billable Hours". The show is now in its second season and is garnering respectable ratings, but isn't yet they hit it deserves to be. To some extent this is because it doesn't have access to the promotional strength it needs to draw larger audiences.
LISTNUM 1 \l 1114 So if a show like "Billable Hours" were launched in a world where CanWest and Alliance Atlantis were one company, in addition to the campaign it would receive on Showcase itself, we would also promote the program on Global and E! for its 10‑week run.
LISTNUM 1 \l 1115 We would also provide coverage on Entertainment Tonight Canada and promote it during our morning shows and during news breaks. We would also run ads in CanWest newspapers nationally and across the CanWest websites.
LISTNUM 1 \l 1116 Based on fairly conservative media estimates, the additional value of marking "Billable Hours" across CanWest conventional networks, newspapers and websites would represent about $5 million, whereas currently we estimate that the promotional campaign for the show was in the $1.5 million range.
LISTNUM 1 \l 1117 There is no doubt that the ability to increase the promotional weight of "Billable Hours" more than three times its current value would help grow audiences and viewing to this quality Canadian program.
LISTNUM 1 \l 1118 As a marketer, when I think about the combined impact of the Alliance Atlantis and CanWest assets I see tremendous upside for the promotion of Canadian programming. There is no doubt in my mind that CanWest is uniquely positioned as the best and most logical buyer of these 13 networks.
LISTNUM 1 \l 1119 MR. ASPER: Commissioners, you have heard all the reasons why we believe this transaction represents the best possible proposal under the circumstances. Over the last three decades CanWest has grown from a small regional broadcaster to one of the largest integrated media companies in Canada.
LISTNUM 1 \l 1120 Seven years ago the Commission approved our acquisition of the WIC television assets and as part of the transaction we committed to spend over $89 million in programming enhancements, training, education and social benefits for the Canadian broadcasting system. We kept our word. We spent every dollar, as we said we would, and then some.
LISTNUM 1 \l 1121 As a result of CanWest ownership of the WIC stations, we restored local programming in both Hamilton and Victoria and we launched a much needed third national news voice in this country.
LISTNUM 1 \l 1122 Global National has now become the most watched national newscast in the country and, I might add, Commissioners, that it was a benefit in the transaction. It was only supposed to go for five years, but despite that we have continued the program and it will continue well into the foreseeable future.
LISTNUM 1 \l 1123 This was no small accomplishment, given the strength and historical stronghold of both CBC and CTV in this area, but we did it.
LISTNUM 1 \l 1124 Our local newscasts are strong in every market in which we operate, benefiting from the strength of the national news‑gathering capabilities that we have in our company and the Global National team as well.
LISTNUM 1 \l 1125 CanWest's interactive group provided the technological support to expand our news presence onto the web and mobile platforms. We have made major investments in infrastructure and Canadian talent in order to compete in the national news game. In fact, since we launched our spending has almost tripled from the original investment we made in 2001.
LISTNUM 1 \l 1126 But none of this would have been possible without Global consolidating with WIC in 2000, and the same opportunity for the system exists here. By uniting our distinct yet complementary television services we will be creating a combined entity that will be much better positioned to compete in a highly fragmented and integrated media environment and, at the same time, continue to meet important cultural and social goals for the benefit of our Canadian audiences, the independent production sector in Canada, and the system overall.
LISTNUM 1 \l 1127 Commissioners, we thank you for your attention and we look forward to your questions.
LISTNUM 1 \l 1128 THE CHAIRPERSON: Thank you, Mr. Asper.
LISTNUM 1 \l 1129 Attached to your presentation are some charts.
LISTNUM 1 \l 1130 Can you explain to us what these charts are, why they are here and what purpose they serve?
LISTNUM 1 \l 1131 MS BELL: The charts that we have attached are representative of the puts and calls and we just attached them for guidance when you are asking your questions. We just thought they might be helpful.
LISTNUM 1 \l 1132 THE CHAIRPERSON: All right. Thank you.
LISTNUM 1 \l 1133 I always appreciate a picture. It is much easier.
LISTNUM 1 \l 1134 This is a very complicated transaction so we will ask you about control primarily, programming synergies, valuation and benefits.
LISTNUM 1 \l 1135 Let me start with control, assisted by my colleague Mr. Katz.
LISTNUM 1 \l 1136 You have in front of you CRTC Exhibit 1, which on the very first page sort of tries to capture in one picture the entire transaction.
LISTNUM 1 \l 1137 Do you have it in front of you?
LISTNUM 1 \l 1138 MR. ASPER: I'm getting it in front of me. Just a minute.
LISTNUM 1 \l 1139 THE CHAIRPERSON: Sure.
LISTNUM 1 \l 1140 MR. ASPER: Okay, I have it now. Thank you.
LISTNUM 1 \l 1141 THE CHAIRPERSON: As you can see it shows CanWest and Goldman Sachs putting in their respective investments and then it shows the Shareholders Agreement which governs the relationship with 66.7 per cent resting in CanWest and 33 per cent in Goldman Sachs. Then you have the regulated entities, which is basically what you are acquiring from Alliance Atlantis. On the left‑hand side you have the contributed business, which is your existing regulatory business that you want to contribute in 2009.
LISTNUM 1 \l 1142 Now, if I look at this chart it is clear that the Shareholders Agreement will govern the relationship between the two key shareholders, CanWest and Goldman Sachs.
LISTNUM 1 \l 1143 The Management Agreement, having looked at it, basically suggests that CanWest is going to run the regulated entities as well as the contributed.
LISTNUM 1 \l 1144 What I don't see as an Executive Committee. Where exactly are you going to meet, discuss and do things?
LISTNUM 1 \l 1145 It strikes me that what you call it euphemistically a Reporting Committee is de facto the Executive Committee. It will have five members, three from CanWest, three from Goldman Sachs. To the extent there are issues you have to discuss, et cetera, that is a forum where it is going to take place.
LISTNUM 1 \l 1146 Is that correct?
LISTNUM 1 \l 1147 MR. ASPER: There is no Executive Committee, Mr. Chairman.
LISTNUM 1 \l 1148 The Reporting Committee doesn't have any decision‑making power, it is really simply a committee that receives information.
LISTNUM 1 \l 1149 There will be four Board meetings per year and that is where any substantive matters would be discussed.
LISTNUM 1 \l 1150 Typically the Reporting Committee will meet prior to or just after the Board meeting. Effectively they may be part of the same meeting, but any Board decisions would be taken as part of a formal Board session.
LISTNUM 1 \l 1151 THE CHAIRPERSON: So they will be coterminous, the meetings of the Reporting Committee and the Board?
LISTNUM 1 \l 1152 MR. ASPER: Yes, most likely. I would not foresee any separate meeting of a Reporting Committee that wasn't going to take place at the same time as a Board.
LISTNUM 1 \l 1153 THE CHAIRPERSON: I understood the Reporting Committee was the idea to monitor, to make sure what's going on here, what's going on in the contributed business, what's going on in the regulated entity, making sure ‑‑ Goldman Sachs obviously wants to make sure that their investment is being applied in the proper manner, et cetera.
LISTNUM 1 \l 1154 So if that's not the purpose, what is the purpose of the Reporting Committee?
LISTNUM 1 \l 1155 MS MARTIN: Well, as I say, it is simply to receive information.
LISTNUM 1 \l 1156 CanWest has five members of that committee and Goldman has two, as you know, and the Board has three CanWest members and two Goldman members. To say they would be coterminous may not be entirely accurate. They would be back‑to‑back potentially, just for ease of travel.
LISTNUM 1 \l 1157 THE CHAIRPERSON: Or in between. Right?
LISTNUM 1 \l 1158 MR. ASPER: Pardon me?
LISTNUM 1 \l 1159 THE CHAIRPERSON: Or in between Board meetings?
LISTNUM 1 \l 1160 MR. ASPER: No. I doubt that there would ever be a reporting committee between Board meetings.
LISTNUM 1 \l 1161 THE CHAIRPERSON: Is there anything preventing them from meeting in between?
LISTNUM 1 \l 1162 MR. ASPER: No.
LISTNUM 1 \l 1163 Maybe I'm not ‑‑
LISTNUM 1 \l 1164 THE CHAIRPERSON: Mr. Asper, I am not trying to fence with you, I am trying to understand how you are doing this.
LISTNUM 1 \l 1165 If I was Goldman Sach, I would be very worried that my investments are being applied properly.
LISTNUM 1 \l 1166 Where is the forum?
LISTNUM 1 \l 1167 One forum, obviously, is a Board meeting, and you said it meets every three months. That is a long time in between, et cetera, unless you want to call an extraordinary meeting.
LISTNUM 1 \l 1168 You are going to have this reporting committee, and if there are issues, they are going to be discussed there. And then you are only going to say, "Len, I am not happy with what you are doing here," or, "I think this is great," or whatever the issue happens to be, "Explain this to me."
LISTNUM 1 \l 1169 Isn't that what the whole idea of the reporting committee is about?
LISTNUM 1 \l 1170 MR. ASPER: No, I don't think so. I think the reporting committee is simply to be ‑‑ it may be a vehicle. If there is a problem, it could be used more frequently.
LISTNUM 1 \l 1171 But, as far as we intend ‑‑ and I can't recall exactly what the agreements say about times of meetings, but, practically speaking, the reporting committee will not meet ‑‑ is not intended to meet between Board meetings.
LISTNUM 1 \l 1172 It is certainly not expected to function as an executive committee, as you suggested at the outset. An executive committee is usually something that is delegated authority by a Board, and that is certainly not the case here.
LISTNUM 1 \l 1173 THE CHAIRPERSON: If I understand correctly, the reporting committee ‑‑ there are no records being kept for this, and there are no rules of procedure or anything. It is just, as you say, a monitoring committee.
LISTNUM 1 \l 1174 MR. ASPER: I might, for the technical operations of the committee, turn to my left and ask if Tom or Richard have any comments on that role.
LISTNUM 1 \l 1175 MR. LEIPSIC: Mr. Chairman, if I might ‑‑ I am Richard Leipsic, general counsel.
LISTNUM 1 \l 1176 In fact, the reporting committee has already met on one occasion. It does keep proceedings. It does keep records.
LISTNUM 1 \l 1177 The primary purpose behind the reporting committee is to recognize that the level of investment is at the CW Investment Co. entity, of which there is a Board of Directors which will make all decisions that one would expect of a Board.
LISTNUM 1 \l 1178 There is, however, obviously, the obligation of CanWest to contribute to the contributed business in 2011.
LISTNUM 1 \l 1179 To the extent that Goldman Sach would like to have some perspective and visibility into that business, because they do not sit on the Board of CanWest in this diagram, we recognized the opportunity for them to receive information and to have some insight. Hence we created the reporting committee.
LISTNUM 1 \l 1180 But the reporting committee is, really, simply to be able to have insight and to be able to obtain information with regards to the contributive business, per se, that it wouldn't normally, for fiduciary obligations and confidentiality reasons, have by virtue of its sitting on the Board of CW Investment Co.
LISTNUM 1 \l 1181 THE CHAIRPERSON: You just made my point. That is exactly what I am getting at. This is the way that Goldman Sach finds out what is going on with the contributed business that it doesn't get by virtue of being on the Board.
LISTNUM 1 \l 1182 Therefore, I think there should be some transparency here and some record.
LISTNUM 1 \l 1183 I don't understand why the reporting committee's minutes are not being kept and why there aren't very clear rules as to how the reporting committee functions, because it is another way that Goldman Sach has access to what is going on in the contributed business.
LISTNUM 1 \l 1184 MR. LEIPSIC: You are right, Mr. Chairman, access, but the decisions associated with the way in which the contributed business is operated reside, obviously, with CanWest.
LISTNUM 1 \l 1185 THE CHAIRPERSON: I don't dispute that, but if you have access you can comment on it, et cetera, and CanWest, having its biggest investor being concerned on something, presumably, will take that into account.
LISTNUM 1 \l 1186 That is why I said that it's a de facto executive. They may not make decisions, but this is where the big issues can be raised, can be aired, can be discussed. The decision later on may be taken formally at the Board level, but this is sort of ‑‑ exactly as you mentioned. Information will be available to them, but it will not necessarily be available at Board meetings.
LISTNUM 1 \l 1187 MR. LEIPSIC: That's correct, Mr. Chairman.
LISTNUM 1 \l 1188 As I noted earlier, there are proceedings and there are minutes taken of the reporting committee. We had a meeting, I think, earlier in October, for the very purpose, as you point out, to be able to have some visibility.
LISTNUM 1 \l 1189 THE CHAIRPERSON: I don't think I have to beat a dead horse. I think you got my point. I think the reporting committee, the way it's set up here, and the key role, needs a little bit more structure and transparency.
LISTNUM 1 \l 1190 Let's move to the main thing, which is the Board itself. Everything is governed by the Shareholders' Agreement, and the shareholders, not surprisingly ‑‑ it's a given that Goldman Sach, having a majority of the investment but a minority of the votes, gives them some special rights. Some of them are veto rights, et cetera.
LISTNUM 1 \l 1191 I am looking particularly at Section 4.7 of the Shareholders' Agreement.
LISTNUM 1 \l 1192 First of all, 4.7(b) essentially sets out what are the veto rights of Goldman Sach, and they require the approval of each of the directors of Goldman Sach, i.e., both members have to agree.
LISTNUM 1 \l 1193 The Board normally works by majority, but if any of these issues come up, both Goldman Sach members have to agree. Why both?
LISTNUM 1 \l 1194 This is more than a veto, this is sort of a special veto.
LISTNUM 1 \l 1195 If you have a majority of one ‑‑ let's say there is a division between the two Goldman Sach directors. That's not good enough. You need both of them to agree.
LISTNUM 1 \l 1196 Can somebody explain to me why that is required?
LISTNUM 1 \l 1197 MR. ASPER: I think, first of all, it is probably not germane whether it is one or two Goldman Sach directors that have the ability to block something.
LISTNUM 1 \l 1198 I think the overall philosophy underlying this section is that, to some extent, Goldman Sach has the right to have some protection over the asset in which it has invested in terms of what it invested in.
LISTNUM 1 \l 1199 It invested in something, and I think it is fairly standard and expected that they would have the right to ensure that what they end up with over time is roughly the same thing.
LISTNUM 1 \l 1200 From our perspective, there is a significant degree of latitude for us to operate the business and manage the strategy with these, and we found these vetoes in this section to be very de minimis from our perspective.
LISTNUM 1 \l 1201 So, yes, there are a few things, but I think, as a lender, if you will ‑‑ whatever you want to call their stake ‑‑ these are very similar to things that are found in banking debt covenants as well.
LISTNUM 1 \l 1202 THE CHAIRPERSON: I will get to that in a second.
LISTNUM 1 \l 1203 First of all, if it's not germane, why is it there?
LISTNUM 1 \l 1204 You say that it's not germane whether it's one or both. In that case, why do you specify that it has to be both?
LISTNUM 1 \l 1205 MR. ASPER: The principle there was simply one to provide Goldman Sach with a veto.
LISTNUM 1 \l 1206 THE CHAIRPERSON: Okay. Secondly, I agree with what you just said. There are standards and such things as changes in the articles of the bylaws, changes in the authorized issued capital, et cetera, and issues of allotment on redemption of the purchase.
LISTNUM 1 \l 1207 I quite understand that. But then you have something which is very strange to my mind. You have, first of all, a general one, which basically says that the incurrence of any material liability, other than indebtedness, other than the ordinary course of business ‑‑ with material liability not being defined.
LISTNUM 1 \l 1208 Anything material requires ‑‑
LISTNUM 1 \l 1209 On top of that, you have special demands, that are $15 million pre‑merger, $25.5 million after merger, and then $10 million with regard to any channel.
LISTNUM 1 \l 1210 What is the difference between material undefined under Section 4.7(b)(vi) and those thresholds?
LISTNUM 1 \l 1211 Why don't we have one threshold for ‑‑
LISTNUM 1 \l 1212 Let me just put it the way I see it.
LISTNUM 1 \l 1213 Goldman Sach is betting on your business acumen. You know how to run a television network. You are now acquiring specialty channels.
LISTNUM 1 \l 1214 I can see that they want to say: This is the business we are investing in. Now, before you sell any of those channels, or buy a new one, or you sell part of your network, or buy a new one, I want to have a say, because that's what I am betting on. That is the co‑asset.
LISTNUM 1 \l 1215 These co‑assets, if you sell them, I want to have a veto.
LISTNUM 1 \l 1216 That is perfectly understandable and reasonable, but that is not what we have here.
LISTNUM 1 \l 1217 First of all, anything material you can't do; and, on top of that, we have the special thresholds regarding indebtedness or purchases; and, on top of that, we have a third category dealing with channels, where we take the threshold down to $10 million.
LISTNUM 1 \l 1218 I don't understand the concept, the theory, or how all of this fits together. Maybe you could help me.
LISTNUM 1 \l 1219 MR. ASPER: I will turn to Tom and Richard in a second, but I think the general philosophy, again, comes back to the issue of ‑‑ there had to be some line drawn somewhere, in terms of where our unfettered discretion ended, and this was simply a negotiated item and, effectively, a compromise between what we might want and what Goldman Sach might want.
LISTNUM 1 \l 1220 But, from our perspective, as you negotiate an agreement, you decide what is important to you and what you must have, and you decide what is not that important. From our perspective, these thresholds give us a very, very wide latitude to do pretty much anything that we think we would foreseeably want to do strategically and operationally going forward.
LISTNUM 1 \l 1221 THE CHAIRPERSON: Let me stop you right there. If that gives you latitude, et cetera, why do you then have, over and above, the requirement for material, which is undefined and which does not have a threshold?
LISTNUM 1 \l 1222 MR. ASPER: I will ask Richard to answer that question.
LISTNUM 1 \l 1223 MR. LEIPSIC: Mr. Chairman, as I think we noted in one of the answers to the deficiencies, we indicated where the level of the liability could actually be put into monetary terms. We indicated that it would be the actual threshold amount.
LISTNUM 1 \l 1224 For instance, pre‑combination was going to be $15 million.
LISTNUM 1 \l 1225 We also noted, however, that in certain instances you cannot necessarily translate a liability into monetary terms. There may be a contract that has very onerous terms which commit the company beyond economic terms; for instance, to enter into a long‑time supply agreement at something that is not on market terms.
LISTNUM 1 \l 1226 Therefore, it was appropriate to allow the issue of materiality to have definition in circumstances when it could not be put into pure monetary amounts.
LISTNUM 1 \l 1227 THE CHAIRPERSON: I notice that you don't have a definition of materiality here along the lines of what you are suggesting.
LISTNUM 1 \l 1228 MR. LEIPSIC: I think that was on purpose, Mr. Chairman. I think people know what is material in the context of the business, and it is usually on the basis of the particular facts.
LISTNUM 1 \l 1229 Clearly, we tried, for both of our purposes, to avoid long definitions and have something that people could, in common sense, appreciate.
LISTNUM 1 \l 1230 I think we have a very appreciative understanding, as I think does Goldman Sachs, when something happens to be material, you will know it when it happens.
LISTNUM 1 \l 1231 THE CHAIRPERSON: That is relatively little comfort to me. As a regulator, I am supposed to determine who is in control here.
LISTNUM 1 \l 1232 Do you know what is material? I don't know what is material, and you don't give me any help by not giving me a definition or description other than the one explanation.
LISTNUM 1 \l 1233 I appreciate that not everything can be converted into money terms, but surely saying material ‑‑
LISTNUM 1 \l 1234 MR. LEIPSIC: I think the other thing that you probably should appreciate, Mr. Chairman, is material is noted in the context of being outside the normal course. The provisions where materiality typically arise speak about circumstances other than in the ordinary course of the business. So, there actually has to be a threshold event which occurs before we even get into the issue about what materiality is.
LISTNUM 1 \l 1235 And that is that the activity contemplated is outside the ordinary course of these businesses, which is programming, which is putting audiences and programming together. So, it has to be something typically that wouldn't involve the business as Alliance Atlantis is today operating.
LISTNUM 1 \l 1236 I think there is some protection and some comfort that you might find in those words that don't necessarily allow material liability issues to arise on every instance.
LISTNUM 1 \l 1237 MR. ASPER: Mr. Chairman, just to add very briefly to that, to the extent one tries to define material liability, it would likely end up constraining CanWest more than not because we are the ones who are in control of the business day to day. If we took a position that something was not material and Goldman took the position that something was, by operation of the agreement we would still be able to do it and their recourse at that point would be to trigger an arbitration section, which is something one does very rarely and very deliberately only when it's a last resort.
LISTNUM 1 \l 1238 THE CHAIRPERSON: I am not trying to be difficult here. I want you to succeed. But I want to make sure that you can exercise your judgment and Goldman Sachs don't say, hey, this is material, you didn't consult me, I have a veto here.
LISTNUM 1 \l 1239 I hear you explanation; I hear the explanation of your counsel. It doesn't give me much comfort, as I said.
LISTNUM 1 \l 1240 On top of that, these threshold amounts, how did you come to pick these amounts? The transaction is $1.4 billion, and you are saying a veto right $50 million pre‑merger, $22.5 million post‑merger. That is less than 1 per cent.
LISTNUM 1 \l 1241 That is material?
LISTNUM 1 \l 1242 MR. ASPER: I think again, Mr. Chairman, this was a function of a negotiated number. The transaction may be large, but it is comprised of a number of relatively small assets that together create a much larger entity.
LISTNUM 1 \l 1243 So, there are, as you well know, a number of very small and growing specialty channels that are part of the television stations within the Global and E! groups. Again, it comes back to the overriding philosophy and objective of Goldman to not run the business but to at least have the security package over which they have an investment relatively protected within certain parameters.
LISTNUM 1 \l 1244 Again, when we look at the channels individually, the assets individually in the group, we find these thresholds are very manageable for us, and they don't constrain us in any way that we think would be damaging to our objectives.
LISTNUM 1 \l 1245 THE CHAIRPERSON: When you go and make your annual trip to Hollywood to buy programming rights, et cetera, you stay underneath these limits?
LISTNUM 1 \l 1246 MR. ASPER: That wouldn't be part of it because that would be the ordinary course of business.
LISTNUM 1 \l 1247 THE CHAIRPERSON: You are telling me you are spending more than $10 million to buy programming rights for one of your specialty channels that wouldn't be caught by this?
LISTNUM 1 \l 1248 MR. ASPER: For one of the channels or from? Sorry.
LISTNUM 1 \l 1249 MS BELL: Chairman, the threshold limits only apply to things that are outside of the ordinary course of business, and programming would not fall in that category. Programming would be within the ordinary course of business, so it wouldn't apply.
LISTNUM 1 \l 1250 MR. ASPER: I think that goes for a whole raft of things, a whole array of things that the business does as part of its routine of being operated.
LISTNUM 1 \l 1251 THE CHAIRPERSON: Can I hear from Goldman Sachs on that point? Is that their interpretation too?
LISTNUM 1 \l 1252 MR. LEIPSIC: Yes, it is.
LISTNUM 1 \l 1253 THE CHAIRPERSON: Then how did you arrive to $10 million per individual channel and $15 million pre and $22.5 million post? There must be some reference point that you picked to come to these numbers.
LISTNUM 1 \l 1254 I appreciate it was probably a heated negotiation, and I don't ask you to disclose business confidentiality. I would just like to understand the parameters.
LISTNUM 1 \l 1255 MR. ASPER: I will turn the microphone over to the person who was actually in the room at that time.
LISTNUM 1 \l 1256 MR. STRIKE: Chairman, the threshold amounts were decided by a fairly active negotiation between the parties and in the context of the overall agreement, and they were, quite frankly, traded for a variety of other financial advantages in the agreement for us.
LISTNUM 1 \l 1257 The threshold amounts, in fact, that Goldman Sachs was originally seeking were considerably lower than the ones that we have agreed upon here. Just to be precise, the threshold amounts deal with three particular matters.
LISTNUM 1 \l 1258 One is the incurrence of debt outside the ordinary course of business; the acquisition of or investment in businesses outside the ordinary course of business; and the disposal of certain assets. To put these things in context, I don't recall us very frequently selling businesses. We are in the business of operating and owning them. Everything inside the ordinary course of business is excluded from these particular matters and, therefore, not subject to any thresholds.
LISTNUM 1 \l 1259 The acquisition of businesses in this particular sector tend to be more than $15 million or $20 million. In fact, the one that we are before you with today is $1.5 billion and no threshold amount that we would set would actually have not had us consulting with Goldman Sachs on that.
LISTNUM 1 \l 1260 So, I think it is just important to contextualize these particular things.
LISTNUM 1 \l 1261 THE CHAIRPERSON: I understand that, but I am starting off, and my starting point is control in effect means your actually majority shareholder but minority holding rights holder here, does he have the ability to exert the size of influence over the strategy, management or operation of the business or the entity?
LISTNUM 1 \l 1262 That was a test when the initial Transportation Agency were pronouncing Canadian Airlines and that has been applied ever since. Obviously I think nobody has any problem with the test. It is a question of how you apply it and looking at the specific facts.
LISTNUM 1 \l 1263 Here, if you want to trade one channel for another, for instance, et cetera, that is a strategic decision that you make because you think it makes your lineup better. If I understand it, each time you need the consent of Goldman Sachs, both members of the board, unless it happens to be less than $10 million?
LISTNUM 1 \l 1264 MR. ASPER: That's right. In the case you referred, I think the words are important because, remember, they can't cause us to do anything. The only thing we are talking about here is some constraints on our activity. So, when we talk about control, I think it is important to point out there is nothing that Goldman can cause us to do that they wouldn't otherwise want to do.
LISTNUM 1 \l 1265 There are channels certainly that do sell for less than $15 million. They are probably going to be digital channels. Again, if we wanted to do a major transaction of a group of what are currently called analogue channels, yes, that would be something we would have to go to Goldman to seek their approval to do. But I would just make the point, and I know you are going to get to this, but we would have to go to our banks at the CanWest level and the banks at the CW Media level to do anything like that as well.
LISTNUM 1 \l 1266 These constraints are typical, again, of a security holder, and so we, again, felt that they gave us sufficient latitude to make almost all of the foreseeable strategic moves we would want to make going forward anyway.
LISTNUM 1 \l 1267 We have essentially made our bet and our major move in to specialty here. From going forward, I would foresee that small add ons, small changes may come to us, but our focus for the next number of years is going to be to ultimately acquire 100 per cent of this business, but also to simply operate the business as we have.
LISTNUM 1 \l 1268 THE CHAIRPERSON: As I say, I see no problem with Goldman Sachs wanting to protect its core investments, but you made it, it seems to me, very complicated and very difficult to appreciate. If it had been written along the lines of, say, you can't buy or sell a channel or a station without their consent, because that is the core of it, that is fine. But these threshold levels, at these levels, as low as they are, do cause problems for me.
LISTNUM 1 \l 1269 Let me point out one more thing. Without the prior written consent of Goldman from April 1 '10 through the combination, you cannot sell, lease or otherwise dispose of any property or assets of the contributed business with a value in excess of $15 million or that contribute in any way to the generation of combined EDITDA of the regulated industries.
LISTNUM 1 \l 1270 There is absolutely no limit here of contributing to the EDITDA of the regulated industry and the contributed business for such year other than the ordinary course of business. Why is that there? That seems to me to basically cover anything that generates money is going to be caught by this.
LISTNUM 1 \l 1271 MR. STRIKE: Chairman, that particular section which you are looking at, 5.5(d) applies only for the 12 months prior to the combination date, and it is really a subset of (c), which precedes that.
LISTNUM 1 \l 1272 THE CHAIRPERSON: No, I understand that.
LISTNUM 1 \l 1273 MR. STRIKE: The reason for that particular more ‑‑ a tighter constraint during that period was to provide some comfort to Goldman Sachs that CanWest would not do something to damage the value of the investment in the year of the combination, because this is the year preceding the combination date and they wanted to ensure that we weren't going to unduly negatively affect the value of the business in that year.
LISTNUM 1 \l 1274 THE CHAIRPERSON: I understand that. My point is why is that section there? Why on earth would CanWest want to do that prior to the year? It seems to me it puts the direct finger of control on CanWest. You can't do any of these things, et cetera, because they contributed to ‑‑ I just don't understand why it's there.
LISTNUM 1 \l 1275 Why do you have ‑‑ what is the sort of behaviour of CanWest that you are trying to prevent which could possibly be in the interest of CanWest? I just don't understand the business rational behind this.
LISTNUM 1 \l 1276 MR. STRIKE: I think, though, there is a lot of sections and agreements that are drafted for perhaps ‑‑ would be called belts‑and‑suspenders approaches to ensure that parties don't act irrationally. I can't conceive of a situation where we would want to do what is being proposed we can't do.
LISTNUM 1 \l 1277 But notwithstanding that, minorities who aren't in control of businesses do, I believe, require some comfort that irrational behaviour won't prevail in those circumstances.
LISTNUM 1 \l 1278 MR. ASPER: Mr. Chairman, I think Mr. Cardinale would like to add something to that.
LISTNUM 1 \l 1279 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1280 MR. CARDINALE: Yes, Mr. Chairman, I think the purpose of it really was to ensure, as Mr. Strike was saying, that there is no gaming going on in terms of the ultimate ownership that would be realized in the combination.
LISTNUM 1 \l 1281 So it was really more to make sure that rational behaviour is prevailing in the ordinary course of business, that nothing outside of the ordinary course of operational activity would be going on in order to affect that ultimate ownership change ‑‑ ultimate ownership that's realized upon a combination.
LISTNUM 1 \l 1282 THE CHAIRPERSON: Now, presumably you are investing in CanWest because you think it is being run by rational people.
LISTNUM 1 \l 1283 MR. CARDINALE: Yes.
LISTNUM 1 \l 1284 THE CHAIRPERSON: That is a rational business decision.
LISTNUM 1 \l 1285 MR. CARDINALE: Right.
LISTNUM 1 \l 1286 THE CHAIRPERSON: I mean I cannot conceive why you say a rational decision. That's exactly what it would be.
LISTNUM 1 \l 1287 MR. CARDINALE: Well, again, I think this aspect as well as your earlier question, I think, it just falls under the rubric from my perspective, from Goldman Sachs' perspective, of typical minority investor protections.
LISTNUM 1 \l 1288 And you know, as we have a fiduciary responsibility to our investors I think there needs to be just some codification of basic minority protections that certainly does not at all, you know, undermine our confidence in CanWest here being rational operator. But it's more, I think, just a procedure from a minority investor protection standpoint.
LISTNUM 1 \l 1289 The thresholds that you talked about before, for example; yes, you know, this is a $1.4 billion transaction, as you point out, but I do think that if you look at the history here of CanWest's activity on a divestiture or on an acquisition basis, you know, they are really not tremendously in the business of acquiring or selling.
LISTNUM 1 \l 1290 And again, I think all we wanted to do outside of the ordinary course of their usual business activities is just ensure that, you know, we had some input if they were to get into things such as, you know, businesses, oil businesses, car businesses, anything else outside of their ordinary course of business.
LISTNUM 1 \l 1291 Again, more procedural in my view; more sort of minority investor protections but nevertheless something that I can in a straight face say to my investors that, you know, I have fulfilled my fiduciary responsibility.
LISTNUM 1 \l 1292 MR. ASPER: If I can just ‑‑ sorry, Mr. Chairman, just to put a finer point on that; again, all of these clauses you are referring come back to Goldman saying, "We bargained to get this and we would like to get this with some" ‑‑ you know, not exactly this but something reasonably close to this, you know, what they bargained for.
LISTNUM 1 \l 1293 THE CHAIRPERSON: Mr. Cardinale said, and they underline it:
"...as such, do you not see yourself as strategic investors in the broadcast asset but rather as a financial backer supporting CanWest?" (As read)
LISTNUM 1 \l 1294 THE CHAIRPERSON: And that's what I am testing, you know, that he is truly a financial backer supporting CanWest. He is not a strategic investor. He is not trying to run the business.
LISTNUM 1 \l 1295 When you look at that clause you may say it's belts and suspenders but it basically says to me, let's say, that last year prior to merger they really have a major say in your business.
LISTNUM 1 \l 1296 But I made my point. Let me come ‑‑ one other point I wanted to before I turn it over to Mr. Katz, is once the contributed business is contributed and it's together, if I understand it, the voting shares remain ‑‑ the voting powers remain the same. You have 67 percent, Goldman has 33, but you at that point in time are a much larger equity partner than before because after all you have taken the contributed businesses and added it to the mix.
LISTNUM 1 \l 1297 Why doesn't that then trigger in a proportionate readjustment in the voting shares? If Goldman Sachs can live with 66 ‑‑ 67 percent with you and 33 percent when you have a small investment, why when you now have a larger investment do they still need ‑‑ do you not get rewarded for that investment?
LISTNUM 1 \l 1298 MR. ASPER: I think we would still be under the ‑‑ I don't think we would be at the 66 percent level anyway.
LISTNUM 1 \l 1299 THE CHAIRPERSON: No.
LISTNUM 1 \l 1300 MR. ASPER: We wouldn't even have the amount of equity even that matched our vote so we just saw no reason to change the voting.
LISTNUM 1 \l 1301 I mean, there would be no ‑‑ I'm not sure what the formula would be to how we increase our voting if we have that effectively absolute control to nil today. It doesn't need to change from our perspective after the combination date. We still vote more than our equity and we still vote the two‑thirds.
LISTNUM 1 \l 1302 THE CHAIRPERSON: No, I understand that.
LISTNUM 1 \l 1303 Okay. It doesn't answer my question but I understand.
LISTNUM 1 \l 1304 Okay, Mr. Katz.
LISTNUM 1 \l 1305 COMMISSIONER KATZ: Thank you, Mr. Chairman.
LISTNUM 1 \l 1306 I am going to go back a bit before I go forward.
LISTNUM 1 \l 1307 With regard to the thresholds has the partnership, the relationship that you have with Goldman Sachs gone back the last, say, three to five years with Alliance Atlantis and seen how many times those $15 million or $22.5 million thresholds would have come up for review if you look back at Alliance Atlantis' business?
LISTNUM 1 \l 1308 MR. ASPER: Well, their capital expenditures would be roughly in the $6 million per year range. They might have jumped closer to eight or nine one year ‑‑ I think this last year or the year coming up for high definition conversion for some of their channels. But remember, again, this comes back to the ordinary course of business question.
LISTNUM 1 \l 1309 I don't know of any time from any knowledge I have of Alliance Atlantis, and there may be others who have been from the operating side who can tell me where this would have been ‑‑ there would have been an expenditure outside the ordinary course of business that was this $15 million ‑‑ that the threshold can ‑‑ I turn to Barb or Walter or others who may know.
LISTNUM 1 \l 1310 COMMISSIONER KATZ: It's always positive to go back and sort of see when this would have happened if it all. If it wouldn't have ever happened at all that's one thing, but can I ask you guys to take an undertaking to find out whether this would have hit a situation where it would have come up for that threshold number, going back say five years?
LISTNUM 1 \l 1311 MR. ASPER: Sure. Yes, we will of course, Mr. Katz.
LISTNUM 1 \l 1312 Just as I think about it, the only thing I can think of might be an investment in a channel called "The Score" and I don't know what the amount of that investment was but it would be ‑‑ that may be the only ‑‑ that's the only one I can think of.
LISTNUM 1 \l 1313 Certainly from the operating perspective I can't think of anything, but we will undertake to answer that question.
LISTNUM 1 \l 1314 COMMISSIONER KATZ: Thank you.
LISTNUM 1 \l 1315 Second question, just going back again, as I said the term "out of the ordinary course of business", have you folks taken a look as to what is in and what is out in terms of delineating those things?
LISTNUM 1 \l 1316 I heard oil and gas and banking, and I can appreciate that being out of the ordinary course of business, but as you start to bring it in on both sides is there something where you folks have sat down and said, "This is part of the ordinary course and this will be interpreted as being out of the ordinary course in case we have something in front of us?"
LISTNUM 1 \l 1317 MR. ASPER: Yes, we have discussed it. Certainly, what is within the ordinary course of business is anything that historically the business has been doing, which is the buying of program and the garnering of advertising contracts, the capital expenditures, the regular operating expenditures of the business and of course, you know, investments in specialty channels. So that I think covers, you can tell, a very wide range of things.
LISTNUM 1 \l 1318 Again, businesses outside of specialty wouldn't be included. Getting into the radio business, for example, may not be included. That's about the extent of our discussions.
LISTNUM 1 \l 1319 And from our perspective again, that CanWest ‑‑ as I said earlier to a question, the less defined that is we think the more it favours CanWest because if you go back and look at jurisprudence on ordinary course of business it is a pretty wide definition and to try to constrain it into a specific set of activities does limit us because there could be things coming in the future that logically are part of the ordinary course of business that we wouldn't think of that might not be on that list.
LISTNUM 1 \l 1320 So I would describe it as things that historically the business has done and logically the business would do to continue its existing activities.
LISTNUM 1 \l 1321 COMMISSIONER KATZ: Now, let me take that one step further and give you a for example.
LISTNUM 1 \l 1322 You touched upon radio, which I heard now is outside the ordinary course of business. New media, brand new industry evolving. We have no idea where it is going to be in 15, 10 years from now.
LISTNUM 1 \l 1323 Is new media and the things that CanWest would want to do in this face of new media come under the ordinary course of business or would it not? Was it discussed at all?
LISTNUM 1 \l 1324 MR. ASPER: Not to my recollection specifically, but I would ‑‑ certainly from our perspective it would be any new media that relate to the channels in the existing businesses that they have. Websites for home and garden TV and any mobile or further applications of the extensions of these channels that we have would be certainly ‑‑ certainly within the ordinary course of business.
LISTNUM 1 \l 1325 Going and acquiring a totally unrelated website, for example, was not something we discussed and, again, it would depend ‑‑ it would depend on the characteristic of what that website is. If it's a website that is, you know, one that gets audience, attracts audience and sells advertising or subscriptions I would think it would come very close to being, you know, within the ordinary course of business. If it was trying to acquire a search engine it's a different business model and maybe that's not ‑‑ you know I have to confess we haven't gone as far as a discussion about every possible type of new media.
LISTNUM 1 \l 1326 COMMISSIONER KATZ: Can I ask Mr. Cardinale if he feels the same way about new media and anything to do with vertical or horizontal relationships with linear broadcasting going out into new media space would equally be defined as being within the course of business?
LISTNUM 1 \l 1327 MR. CARDINALE: Yes. You know, I think picking up on something Mr. Leipsic said, you know it when you see it and I do think that ‑‑ you know, we are a financial backer to CanWest here. Our interest really is aligned and not being obstructionist in any way. It's to support.
LISTNUM 1 \l 1328 And, you know, I think Leonard makes a very good point which is something in a website associated with some of the channels, for example, defined as new media that is very supportive of branding and getting the ‑‑ helping these individual businesses, I think, is within the ordinary course.
LISTNUM 1 \l 1329 If it was an auction site, for example, a home lending site or something like that, it's not.
LISTNUM 1 \l 1330 So it's pretty easy to see what is in and what is out. I certainly would think that, consistent with what they have said, I would agree with.
LISTNUM 1 \l 1331 COMMISSIONER KATZ: It's always easy when you are first getting married ‑‑ my wife may not agree with me. You always want to contemplate what happens if you have to get to the divorce stage as well when you get involved with another partner.
LISTNUM 1 \l 1332 So I think it's important to understand these issues beforehand as well.
LISTNUM 1 \l 1333 Grey areas sound great. Two partners feel the same way about things as well until the rubber meets the road, and then sometimes you start misinterpreting or differently interpreting certain clauses.
LISTNUM 1 \l 1334 MR. LEIPSIC: If I might, Mr. Katz, a marriage, as we all hope to be long and endearing ones, I think in the context of ordinary course too you have to put it into perspective in terms of where these businesses have been and where they are going to be, where we believe that there will be an exercise of a liquidity event, of which CanWest will then become 100 per cent owner. That period of time is going to be between now and 2011 and 2012. That's three or four years from now.
LISTNUM 1 \l 1335 I think the notion of huge changes that are going to make the definition of ordinary course difficult to comprehend or interpret in a span of three or four years are not going to be difficult ones.
LISTNUM 1 \l 1336 I would agree with you that ordinary course over the span of a marriage of 20 to 30 years might be more difficult. But I don't think in this context, with all due regard, the analogy is necessarily completely appropriate.
LISTNUM 1 \l 1337 MR. ASPER: I think, Mr. Katz, also if you look at the overall picture from CanWest's perspective, remember we are not fettered in that way with the CanWest assets, with the Global Television group. We can acquire or get into other businesses freely until the combination date.
LISTNUM 1 \l 1338 Then whatever we do of course forms part of the contributed business.
LISTNUM 1 \l 1339 But again, because of the bifurcated structure of this transaction, we feel we again have enough latitude to pursue our strategic objectives.
LISTNUM 1 \l 1340 COMMISSIONER KATZ: Thank you.
LISTNUM 1 \l 1341 I have one other question going back to Mr. Cardinale.
LISTNUM 1 \l 1342 Goldman Sachs talks about being a financial investor, not a strategic investor, yet I was directed to something called the GSEP Investment Philosophy.
LISTNUM 1 \l 1343 I will quote just one line from it. I assume you know where it comes from, although I have a reference here off the Internet:
"We create value through meaningful involvement with the company's strategic decision‑making and operating philosophy."
LISTNUM 1 \l 1344 Can you comment on how that statement does or does not relate to your relationship with CanWest?
LISTNUM 1 \l 1345 MR. CARDINALE: Yes, absolutely.
LISTNUM 1 \l 1346 We have been doing this for 25 years. I personally have been doing it for 15 years. I think our investment philosophy has been consistent from the very beginning.
LISTNUM 1 \l 1347 We are a very client‑oriented firm and we look to support our management teams and our partners. If you go back and look at every investment we have made, it's been pretty clear that we do not hold ourselves out to be operators.
LISTNUM 1 \l 1348 Now just because we are not operators, my hope would be that Leonard and Kathy and the team would find me useful to them as a sounding board and as a financial backer in terms of a range of issues. But it certainly doesn't mean that I'm directing in any way the strategy of the company. I'm simply there to be a resource and that's the approach we have taken in all our company.
LISTNUM 1 \l 1349 We try to be as supportive as we can. Obviously in this our whole approach here is to be more of a minority investor. This was very much a strategy and a course of activity that Leonard and his team came up with and we were asked to try to help.
LISTNUM 1 \l 1350 And that's the spirit in which we are going to continue to be involved.
LISTNUM 1 \l 1351 The investment philosophy you have read I think is consistent with that. We are just not operators. We don't pretend to be managers. We actually have a day job and we are there to support as much as we can.
LISTNUM 1 \l 1352 COMMISSIONER KATZ: Thank you.
LISTNUM 1 \l 1353 Can I direct you all to one of your filings. It is Schedule 3.1 of the Shareholders Agreement.
LISTNUM 1 \l 1354 There is a series of vertical companies listed on here, from C.W. Investments Co. to a numbered company, 4414624 Canada Inc., C.W. Media Holdings Inc., 4414641 Canada Inc. and ultimately C.W. Media Inc.
LISTNUM 1 \l 1355 Can you tell us what each of these companies do, how they differ from each other, and particularly how the board is composed?
LISTNUM 1 \l 1356 Are they exactly the same boards for each one of these and what are the roles of each one of those companies?
LISTNUM 1 \l 1357 MR. ASPER: I will ask Mr. Leipsic to respond to that.
LISTNUM 1 \l 1358 MR. LEIPSIC: Well, Mr. Katz, first of all, in regard to the issue associated with the board, the board, as you will know, is in regard to the Shareholders Agreement referring to C.W. Investment Co. Its decisions are meant to be ones which are going to be binding on all the other subsidiaries below.
LISTNUM 1 \l 1359 I think the Shareholders Agreement specifically says that to the extent that boards have to be constituted in order to ensure that the decisions that will be made by the board, the C.W. Investments Co., they will be so constituted.
LISTNUM 1 \l 1360 So the idea is that all the decisions will flow down to the extent that they go down to C.W. Media Inc.
LISTNUM 1 \l 1361 For purposes of the reasons why the structure is there, there is really a combination.
LISTNUM 1 \l 1362 You will see, for instance, C.W. Media Holding Inc. is where the third party debt goes in there. That entity is there in place to allow the debt holders to take a particular security position which is afforded to them.
LISTNUM 1 \l 1363 The other reasons for the various other companies were primarily tax driven because they came out of the reorganization and the arrangement.
LISTNUM 1 \l 1364 So there is nothing really beyond structuring the debt in the right entity for tax reasons and the overall structure for tax reasons for those entities to be interposed between C.W. Investment Co. and C.W. Media Inc.
LISTNUM 1 \l 1365 COMMISSIONER KATZ: And the board of C.W. Investment Co. and C.W. Media Inc. are the same?
LISTNUM 1 \l 1366 MR. LEIPSIC: Yes, they are.
LISTNUM 1 \l 1367 COMMISSIONER KATZ: And they will continue to be throughout the entire term of this relationship?
LISTNUM 1 \l 1368 MR. LEIPSIC: Well, certainly their entitlement to the nomination rights that are afforded CanWest and Goldman Sachs, as pursuant the agreement, will remain in place.
LISTNUM 1 \l 1369 I think there is a provision that indicates that if Goldman Sachs' position is decreased to below I believe 50 per cent, their two board seats will be reduced to one board seat.
LISTNUM 1 \l 1370 Other than through the terms of the agreement, the boards will have to remain in tact during the continuance of Goldman Sachs investment.
LISTNUM 1 \l 1371 COMMISSIONER KATZ: And that reduction in board seats would apply to both companies at the same time?
LISTNUM 1 \l 1372 MR. LEIPSIC: Yes, it would. They are meant to be transparent in terms of their board positions.
LISTNUM 1 \l 1373 COMMISSIONER KATZ: The other three boards, are there active boards there as well?
LISTNUM 1 \l 1374 MR. LEIPSIC: They are not per se active boards but they are boards there that have all been created with the same constitution.
LISTNUM 1 \l 1375 COMMISSIONER KATZ: And the same membership?
LISTNUM 1 \l 1376 MR. LEIPSIC: And the same membership.
LISTNUM 1 \l 1377 COMMISSIONER KATZ: And presumably they all meet at the same time as well?
LISTNUM 1 \l 1378 MR. LEIPSIC: There is obviously some recognition that for practical reasons they will be combined in meeting, so those will have not seriatim meetings but they will be deemed, for purposes of convenience, to be holding their meetings concurrently.
LISTNUM 1 \l 1379 COMMISSIONER KATZ: Can we go to Shareholder Agreement 5.2, subsection (e). It is part of the covenance.
LISTNUM 1 \l 1380 The covenance here reads:
"From the date of this agreement through the combination date CanWest agrees that neither it nor any of its affiliates will enter into any new financing or refinance existing debt or capital if the terms of such financing or refinancing would restrict, prevent or otherwise materially adverse the effect, the ability of the parties to consummate the combination transaction..." (As read)
LISTNUM 1 \l 1381 And then it continues on.
LISTNUM 1 \l 1382 Does this limit CanWest's ability to pursue other business ventures, both in North America and internationally?
LISTNUM 1 \l 1383 MR. STRIKE: I think the answer is no. What this is meant to do is to say that if we do so and if we wish to finance a particular venture with indebtedness, we have to be cognizant of the fact that we do have an obligation to combine the contributed business in 2011 and therefore that any new financing arrangement has to take that into account and be effectively carved out from any other covenance that may be associated with that financing arrangement.
LISTNUM 1 \l 1384 COMMISSIONER KATZ: If there was an opportunity for you to make some investment in some aligned business, not necessarily coming under the CRTC's broadcasting jurisdiction, there would be a need for you to speak with Goldman Sachs and get relief from them.
LISTNUM 1 \l 1385 MR. STRIKE: No. I don't think that's what that says. It just says that we recognize that if we want to pursue a transaction of that nature and if we decide to finance that transaction in whole or in part using debt, in crafting that debt it is not unusual to have in debt agreements covenants that say that you can't dispose of assets without the lender's consent.
LISTNUM 1 \l 1386 In this case, what this particular section is saying is that if we do finance with debt, we have to seek from those lenders an exception to that particular restriction so that it's not an impediment to the combination of the contributed business with the C.W. Media business in 2011.
LISTNUM 1 \l 1387 It's no more than that.
LISTNUM 1 \l 1388 MR. ASPER: I think, if I can just clarify a little bit, currently the CanWest parent level, for example, there are high yield notes in place which restrict the ability of CanWest to sell Global, for example, without their consent, because Global is part of the security package over which their debt lies.
LISTNUM 1 \l 1389 So that's what this clause is trying to do.
LISTNUM 1 \l 1390 And that debt expires or reaches maturity in 2012. So by 2011 when the combination date comes, for example, there may be a tiny penalty that we would pay to terminate that debt early to be able to make the contribution. In other words, we are free to make the contribution just with a small payment to buy out that debt one year early.
LISTNUM 1 \l 1391 So from our perspective, that is one of the reasons why we couldn't necessarily do this transaction now and contribute the business today because there was this constraint in the parent company of the debt that is at the parent company.
LISTNUM 1 \l 1392 So what this clause is trying to do is say you can't go out and do that again and do something that would prohibit you from doing what you have contracted to do which is contribute this business. So you can't go raise a bunch of debt at CanWest that has some constraint in it that stops you from contributing this business.
LISTNUM 1 \l 1393 COMMISSIONER KATZ: But this goes to the point of refinancing existing debt as well and if you become a stronger company and you want to refinance and you are able to call your debt and reissue debts at a lower interest rate, this also says you have got to sit down with the Goldman Sachs folks, presumably, if I read it correctly. If I don't, then tell me.
LISTNUM 1 \l 1394 MR. STRIKE: With respect, I don't think you are interpreting this section correctly, Mr. Katz. This is saying that we have covenanted not to enter into a new financing arrangement unless it does not impede the combination. So it is really an issue for us and potentially new lenders.
LISTNUM 1 \l 1395 As I said before, it is not unusual for lenders to require restrictions on disposition of assets because they are in fact making investments, whether they are secured or not, over a package of assets that support that debt.
LISTNUM 1 \l 1396 And in fact we have in the past sought these kinds of exemptions successfully from lenders because we were contemplating transactions, either a divestiture or in this case it would be the combination of this asset.
LISTNUM 1 \l 1397 Whereas perhaps on day one when we were making this new investment that lender was looking to 100 percent of the contributed business as part of its comfort or security package, that lender would have to explicitly recognize that on the combination date in 2011 they would no longer have rights to 100 percent of the contributed business but to whatever the equity percentage was of the combined business at that date.
LISTNUM 1 \l 1398 So in fact they would be relinquishing their rights over a certain equity percentage of the contributed business but at the same time be receiving a percentage of the CW Media business which they would not have today.
LISTNUM 1 \l 1399 So this is really a matter not for Goldman Sachs. This is really a matter that we have to be mindful of in doing any refinancings of our corporate operations between now and 2011.
LISTNUM 1 \l 1400 THE CHAIRPERSON: Is that interpretation shared by Goldman Sachs?
LISTNUM 1 \l 1401 MR. CARDINALE: Yes, it is.
LISTNUM 1 \l 1402 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1403 COMMISSIONER KATZ: I want to spend a few minutes talking about the credit facilities and the bridge loan.
LISTNUM 1 \l 1404 THE CHAIRPERSON: Before you do that, I think it is time for a break.
LISTNUM 1 \l 1405 COMMISSIONER KATZ: Certainly. We will take a 15‑minute break.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1406 THE CHAIRPERSON: Thanks.
‑‑‑ Upon recessing at 1051 / Suspension à 1051
‑‑‑ Upon resuming at 1110 / Reprise à 1110
LISTNUM 1 \l 1407 THE SECRETARY: Please be seated. The hearing will reconvene.
LISTNUM 1 \l 1408 THE CHAIRPERSON: Commissioner Katz, I interrupted you, so please go back to where you were.
LISTNUM 1 \l 1409 COMMISSIONER KATZ: Thank you, Mr. Chair.
LISTNUM 1 \l 1410 I wanted to pursue the issue of the debt financing. I know that during the last two months or so Goldman Sachs has been trying to syndicate their debt.
LISTNUM 1 \l 1411 Perhaps we can get an update as to where things stand and where the financial investment of Goldman Sachs stands as of now?
LISTNUM 1 \l 1412 MR. MAGUIRE: Maybe I will speak to that.
LISTNUM 1 \l 1413 You are absolutely correct. In the period subsequent to the close of the transaction in August Goldman has been involved in the syndication of both the senior debt and the bridge. At this point all but $40 million of the bridge has been syndicated and that $40 million that remains in Goldman hands is with a variety of Goldman entities and it is not with the original leverage finance group. So they would say that that debt has been syndicated.
LISTNUM 1 \l 1414 With respect to the bridge ‑‑ sorry, that was the senior I was speaking of.
LISTNUM 1 \l 1415 With respect to the bridge, Goldman and Lehman have sold down the bridge with the exception of $48 million U.S. which also remains in Goldman hands.
LISTNUM 1 \l 1416 That represents about 16 per cent of the bridge remains with Goldman.
LISTNUM 1 \l 1417 COMMISSIONER KATZ: So when you add the bridge in with their equity investment, where are we at, just so I understand.
LISTNUM 1 \l 1418 MR. CARDINALE: Commissioner Katz, we don't think about it as adding in, mingling the two.
LISTNUM 1 \l 1419 Just to be clear, the entities affiliated with Goldman Sachs that own the pieces that Mr. Maguire spoke about, the $40 million on the senior debt and the $48 million on the bridge, are entities that I have interaction with at Goldman Sachs. These are debt investors.
LISTNUM 1 \l 1420 So we could add up our equity and those debt amounts to answer your question, but I think where you may be going is that there is no interaction at all between that.
LISTNUM 1 \l 1421 COMMISSIONER KATZ: No, I understand that. I just want to get a better sense for the total investment by Goldman Sachs in total.
LISTNUM 1 \l 1422 MR. CARDINALE: Yes. I have to add that up. I don't know.
LISTNUM 1 \l 1423 COMMISSIONER KATZ: Well, there would be another $88 million roughly.
LISTNUM 1 \l 1424 MR. CARDINALE: Right.
LISTNUM 1 \l 1425 THE CHAIRPERSON: Before we leave that point, Mr. Cardinale, what is your role in both the senior debt and the bridge debt?
LISTNUM 1 \l 1426 You were the lead syndicator. Right?
LISTNUM 1 \l 1427 MR. CARDINALE: Goldman Sachs?
LISTNUM 1 \l 1428 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1429 MR. CARDINALE: In Goldman Sachs, yes, correct.
LISTNUM 1 \l 1430 THE CHAIRPERSON: To the extent that anybody speaks for the syndicator, it will still be you if issues come up? I mean, will you have any say vis‑à‑vis the operation not as shareholder but as lead syndicator?
LISTNUM 1 \l 1431 MR. CARDINALE: One second, please.
LISTNUM 1 \l 1432 THE CHAIRPERSON: Go ahead.
LISTNUM 1 \l 1433 MR. CARDINALE: Yes, from a representative basis on the syndication front I believe in the near term, in the ensuing 12 months I think, we will be the representative, Goldman Sachs will.
LISTNUM 1 \l 1434 THE CHAIRPERSON: Your slice of the bridge is the largest single one?
LISTNUM 1 \l 1435 MR. CARDINALE: I don't know.
LISTNUM 1 \l 1436 THE CHAIRPERSON: I beg your pardon?
LISTNUM 1 \l 1437 MR. CARDINALE: I do not know.
LISTNUM 1 \l 1438 THE CHAIRPERSON: You don't know?
LISTNUM 1 \l 1439 MR. CARDINALE: John, do you know?
LISTNUM 1 \l 1440 MR. MAGUIRE: No, I don't know. We don't have the breakdown. All we know is that it has been sold down.
LISTNUM 1 \l 1441 THE CHAIRPERSON: But surely you can let us have the breakdown? Surely you can let us have the breakdown?
LISTNUM 1 \l 1442 MR. MAGUIRE: We will undertake to obtain it.
LISTNUM 1 \l 1443 THE CHAIRPERSON: What I'm trying to get at non too subtly here is whether you have any control ‑‑ not control, any way to exercise ‑‑
LISTNUM 1 \l 1444 MR. CARDINALE: The answer to the question ‑‑
LISTNUM 1 \l 1445 THE CHAIRPERSON: Any exercise or any power, leader on the bridge of the senior debt on the operation?
LISTNUM 1 \l 1446 MR. CARDINALE: No. I would think that the amount that Goldman holds is a minority percentage as you. It is 9 per cent of the senior debt and it is 16 per cent of the bridge amount.
LISTNUM 1 \l 1447 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1448 MR. CARDINALE: So there are two things I would say.
LISTNUM 1 \l 1449 Those are minority holdings and so they cannot dictate the full debt amounts, number one.
LISTNUM 1 \l 1450 Number two, I have no interaction at all. The equity side has no interaction at all with this side. So it is not looked at on an equity basis.
LISTNUM 1 \l 1451 THE CHAIRPERSON: I appreciate it is a minority from the overall, but I don't know the size of the others.
LISTNUM 1 \l 1452 MR. CARDINALE: Sure.
LISTNUM 1 \l 1453 THE CHAIRPERSON: If you are the single largest one then it is different than if there are others who are larger.
LISTNUM 1 \l 1454 MR. CARDINALE: We will get to that amount, yes.
LISTNUM 1 \l 1455 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1456 MR. MAGUIRE: Maybe I could just add on.
LISTNUM 1 \l 1457 On the senior debt there are 57 institutions that are involved in that syndication and Goldman, through three entities, holds their $40 million. So it is widely held. This is debt that trades all the time and it does not provide any control provisions.
LISTNUM 1 \l 1458 COMMISSIONER KATZ: Are they unique rights that a lead lender has over any other lender?
LISTNUM 1 \l 1459 MR. MAGUIRE: No, I would say there are not. There are certain provisions of a credit agreement which require unanimous consent of all the lenders and then there are certain other provisions that require majority, "majority" being 50.1 per cent.
LISTNUM 1 \l 1460 COMMISSIONER KATZ: Could you file what those rights are for the lead lender with us?
LISTNUM 1 \l 1461 MR. MAGUIRE: Yes, we can do that.
LISTNUM 1 \l 1462 COMMISSIONER KATZ: All right.
LISTNUM 1 \l 1463 MR. LEIPSIC: Mr. Katz, if I just might reiterate.
LISTNUM 1 \l 1464 I think Mr. Maguire indicated there were no rights provided to a lead lender, it was only a question of whether there were unanimous decisions of all the lenders or a majority.
LISTNUM 1 \l 1465 COMMISSIONER KATZ: There must be a role that they play in bringing the parties together and whether it is constituting a vote or a resolution or something.
LISTNUM 1 \l 1466 MR. MAGUIRE: Well, there is an administrative agent for both of the credits, both the senior and the bridge. Goldman Sachs is not the administrative agent under either facility.
LISTNUM 1 \l 1467 So the admin agent is typically the bank that will ultimately take the lead in organizing any type of response to the lender or any action taken by the lenders.
LISTNUM 1 \l 1468 COMMISSIONER KATZ: Goldman Sachs is not that lead?
LISTNUM 1 \l 1469 MR. MAGUIRE: No. For the senior credit General Electric is, GE Capital, and Lehman Brothers is the admin agent for the bridge.
LISTNUM 1 \l 1470 THE CHAIRPERSON: So you are going to tell us how it is sliced up, because we want to see whether Goldman is sort of the largest single one in either the bridge or the senior debt.
LISTNUM 1 \l 1471 Whether Goldman basically could lead the pack or not, that's what we are trying to find out.
LISTNUM 1 \l 1472 MR. MAGUIRE: We will undertake to provide that information.
LISTNUM 1 \l 1473 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1474 COMMISSIONER KATZ: I'm going to change topics now and go to the Programming Committee and the composition of Programming Committee.
LISTNUM 1 \l 1475 I understand that not withstanding the fact that the Programming Committee is composed of three people, senior executives of CanWest, there is a requirement in the Shareholder Agreement somewhere ‑‑ and I haven't found it right in front of me here but I'm sure you are familiar with it ‑‑ that indicates that the Board has some degree of influence on a change in membership of the Programming Committee.
LISTNUM 1 \l 1476 Can you give us some insight on that?
LISTNUM 1 \l 1477 MR. ASPER: Well, I'm certain it's ‑‑ again that is a decision that would be a majority decision, not one which requires any unanimous consent or provides Goldman with any veto.
LISTNUM 1 \l 1478 It is section 2.2 of the Management Services and Administrative Agreement. I think that's the only reference to it and it says:
"Decisions of CanWest in respect of the programming by CW Media and its subsidiaries shall not be subject to any review or revision by the Reporting Committee." (As read)
LISTNUM 1 \l 1479 COMMISSIONER KATZ: But yet I read somewhere ‑‑ and I can find it if I have to ‑‑ to remove somebody off the Programming Committee requires approval from the Board.
LISTNUM 1 \l 1480 MR. LEIPSIC: I don't think so. Let me perhaps refer you ‑‑ I can't unfortunately indicate to you, Mr. Katz.
LISTNUM 1 \l 1481 I think it was in response to Question 13 in the deficiency letter of the CRTC dated June 8, our reply was June 13, we filed a proposed resolution creating the Programming Committee wherein it specifically provides, under subparagraph (d):
"The Programming Committee shall consist of at least three members, all of whom shall be appointed by CanWest and shall be senior programming executives of CanWest and CanWest Media Inc." (As read)
LISTNUM 1 \l 1482 COMMISSIONER KATZ: All right. I have it in front of me here.
LISTNUM 1 \l 1483 MR. LEIPSIC: That hopefully will answer your question and may refresh you as to where you might have seen that language.
LISTNUM 1 \l 1484 COMMISSIONER KATZ: All right. So in clause (d) here:
"The Programming Committee shall consist of at least three members, all of whom shall be appointed by CanWest and shall be senior programming executives of CanWest and CanWest Media Inc." (As read)
LISTNUM 1 \l 1485 When representatives on this committee turn over what is a protocol for their turnover, who has to ratify it? Who has to approve it?
LISTNUM 1 \l 1486 MR. LEIPSIC: It would continue to be as provided in the resolution. It would be a CanWest appointment authority exclusively to appoint any replacements to fill any particular vacancies.
LISTNUM 1 \l 1487 COMMISSIONER KATZ: Would it require approval by the Board?
LISTNUM 1 \l 1488 MR. LEIPSIC: This would normally be a management decision of CanWest to have members of the Programming Committee established.
LISTNUM 1 \l 1489 THE CHAIRPERSON: Mr. Campbell or Mr. Wilson, we are talking about section 117 of your opinion.
LISTNUM 1 \l 1490 Can you clarify?
LISTNUM 1 \l 1491 MR. WILSON: Yes, just to clarify, to refer CanWest to their 29th June response letter, paragraph 17, wherein it was proposed that:
"Any decision respecting the removal of members of the Programming Committee shall be made by a majority vote of the Board of Directors of CW Media Inc." (As read)
LISTNUM 1 \l 1492 I believe that is what Vice‑Chairman Katz is referring to.
LISTNUM 1 \l 1493 COMMISSIONER KATZ: Yes, thank you for that correction, James.
LISTNUM 1 \l 1494 And that would be a simple majority of course over which CanWest obviously would have the opportunity to ensure that the resolution that we had filed earlier was put into place which would effectively mean the majority would be appointed by CanWest.
LISTNUM 1 \l 1495 COMMISSIONER KATZ: To the extent that Goldman Sachs has no involvement at all in programming, why would it have to go to the Board? Notwithstanding the fact that CanWest has a majority of the Board, why would it have to go to the Board for that approval?
LISTNUM 1 \l 1496 MR. LEIPSIC: Well, we think it is probably important for the Board because of the significance of programming per se to have some input into the constitution of that.
LISTNUM 1 \l 1497 It's not an insignificant capacity and function that the Programming Committee runs.
LISTNUM 1 \l 1498 COMMISSIONER KATZ: But to the extent that it goes before the Board, then there is dialogue and discussion and there is opportunity to balance interests and rights at a Board meeting that Goldman Sachs might bring to the table.
LISTNUM 1 \l 1499 I guess I'm just trying to understand, if the programming is totally independent and totally Canadian and totally within the rights of CanWest to manage, why would it have to go to the Board as opposed to a senior team of CanWest executives?
LISTNUM 1 \l 1500 MR. LEIPSIC: Mr. Chairman, I think we can certainly take under advisement, if you wish, the notice of reconstituting the appointment authority to be one in which it was effectively available to CanWest alone, but ultimately ‑‑ and that would be, presumably, one of its added authorities that it would have under the management agreement, because that would be the appropriate place, I think, to contractually provide for it.
LISTNUM 1 \l 1501 We haven't consulted with Goldman Sachs on the issue, but I would dare say, because they appreciate that this is ultimately a CanWest decision, that they would have no particular objection to ensuring that the appointment of members to the programming committee was an exclusive CanWest decision.
LISTNUM 1 \l 1502 COMMISSIONER KATZ: Between now and tomorrow, when you come back, you may want to think about that as well.
LISTNUM 1 \l 1503 MS BELL: Vice‑Chairman Katz, may I interrupt for just a second?
LISTNUM 1 \l 1504 There is one clarification that we wanted to make with regards to the programming committee. We did state that it was going to be three members of the CanWest executive team, but, in fact, it would be our preference if it could be five members.
LISTNUM 1 \l 1505 Also, the composition of the programming committee would be consistent with the direction on foreign ownership, which means that out of the five members, one of them could not be a Canadian citizen.
LISTNUM 1 \l 1506 It is to take into account the fact that Kathy Dore, the President of the operations, is not a Canadian citizen, and since all of the people who would be sitting on that programming committee would be reporting to her, ultimately, it wouldn't make a whole lot of sense if she wasn't part of that committee.
LISTNUM 1 \l 1507 And this is consistent with past practice. The Commission has done this in the past, I believe, in the case of Fundy and ‑‑ there is another precedent out there.
LISTNUM 1 \l 1508 COMMISSIONER KATZ: Perhaps you could put all of that in a package for us tomorrow.
LISTNUM 1 \l 1509 MS BELL: Yes. I just wanted to say that for the record.
LISTNUM 1 \l 1510 COMMISSIONER KATZ: Thank you.
LISTNUM 1 \l 1511 On the issue of the Board and quorum ‑‑ I want to pursue the issue because quorum is necessary for Board ratification, but if I look at the two clauses in the Shareholders' Agreement dealing with quorum, if there is no quorum in the initial meeting, then it is reconvened upon a certain notification period ‑‑ five days in this case ‑‑ at which quorum shall be the majority of the directors.
LISTNUM 1 \l 1512 And I look at Clause 4.4, as well as the shareholder one a little further on.
LISTNUM 1 \l 1513 What that could imply, hypothetically, is a reconstitution, with two members of Goldman Sach and one member of CanWest.
LISTNUM 1 \l 1514 Can you comment on whether you folks see a problem with putting in an amendment that basically would insist upon and require a majority of CanWest representatives at a Board meeting that constitutes a quorum?
LISTNUM 1 \l 1515 MR. ASPER: I will just make a general comment. That clause is really there to ensure that Goldman Sach is not able to hold up a meeting of the Board.
LISTNUM 1 \l 1516 But, I think, again, in making any change, we will certainly take that under advisement.
LISTNUM 1 \l 1517 There are two parties to this agreement, of course, so ‑‑
LISTNUM 1 \l 1518 If I could clarify what you are asking, you are suggesting that it be changed to ensure that if the Board is reconstituted, there is a majority of CanWest representatives at that second or subsequent meeting?
LISTNUM 1 \l 1519 COMMISSIONER KATZ: That's correct.
LISTNUM 1 \l 1520 MR. ASPER: Richard, do you have any comment?
LISTNUM 1 \l 1521 MR. LEIPSIC: No, I think that Mr. Asper noted properly that it is worthwhile for us to consider it, and we would obviously be in a position to respond to you later in the proceedings.
LISTNUM 1 \l 1522 COMMISSIONER KATZ: Thank you.
LISTNUM 1 \l 1523 Could I refer you to Article 5.2(b) of the Shareholders' Agreement.
LISTNUM 1 \l 1524 The second half of that article reads as follows:
"The parties will work in good faith to attempt to obtain a step‑up in bases for U.S. tax purposes for the assets of the combined business, provided that doing so would not have any adverse consequences to CanWest, its affiliates, or the corporation and its subsidiaries." (As read)
LISTNUM 1 \l 1525 It doesn't say "and the Government of Canada," and I am just wondering whether there is any situation here where, through this step‑up, there might be a situation where taxes are traded between Canadian authorities and American authorities.
LISTNUM 1 \l 1526 MR. ASPER: I am hoping that someone has the answer to that question.
LISTNUM 1 \l 1527 I know you are not looking at me, which is a good sign.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1528 MR. LEIPSIC: If we wanted to have all of the tax practitioners here who had an involvement in this agreement, we would need seven or more rows.
LISTNUM 1 \l 1529 I am not sure, Mr. Katz, what your question is.
LISTNUM 1 \l 1530 COMMISSIONER KATZ: I think what is being asked for here is to try to do what is best for the parties in order to mitigate U.S. taxes, and I want to make sure that it's not at the expense of Canadian taxes. That's all.
LISTNUM 1 \l 1531 If a dollar has to be paid, I would prefer that it be paid to our government than to the American government, speaking as a Canadian.
LISTNUM 1 \l 1532 MR. LEIPSIC: There are a couple of responses.
LISTNUM 1 \l 1533 First of all, there are treaties, as you know, between the United States and Canada, in particular, tax treaties, so that, in effect, there is a recognition that the parties do have the ability to get credit in one country for taxes that they would pay in another.
LISTNUM 1 \l 1534 Secondly, this is simply an attempt to allow Goldman Sach, in anticipation of a divestiture of their interest, or one of the liquidity mechanisms, to the extent possible, and provided it does not cause adverse consequences to CanWest, to be able to legitimately, under the Internal Revenue Code, increase the cost base associated with any subsequent disposition.
LISTNUM 1 \l 1535 I think everybody ought to appreciate that every party to every transaction should have the ability to structure their affairs in a fashion so as to minimize the tax. We actually made sure that we added the proviso that it should not, in any way, adversely affect CanWest or any of our affiliates.
LISTNUM 1 \l 1536 I think it was a fair compromise in terms of the relative positions of the parties as it related to tax.
LISTNUM 1 \l 1537 MR. STRIKE: If I could add one thing, Mr. Katz, the section contemplates specifically that the combination would take place under the auspices of section 85 of the Income Tax Act of Canada, which allows us some latitude in effecting a combination on a tax deferred basis.
LISTNUM 1 \l 1538 So, I think, in answer to your question, this would not be transferring taxes otherwise paid in Canada to some other jurisdiction.
LISTNUM 1 \l 1539 COMMISSIONER KATZ: Okay. Thank you.
LISTNUM 1 \l 1540 My last series of questions deals with what I would call the "drag‑along" provisions, ultimately, and the proposal here that once the parties have gone through the calls and the puts and the IPOs and everything, there is an agreement by both parties that CanWest would put up their share of the business in a public sale, if, in fact, Goldman Sach needs to liquidate and chooses to liquidate and has used up all alternatives available under the agreement.
LISTNUM 1 \l 1541 I wanted to know from CanWest what their view is on being brought along in this drag‑along rights process.
LISTNUM 1 \l 1542 MR. ASPER: I think the whole set of liquidity mechanisms is a package, and the first point to make is that it is designed so that every possible opportunity for CanWest to acquire the business, and for Goldman Sach to exit, has occurred.
LISTNUM 1 \l 1543 There are three calls and, effectively, two and a half put options for Goldman Sach. We only get to that stage after, from our perspective at CanWest, we have had many, many opportunities to buy Goldman.
LISTNUM 1 \l 1544 If it gets to that stage, though, in order to be able to negotiate a call option, an absolute unfettered right to buy someone's interest, typically what one has to give, at least, in that negotiation is the opportunity for the other party, if one doesn't exercise the call, to have its own way to exit the investment.
LISTNUM 1 \l 1545 Again, I think the important thing from the overall perspective here is that all of this is designed to give Goldman Sach the most opportunities to exit their investment, and CanWest the most opportunities to acquire that before we get to this stage.
LISTNUM 1 \l 1546 But, as a last resort ‑‑ or a second‑last resort, because, of course, the initial public offering is the final stage in this series of liquidity mechanisms, that is what we found acceptable.
LISTNUM 1 \l 1547 We view it as a remote possibility, because we have four years to plan for what we need and what we would like to do in 2011 to 2013.
LISTNUM 1 \l 1548 Actually, we have, effectively, six years to do that.
LISTNUM 1 \l 1549 MR. ASPER: Just to put a finer point on it, we have seven chances to purchase their interest before we get to the potential sale of the business in which CanWest is involved.
LISTNUM 1 \l 1550 COMMISSIONER KATZ: But at that point in time you are being dragged along the process, as well.
LISTNUM 1 \l 1551 MR. ASPER: Yes.
LISTNUM 1 \l 1552 COMMISSIONER KATZ: And you are accepting of that provision ‑‑
LISTNUM 1 \l 1553 MR. ASPER: Yes.
LISTNUM 1 \l 1554 COMMISSIONER KATZ: ‑‑ as part of the give and take.
LISTNUM 1 \l 1555 MR. ASPER: Yes.
LISTNUM 1 \l 1556 Again, we view that as a very remote possibility. Even in a situation where we haven't exercised the calls, or accepted their puts, or bought them on the first round ‑‑ because the seventh one ‑‑ there are three calls and two and a half or three put options. Then they say, "We want to sell the business," and we have the right of first offer to buy it at the price they suggest ‑‑ that they state. Only when we don't do that is there a chance for them to sell it, and they have the chance to sell 100 percent of the business, including our stake, at that time.
LISTNUM 1 \l 1557 That was, again, something very remote that we found acceptable.
LISTNUM 1 \l 1558 COMMISSIONER KATZ: Those are my questions, Mr. Chairman.
LISTNUM 1 \l 1559 THE CHAIRPERSON: Commissioner Arpin.
LISTNUM 1 \l 1560 COMMISSIONER ARPIN: Thank you very much, Mr. Chair.
LISTNUM 1 \l 1561 I only have one line of questioning. It has to do with your reporting committee.
LISTNUM 1 \l 1562 Usually, in an organization of the size that the new CW Investment will be, you would be producing monthly statements ‑‑ financial statements. Generally speaking, will these monthly statements be made available to Goldman Sach?
LISTNUM 1 \l 1563 MR. LEIPSIC: I will answer that question.
LISTNUM 1 \l 1564 The reporting committee is initially expected to meet on a quarterly basis. I think we have taken the notion that a quarterly reporting is certainly ‑‑ and that is the way we report, typically, to our shareholders ‑‑ a frequent enough reporting opportunity.
LISTNUM 1 \l 1565 In the world that we live in, a quarter doesn't take very long to come around, and we think that is probably an appropriate frequency for reporting.
LISTNUM 1 \l 1566 COMMISSIONER ARPIN: Even if you produce internally monthly financial statements, they will not be made available to Goldman Sachs; that is what you are saying?
LISTNUM 1 \l 1567 MR. LEIPSIC: No, I can't say that. I am saying the formality around the reporting committee is typically that it is going to meet quarterly.
LISTNUM 1 \l 1568 I think that we will typically give some opportunities, some insight into Goldman Sachs on some more frequent basis typically as to how sales on a monthly basis might be doing, how bookings might be doing. Legitimately, I think we are anxious to be able to give information if it is one which meets the spirit of it, and that is to have some visibility into the business which they don't necessarily get through sitting on the board of CW Media. I think it is appropriate.
LISTNUM 1 \l 1569 MR. ASPER: I think the point here is we don't have to, but if we choose to, we may.
LISTNUM 1 \l 1570 THE CHAIRPERSON: So we can hear from Goldman Sachs what they expect the reporting committee to do and how it is going to be functioning?
LISTNUM 1 \l 1571 MR. CARDINALE: Again, I think it is consistent with what Mr. Asper and Mr. Leipsic just described.
LISTNUM 1 \l 1572 Again, for me to be able to satisfy my fiduciary responsibility to our investors, I need to be moderately current on how the business is doing and be able to report that. So, I think it is really for those purposes that it is more fluid. I don't expect, actually, to need this kind of information on a month‑by‑month basis, but, again, as I said to you earlier, I am really here to be supportive.
LISTNUM 1 \l 1573 To the extent there are things going on in the business, if they want a sounding board on or any kind of discussion, I am available. Keeping me in the loop on a more regular basis certainly would be helpful in those circumstances than catching me cold.
LISTNUM 1 \l 1574 COMMISSIONER ARPIN: So, if at any time in between the meetings of the reporting committee things really go bad, you won't be notified of that? That is what you were saying? You will not be able to intervene before getting to the reporting committee around the board meetings?
LISTNUM 1 \l 1575 MR. CARDINALE: The nature of the relationship is such, to take your example, if things are ‑‑ quote/unquote ‑‑ really going bad, I think the professional courtesy that the CanWest team has exhibited to us is that they would let us know, not really needing to go back to look at what ‑‑
LISTNUM 1 \l 1576 COMMISSIONER ARPIN: But it is only a matter of courtesy?
LISTNUM 1 \l 1577 MR. STRIKE: Actually, the reporting obligations and the frequency of meetings are found at section 4.8 of the shareholders' agreement. The obligation is for the reporting committee to meet at least once every financial quarter and to receive financial information at that time, at least once a quarter.
LISTNUM 1 \l 1578 Those are the obligations that we have to Goldman Sachs. Anything beyond that, if we think that more frequent meetings are necessary or more frequent information is necessary would be a CanWest choice, not a CanWest obligation.
LISTNUM 1 \l 1579 COMMISSIONER ARPIN: Thank you, Mr. Chair.
LISTNUM 1 \l 1580 THE CHAIRPERSON: I think you heard us on the reporting committee. We obviously have a difference of view here. We think this is much more important. It is very much a key linking committee to make sure that Goldman Sachs is informed, which of course they are entitled to. They have a huge stake in this, et cetera, but I think the somewhat loose structure that you have and the lack of records and regular meetings and all of that is very troubling to us. We might want to look at that.
LISTNUM 1 \l 1581 Before we leave this whole issue of control, can I take you back to section 4.7(b), sub 17. First of all, it refers to schedule 9.2. I think you mean section 9.2. There is no such thing as schedule 9.2.
LISTNUM 1 \l 1582 MR. ASPER: That is correct.
LISTNUM 1 \l 1583 THE CHAIRPERSON: Am I correct that this clause gives Goldman Sachs really a veto in the acquisition that is subject to a CRTC regulation? Is that essentially the intent of this section?
LISTNUM 1 \l 1584 MR. ASPER: Mr. Chairman, because I was turning to the section when you asked the question, if you could just repeat it, please, just the last part.
LISTNUM 1 \l 1585 THE CHAIRPERSON: I am referring to section 9.2, which, of course, is confidential. Broadly speaking, am I correct to suggest that this clause gives Goldman Sachs a veto over the acquisition of other CRTC‑regulated businesses? Is that what the point of this section is?
LISTNUM 1 \l 1586 MR. LEIPSIC: Mr. Chairman, the language in that section is a little complicated. If you will allow me to take you through it, the reference in subsection 17 is to a defined term, which says the acquired competing business. In order to find the definition of "acquired competing business," you have to turn to section 9.2.
LISTNUM 1 \l 1587 I would point out that 9.2 speaks about a prohibition following the combination date. There is no prohibition on CanWest competing at all from now until the combination date. This section only applies to CanWest after the combination date, and specifically the section that we are referring to as to the acquired competing business, the definition is found in subparagraph (v) under subparagraph (b). The acquired competing business is simply a provision that, first of all, says that there is the entitlement, notwithstanding the non‑competition provision, that allows CanWest to acquire a business that happens to have a component of it, but a small component of it, which is defined as the acquired competing business.
LISTNUM 1 \l 1588 This section allows, in effect, for CanWest to buy something which, as part of its conglomerate, might have something that would be a regulated broadcasting entity as a small component. That allows CanWest to go ahead and do that, provided it is undertaken in order to effect that transaction first to try and sell the small subset of the competing business, but first offering it to the corporation.
LISTNUM 1 \l 1589 It is only in those circumstances where it is offering it to the corporation do you get back to the provision that says Goldman Sachs should be afforded the opportunity.
LISTNUM 1 \l 1590 THE CHAIRPERSON: What is Goldman Sachs' goal in this situation that you just posited? You are acquiring another business, which has a small subset which is subject to CRTC regulation. It is found in 4.7. It requires ‑‑ at 4.7(b), which I thought sets out basically the GS vetoes.
LISTNUM 1 \l 1591 MR. LEIPSIC: Yes. Then in order to acquire that larger entity which I spoke of, and then there was a smaller entity which happens to be a competing entity, there is an obligation first to try and sell the acquired competing business to the corporation so that it should have first opportunity. But it should not be forced on the entity unless Goldman Sachs votes in favour of the acquisition.
LISTNUM 1 \l 1592 THE CHAIRPERSON: It is the acquisition of the non‑regulated business is what you are talking about?
LISTNUM 1 \l 1593 MR. LEIPSIC: It is a non‑television entity.
LISTNUM 1 \l 1594 THE CHAIRPERSON: Right. It has some television aspect. So it is not the television aspect that you are concerned about. It is the non‑television aspect.
LISTNUM 1 \l 1595 MR. STRIKE: In fact, sir, the section is designed so that CanWest, after the combination date, can acquire a business, including a business that may be regulated by this Commission. If a small part of that business is a television undertaking, then that television undertaking must, according to section 9, be offered to the then combined business.
LISTNUM 1 \l 1596 The reason that ‑‑
LISTNUM 1 \l 1597 THE CHAIRPERSON: I understand. So CanWest can't buy it on its own account. It has to offer it to the combined business first of all. That is what you are telling me?
LISTNUM 1 \l 1598 MR. STRIKE: Right. But what the section says is that if we are buying a larger business, part of that business is a television undertaking, that television undertaking naturally should reside within CW Media. So, therefore, it should be offered to CW Media.
LISTNUM 1 \l 1599 What this provision in 4.17 is designed to do is that, of course, we are the buyer and the seller at CanWest, so we can influence both sides of the transaction. This is meant to say Goldman Sachs should have a right to say yes because we are nominating the price at which to put this asset in. They obviously want some protection against us putting an unduly high price on that.
LISTNUM 1 \l 1600 THE CHAIRPERSON: Thank you. I now understand how that provision works. It is very complicatedly worded, I must say. Until I heard Mr. Leipsic, I read it three times and I couldn't figure out what you were getting after.
LISTNUM 1 \l 1601 Thank you. I think that finishes. I will just reiterate where we started off with this morning, Mr. Asper. We have no control at all ‑‑ Goldman Sachs as lead investor can protect the core assets.
LISTNUM 1 \l 1602 The way the vetoes are worded, it strikes us as very restrictive, and you might want to have another look at it. As I say, I would prefer if you would have worded it in terms of core assets. If you want to do it in terms of minimum thresholds, the way you have done it, it strikes us that 1 per cent is very low. Presumably something like 5 per cent would be more appropriate.
LISTNUM 1 \l 1603 Secondly, I think the definition of "material," just saying you will know it when you see it, and if you have any problem, we will go to arbitration, that leaves it somewhat in doubt and I think you might want to see whether you can put some more flesh on the bones of "material."
LISTNUM 1 \l 1604 That is it for this section.
LISTNUM 1 \l 1605 Let's move to the next section. Commissioner Arpin.
LISTNUM 1 \l 1606 COMMISSIONER ARPIN: Thank you very much, Mr. Chairman.
LISTNUM 1 \l 1607 My first line of questions will deal with programming. I will start with this one. In your June 1st, 2007 reply to the first question, so at the top of page 2 of your reply, you wrote, and I am quoting here:
"Neither CanWest nor Goldman Sachs have taken any decisions to make any significant changes in any business of any regulated entity." (As read)
LISTNUM 1 \l 1608 COMMISSIONER ARPIN: End of my quote.
LISTNUM 1 \l 1609 My question goes to CanWest. Should the Commission conclude from that statement that CanWest sees the purchase of the regulated entities of Alliance Atlantis only as an investment?
LISTNUM 1 \l 1610 MR. ASPER: I am not quite sure what you mean by that but I ‑‑
LISTNUM 1 \l 1611 COMMISSIONER ARPIN: Well, the letter ‑‑ the first sentence of the letter says:
"Neither CanWest nor Goldman Sachs have taken any decisions to make any significant changes in the business..."
LISTNUM 1 \l 1612 COMMISSIONER ARPIN: So generally speaking, investors make the decision not to run the organization. Obviously, my line of questioning will be based on ‑‑ based on the answers you are just going to give me.
LISTNUM 1 \l 1613 MS BELL: Well, I think that perhaps it was our interpretation of the question that guided the answer and I think we may have thought that the Commission was asking us if we had any discussions with Goldman Sachs in terms of materially changing the nature of these businesses, either changing the regulatory ‑‑ the licenses, that sort of things, and we said, "No, we haven't done that."
LISTNUM 1 \l 1614 I think that's what we meant when we answered the question.
LISTNUM 1 \l 1615 COMMISSIONER ARPIN: So you don't see yourself only as an investor in the Alliance Atlantis. You are seeing yourself as the operator?
LISTNUM 1 \l 1616 MR. ASPER: Yes. We consider ‑‑ yes, we consider ourselves the active operators.
LISTNUM 1 \l 1617 COMMISSIONER ARPIN: Now, obviously, that answer is dated June 1st. Now, five more months have passed since then, so since that reply. So now that you have had the chance to look into further into the operation of Alliance Atlantis, I will say, have you ‑‑ are you contemplating making any changes regarding the programming of any of the specialty services and what are these changes and what will be the impact that you will expect from those changes?
LISTNUM 1 \l 1618 MR. ASPER: I will let Kathy Dore answer the question.
LISTNUM 1 \l 1619 In general, though, I think we have got ‑‑ acquired an asset that we think is run very well and is fulfilling a very important mandate for audiences and advertisers and so we ‑‑ we wouldn't foresee any major change. Of course, programming is ‑‑ specific programs come and go and services evolve over time but I ‑‑ you know, I think what we bought is something that is in our view a Cadillac that drives very well.
LISTNUM 1 \l 1620 And so I will pass it onto Kathy Dore for anything she wants to add on that.
LISTNUM 1 \l 1621 COMMISSIONER ARPIN: Well, as a backgrounder, and we will suggest that's what ‑‑ none of the replies that you stated says that you are contemplating sharing some programming with either Global or E!, programming that will go on either Showcase or History. So as a background to your answer I would like you to take that into consideration.
LISTNUM 1 \l 1622 MS BELL: Vice‑Chairman, I think there is a couple of components to that.
LISTNUM 1 \l 1623 The first part ‑‑ and I think we always read into your question ‑‑ that are you planning on changing the nature of services or that type of thing, and that the answer would be "no". In terms of changing the programming, obviously if you are merging two companies together there are going to be some synergies and we have discussed those briefly in response to deficiencies.
LISTNUM 1 \l 1624 So I would ask Barb Williams to perhaps give you a little more colour on the programming strategy.
LISTNUM 1 \l 1625 MS WILLIAMS: I think clearly we are excited by the opportunity to have brought these channels together and think of them strategically as a combined group of assets from the programming perspective where we are looking forward to using programming potentially differently on some services some of the time. We are looking at enjoying the leverage we have in buying programming to see if we can help support all channels a little differently than they can each on their own.
LISTNUM 1 \l 1626 So we will look to make all of the channels collectively as successfully ‑‑ as successful as they can be in the competitive market.
LISTNUM 1 \l 1627 So we are looking to bring our programming expertise and our ‑‑ and our strength in the market to bear on growing these channels successfully. But that said we understand the context in which these channels operate and the regulatory framework that they operate within and we don't anticipate adjusting that unless the framework were to change and encourage us to do so.
LISTNUM 1 \l 1628 COMMISSIONER ARPIN: Thank you. Again, in the first reply you have stated that you are planning to operate the acquired business in combination with your home business with the intent to achieve certain deficiencies and synergies.
LISTNUM 1 \l 1629 Can you describe for the Commission any programming synergies contemplated and what will be the impact of these efficiencies and synergies on viewership? What are the financial implications of these efficiencies and synergies on the acquired services?
LISTNUM 1 \l 1630 MS WILLIAMS: I think we clearly anticipate that the financial impact will be a positive one for all of the channels by taking advantage of some appropriate and selective program synergies. I think we will see them in a few distinct areas. I think one of the key things we think this transaction brings to bear is the opportunity to grow the success of Canadian programming.
LISTNUM 1 \l 1631 We have across all the services a vast amount of Canadian original programming made, most of it very selectively made to suit the brand and the channel that it's designed for.
LISTNUM 1 \l 1632 Occasionally, however, across that group of services you will find shows that actually have an opportunity to break out, to be bigger hits than they might have originally thought they could be, and that's where we look to bring to bear the power of the combined services frankly to either move a show from one service to another to allow a bigger audience to grow it or as well you can speak to just use the promotional weight; frankly, of our businesses to grow the potential of a program.
LISTNUM 1 \l 1633 I think what we believe is that conventional programming ‑‑ conventional television, as we have talked a lot at this hearing and others, is a bit of a struggling business at the moment. Nonetheless, what it does still do very well and better than anybody else, is bring the largest audience possible to a single program. It still does that better than anybody else does even though it does it less well, frankly, than it used to. At the same time we are watching audiences and advertising dollars move more aggressively to the specialty side.
LISTNUM 1 \l 1634 What we see from a programming perspective is the opportunity to use what is that remaining power and conventional broadcasting to drive the success of specialty beyond what it could have been on its own. So we really believe the financial impact will come out of the ratings when ‑‑ and hence the revenue end ‑‑ that will come out of using the power of conventional television to drive the success of specialty beyond what its expectation would have been and then at the end of the day we will have grown the financial impact of all the services by driving ratings.
LISTNUM 1 \l 1635 COMMISSIONER ARPIN: So the synergies that you are contemplating are synergies of growing the business, not in making a rearrangement of the organization?
LISTNUM 1 \l 1636 MS WILLIAMS: From a programming perspective?
LISTNUM 1 \l 1637 COMMISSIONER ARPIN: Yes.
LISTNUM 1 \l 1638 MS WILLIAMS: Yes, we are looking to grow the business. We are looking to grow the investment in Canadian content and we are looking to use the investment, that we do make informed programming as wisely and as efficiently, effectively as we can.
LISTNUM 1 \l 1639 COMMISSIONER ARPIN: Okay. And will there be also efficiencies and synergies for the current business of CanWest?
LISTNUM 1 \l 1640 MS WILLIAMS: Outside of programming?
LISTNUM 1 \l 1641 COMMISSIONER ARPIN: No, inside it within ‑‑ still within programming because what we have dealt here is the ones that will apply to Alliance Atlantis and now I'm asking you a similar ‑‑ a very similar question but regarding your over‑the‑air operation or even TVTropolis or your current specialty digital service.
LISTNUM 1 \l 1642 MS WILLIAMS: Yes, we think those opportunities flow both ways. We think there are times when we can be more successful with our conventional businesses with some strategic support from programming on the specialty side. We see that those opportunities can go both ways.
LISTNUM 1 \l 1643 COMMISSIONER ARPIN: Do you have specific examples that you could give us?
LISTNUM 1 \l 1644 MS WILLIAMS: Well, one that I mentioned in the opening remarks, actually, at the Gemini Awards this year. Slings and Arrows was a hugely recognized program ‑‑ I think got more creative awards than any other and it is a program that currently doesn't have a conventional home.
LISTNUM 1 \l 1645 And so for us to offer the opportunity to put, you know, a very, very well recognized Canadian series from a critical acclaimed point of view onto a broader platform, I think, cannot only make that show more successful but would make Global more successful along the way.
LISTNUM 1 \l 1646 COMMISSIONER ARPIN: Any other case that you could contemplate?
LISTNUM 1 \l 1647 MS WILLIAMS: Well, I think one of the pleasures of programming actually is that they are hard to predict, that every year comes with its own creative opportunities and challenges and I think the strength of bringing these two programming teams together, frankly, is to allow us to you know strategically and selectively make those choices as every programming season goes by.
LISTNUM 1 \l 1648 COMMISSIONER ARPIN: Okay. My next line of questioning has to do with ‑‑ is based on again on your June 1st response, but this time to question 19 which is on page 11 of the reply in which you wrote ‑‑ and I'm quoting:
"This will allow us to extend Canadian drama from Global TV and E! to specialty services such as Showcase and History in order to reach wider audiences." (As read)
LISTNUM 1 \l 1649 COMMISSIONER ARPIN: Could you please elaborate with specific examples of programming that you have in mind to be moved from Global towards the specialty service, because the example you gave me is moving something out of Showcase to send it.
LISTNUM 1 \l 1650 MS WILLIAMS: I think the example that comes most quickly to mind is a new comedy that Global put on its primetime schedule this fall, airs Sunday evenings, actually called "Da Kink in My Hair". And it's an urban edgy sort of all black cast comedy that we think actually could be very well supported by the Showcase brand and would expose another layer of audience to that program.
LISTNUM 1 \l 1651 COMMISSIONER ARPIN: Now, as you know, Showcase and History in rating terms are doing fairly well if you compare with other specialty services. But you are also suggesting that you will ‑‑ well, you gave ‑‑ just gave the example of Slings and Arrows. Aren't you afraid of weakening, say, Showcase?
LISTNUM 1 \l 1652 MS WILLIAMS: No, I am not, actually for a couple of reasons.
LISTNUM 1 \l 1653 One, I think, we still need to acknowledge the vast difference between the reach of conventional broadcasting and the reach of specialty. A hit on conventional television, you know, is anywhere from ‑‑ a true huge hit is two million, maybe three million at its max. A hit on specialty television is maybe 250,000. So even when a show is peaking on a strong and successful analog specialty station there is still an enormous audience out there that hasn't been exposed to that show.
LISTNUM 1 \l 1654 And I think the key to this is to do is strategically, not to just assume that one can automatically dump programming from one service to another and find success; but to be very thoughtful about the brands that those programs were first designed for, where the strength of those brands lie, and where the opportunity would be to expose an audience through another show that might ultimately drive audiences to try that brand out in a way before.
LISTNUM 1 \l 1655 So I think it is the very thoughtful combination of programming and marketing across the combined programming teams that will make this work when you are careful about it.
LISTNUM 1 \l 1656 COMMISSIONER ARPIN: Okay. And again in the same reply you wrote:
"We plan to broadcast some Alliance Atlantis popular lifestyle programming during the day time period of our conventional networks to supplement our Canadian programming offer."
LISTNUM 1 \l 1657 Could you give me some examples of what you have in mind.
LISTNUM 1 \l 1658 MS WILLIAMS: Again, I think we look to the lifestyle programming, be it about health or decorating or food content, and see in those shows sometimes an opportunity for a show that has a star that could be really underscored and grown, or a program that actually in its breadth suits a conventional platform.
LISTNUM 1 \l 1659 We think about whether there might be opportunities to try selectively again some of those shows in the day time schedules of E! and Global.
LISTNUM 1 \l 1660 We know that viewers use television channels differently at different times of the day, and we know that a different audience comes to Global's prime time than comes to an Alliance Atlantis specialty channel prime time. What we are looking to do is strategically schedule those shows so that you are not just crashing into audiences that have already seen it but are actively selectively putting shows at times of day on a different platform where you find a whole new audience for it.
LISTNUM 1 \l 1661 So that's what we would be trying to accomplish.
LISTNUM 1 \l 1662 COMMISSIONER ARPIN: I am looking at your current program grid for Global E! and I see during the day time religious programming, game shows, high tech innovation, soap opera and on E! I see types such as Countdown, Entertainment Magazine, talk shows, infomercial as well.
LISTNUM 1 \l 1663 The lifestyle programming that you are contemplating giving a second life during day time on your current over‑the‑air services, which type of programming will they be replacing?
LISTNUM 1 \l 1664 MS WILLIAMS: To be very honest, we haven't built those grids yet, so I'm speculating a little bit. It would depend on the programming line‑up and the rights that were available to move from platform to platform.
LISTNUM 1 \l 1665 Ultimately, we need to be respectful of those rights and how they have been obtained.
LISTNUM 1 \l 1666 I think one of the opportunities potentially is to move away from some of the programming that is currently on the Global grid that has been maybe in place for a long time and maybe deserves a freshening and see if by moving some of the health related programming or decorating or cooking programming over, we might entice a new audience to come to the day time of Global.
LISTNUM 1 \l 1667 COMMISSIONER ARPIN: Mr. Chair, those are my questions regarding programming. We will have later some questions regarding the benefit packages.
LISTNUM 1 \l 1668 Thank you.
LISTNUM 1 \l 1669 THE CHAIRPERSON: You are right on time. I see it is 12 o'clock.
LISTNUM 1 \l 1670 Why don't we take an hour break for lunch and we will resume at 1 o'clock.
LISTNUM 1 \l 1671 Thank you.
‑‑‑ Upon recessing at 1203 / Suspension à 1203
‑‑‑ Upon resuming at 1305 / Reprise à 1305
LISTNUM 1 \l 1672 THE SECRETARY: Please be seated.
LISTNUM 1 \l 1673 THE CHAIRPERSON: Before we proceed, Mr. Asper, we are going to see you again in 2011, if I understand correctly, when the merger takes place and the contributed assets are being rolled into C.W. Investments Company.
LISTNUM 1 \l 1674 At that point in time, if I understand it correctly, in effect the ownership goes from 100 per cent CanWest to 67, or the other way around; Goldman Sachs have required 33 per cent. That needs our approval, so we will see you then again.
LISTNUM 1 \l 1675 MR. ASPER: I am not sure because I think we would distinguish here between a change of ownership and a change of control. I don't purport to know the rules exactly, but I had not contemplated that we would see you in 2011.
LISTNUM 1 \l 1676 I'm always happy to see you. Dinner would be preferable.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1677 MR. ASPER: I don't want to take too many things under advice ‑‑
LISTNUM 1 \l 1678 THE CHAIRPERSON: I think we should clarify this because my understanding is that it would trigger a requirement for approval by the CRTC.
LISTNUM 1 \l 1679 MR. ASPER: Could I ask Grant Buchanan, the specialist at large to help?
LISTNUM 1 \l 1680 THE CHAIRPERSON: Sure.
LISTNUM 1 \l 1681 MR. BUCHANAN: You are quite correct. It will require your approval. It was the turn of phrase "we'll see you" because often these are done administratively when it is something internal.
LISTNUM 1 \l 1682 THE CHAIRPERSON: Okay. By the way, we can do lunch too at the same time.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1683 COMMISSIONER KATZ: Can I just follow up on that. The 2009 asset transfer will not require approval, in your view?
LISTNUM 1 \l 1684 MR. ASPER: Sorry, 2009?
LISTNUM 1 \l 1685 COMMISSIONER KATZ: Yes, I'm looking at Clause 5.1.
LISTNUM 1 \l 1686 MR. ASPER: Of the Shareholders Agreement?
LISTNUM 1 \l 1687 COMMISSIONER KATZ: Yes.
LISTNUM 1 \l 1688 MR. LEIPSIC: If I can answer that, the 2009 is the subsidiarization of the existing CanWest Media entities into a wholly owned subsidiary of CanWest. So there will not be any change in the ultimate ownership as part of that subsidiarization process.
LISTNUM 1 \l 1689 We will obviously be informing the CRTC of the transaction, and there may be an administrative notion of the notion that the licensees have obviously been changed per se. But it would not trigger a change in control because that event does not change in any fashion the ultimate control of the CanWest regulated entities.
LISTNUM 1 \l 1690 THE CHAIRPERSON: Okay. Thank you very much.
LISTNUM 1 \l 1691 Having clarified that, let's move on to evaluation.
LISTNUM 1 \l 1692 Commissioner Duncan.
LISTNUM 1 \l 1693 COMMISSIONER DUNCAN: There has been a lot of questions and answers on the record, so I don't have a lot of questions but I do have a few.
LISTNUM 1 \l 1694 I'm going to be referring to the Price Allocation Schedule as at August 15th and the Audited Combined Consolidated Financial Statements for the broadcasting group for the year ended December 31, 2004 to 2006.
LISTNUM 1 \l 1695 MR. ASPER: Just give us a second to access those, please.
LISTNUM 1 \l 1696 COMMISSIONER DUNCAN: I have an extra copy of the schedule if you would like it.
LISTNUM 1 \l 1697 MR. ASPER: We have probably more than one. It's just finding it.
LISTNUM 1 \l 1698 COMMISSIONER DUNCAN: Thanks, Claude.
LISTNUM 1 \l 1699 COMMISSIONER DUNCAN: Okay?
LISTNUM 1 \l 1700 MR. ASPER: All right.
LISTNUM 1 \l 1701 COMMISSIONER DUNCAN: In that schedule you allocate slightly over $1.4 billion of the purchase price to the purchase of specialty television.
LISTNUM 1 \l 1702 I understand from your June 1st response that the purchase price itself is the result of an arm's length negotiation and that there is no opportunity to reallocate the purchase price based on a subsequent valuation. We are not suggesting that that happen.
LISTNUM 1 \l 1703 In your September 17th response you indicate the purchase price was allocated 57.5 per cent to broadcast specialty and 42.5 to movie distribution entertainment.
LISTNUM 1 \l 1704 What we are trying to understand is the basis for that allocation. For example, was it done on EBITDA the net book value of fixed assets or possibly tax considerations?
LISTNUM 1 \l 1705 We are just wondering if you are able to provide us with the details of the calculation and the assumptions.
LISTNUM 1 \l 1706 MS BELL: I'm going to ask Colin O'Leary and Marlene Lock to answer that question.
LISTNUM 1 \l 1707 COMMISSIONER DUNCAN: Thank you.
LISTNUM 1 \l 1708 MS LOCK: I'm not sure I'm going to be able to answer the question to your satisfaction, and there are others here of course who were involved in the transaction itself and in terms of negotiating the relative purchase prices.
LISTNUM 1 \l 1709 My understanding is there was no mechanics to coming up with that allocation. It was not simply a multiple VBDA or any other calculation.
LISTNUM 1 \l 1710 It was a result of the parties CanWest and Goldman Sachs caucusing together for a period of time and reviewing financial information and coming up with their own determinations of the relative values of the assets, at which time an agreement was made as to how they would be valued.
LISTNUM 1 \l 1711 I think I can safely say that the allocation of the purchase price to broadcasting had nothing to do with tax considerations and anything else and it is the only asset that CanWest has any interest in. So there would be nothing in CanWest's interest to do anything other than to get the lowest price possible for the purchase of those assets.
LISTNUM 1 \l 1712 MR. O'LEARY: It is Colin O'Leary. If I might add to that.
LISTNUM 1 \l 1713 COMMISSIONER DUNCAN: Sure. Yes.
LISTNUM 1 \l 1714 MR. O'LEARY: Our role ‑‑ I am with Ernst & Young. I am a partner in the Valuation Group. Our role was to value the broadcast assets portion of the business. That was our mandate. That is what we did.
LISTNUM 1 \l 1715 The work is affirmative of the transaction price. We weren't asked to come up to the transaction price. We did an estimate of fair market value.
LISTNUM 1 \l 1716 If we had been asked to value all three components, we would have still valued the broadcast portion in the same manner, the same way. We would have had to look at them as three different business lines and three separate valuations.
LISTNUM 1 \l 1717 COMMISSIONER DUNCAN: The amounts are slightly different than were on the valuation report but can I just go back to Mrs. Lock.
LISTNUM 1 \l 1718 Did you say the objective was to keep the price as low as possible for specialty?
LISTNUM 1 \l 1719 MS LOCK: Well, that is CanWest's objective, yes, because that was the only operation that we have an interest in, so we had no interest in paying more than we had to.
LISTNUM 1 \l 1720 COMMISSIONER DUNCAN: So there is nothing more that you can give us on that? We have the valuation and we have the answers to the valuation and we were just trying to understand that number better but if that is all you can give us, that is ‑‑
LISTNUM 1 \l 1721 MS LOCK: I think the valuation goes into a lot of indicative measures of how to determine value and I think it does support the value of broadcast. So it suggests that it is fair market value for broadcast and certainly that is what we intended to negotiate with Goldman Sachs.
LISTNUM 1 \l 1722 COMMISSIONER DUNCAN: Okay.
LISTNUM 1 \l 1723 MR. ASPER: If I could just amplify. Just going back to when the transaction started, it becomes a function of two parties, we and Goldman, sitting down and saying, what does it take to acquire the group and what can each of us afford to pay for the assets which we are acquiring, all or part of.
LISTNUM 1 \l 1724 The amount paid for the broadcast group simply reflects the highest amount effectively that we were prepared to pay for those assets in an arm's length negotiation.
LISTNUM 1 \l 1725 COMMISSIONER DUNCAN: Okay. I appreciate that and I can understand that. I guess it is just when I look at a figure that comes down to $489, it infers that there is something more involved. But that is okay, I will accept what you ‑‑
LISTNUM 1 \l 1726 MR. ASPER: I am sorry, I am not sure what the reference to $489 is.
LISTNUM 1 \l 1727 COMMISSIONER DUNCAN: You see the figure on your schedule. If you read it out, $1,402,538,489 would infer there was more precision. There was more involvement coming to that number rather than two parties saying, well, all right, I agree with $1,400,250,000 and you take the balance for the other two. So that is the only thing.
LISTNUM 1 \l 1728 MR. ASPER: Well, I think it does get to be a question of a multiple of earnings plus the exact debt figure which could be right down to the cents, dollars and cents, and then transaction costs as well.
LISTNUM 1 \l 1729 COMMISSIONER DUNCAN: Would you have anything along those lines you would be willing to give us or you could give us?
LISTNUM 1 \l 1730 MS LOCK: Just in terms of the mechanics of the schedule itself, this is the mechanism that was built out on January 9th and then, as we have explained in the deficiency responses, there were certain changes to the numbers and we did at the end of the day ‑‑ that 57 and a half percent, that percentage carried forward and so that is, I guess, why we get the precision in the numbers as we simply did apply the percentage, with one exception, that there was an adjustment for $8.2 million that was added to the broadcast purchase price to reflect some cash that was retained at broadcast that was not available to repay debt.
LISTNUM 1 \l 1731 COMMISSIONER DUNCAN: Okay, that is helpful.
LISTNUM 1 \l 1732 Mr. Asper, did you want to add anything more or are you okay with that?
LISTNUM 1 \l 1733 MR. ASPER: No, thank you, that is fine.
LISTNUM 1 \l 1734 COMMISSIONER DUNCAN: Okay.
LISTNUM 1 \l 1735 Then referring to the August 15th calculation, the total purchase price allocated to specialty services is slightly in excess of 57.64 percent.
LISTNUM 1 \l 1736 I am just curious to know if the same percentage was applied to allocate the $2.2 billion in equity and the amount in debt and the amount in cash. It appears that it was but I would just like to know that it was, that the same percentage, 57.64 plus, was applied to each of the three components.
LISTNUM 1 \l 1737 MS LOCK: It was. It was applied to the total of those components. The only adjustment to that was actually 57 and a half percent plus $8.2 million. So that was ‑‑
LISTNUM 1 \l 1738 COMMISSIONER DUNCAN: So that is how it gets to 57.64?
LISTNUM 1 \l 1739 MS LOCK: That is right.
LISTNUM 1 \l 1740 COMMISSIONER DUNCAN: All right. So now when I take the ‑‑ we looked to those audited statements, which are confidential, so I will try not to say anything that I shouldn't.
LISTNUM 1 \l 1741 I understand that these are referred to as carved‑out audited financial statements. We looked to these statements to verify the debt figure on this schedule.
LISTNUM 1 \l 1742 So the first thing that we did, we took 37 and a half percent of the current portion of the term loan and 37 and a half percent represents the months left in 2007. Four a half months of 12, that is 37 and a half percent.
LISTNUM 1 \l 1743 So we took 37 and a half percent of the current portion of the term loan plus the long‑term portion of the current loan. So that is the December 31st, 2006 long‑term portion. So that related to the 2008 forward.
LISTNUM 1 \l 1744 When we added that, we got a number that is ‑‑ it is hard to know what substantially but it is quite a bit larger than the $304 million, $4.7 million shown on your schedule.
LISTNUM 1 \l 1745 I am just wondering, and you might want to go away and think about it and give us the detail but if you could just give us an explanation of why that would differ than what we see on the statement.
LISTNUM 1 \l 1746 MR. ASPER: It may be a reference to the then existing debt on the Alliance balance sheet versus the proposed debt to be added but I think it is ‑‑
LISTNUM 1 \l 1747 COMMISSIONER DUNCAN: It is possible that their debt changed from December 31st, 2006. I don't know if term loans would have.
LISTNUM 1 \l 1748 MR. ASPER: It would substantially, yes. It would but I am not sure if you are referring to that specific change, so maybe we should ‑‑ we can't say the numbers here. It is difficult to say what we will get back to you with but ‑‑
LISTNUM 1 \l 1749 COMMISSIONER DUNCAN: Okay. Well, let me just repeat what I did, okay?
LISTNUM 1 \l 1750 I took 37 and a half percent of the current portion of the long term on here plus the long term to come up with a number for total debt and it is slightly ‑‑ well, it is more than slightly larger than the $304 million. So that gives you the ‑‑
LISTNUM 1 \l 1751 MR. ASPER: Okay. Well, we will undertake to provide you with an explanation of the discrepancy.
LISTNUM 1 \l 1752 COMMISSIONER DUNCAN: All right.
LISTNUM 1 \l 1753 Then following along on that calculation, again, looking at these financial statements, the cash balance at the end of December 31st, 2005 and 2006 is pretty consistent, and that is not to say it is going to be consistent every time but at any rate the schedule that you have shown shows $113 million in cash.
LISTNUM 1 \l 1754 We would like to know if you could give us the detail of that cash broken out between specialty television and entertainment. You don't have to give it to me right now. If you could just give it to us later, that is fine.
LISTNUM 1 \l 1755 MS LOCK: Just to clarify, you are looking at the carve‑out statements, the cash that is in the carve‑out statements?
LISTNUM 1 \l 1756 COMMISSIONER DUNCAN: Yes.
LISTNUM 1 \l 1757 MS LOCK: So 59 compared to 61 ‑‑
LISTNUM 1 \l 1758 COMMISSIONER DUNCAN: Yes.
LISTNUM 1 \l 1759 MS LOCK: ‑‑ which increased to $113 million?
LISTNUM 1 \l 1760 I guess we could endeavour to reconcile that. One thing that is important to note is that the $113 million of cash included cash that was swept from the other divisions.
LISTNUM 1 \l 1761 The agreement was to accumulate the cash in Alliance Atlantis Communications Inc. and then use that cash to repay the debt. So it was not exclusively broadcasting cash that was included in the $113 million. There was cash repositioned from entertainment group.
LISTNUM 1 \l 1762 COMMISSIONER DUNCAN: That may also explain the debt difference too then perhaps. So if you could just undertake to give us ‑‑
LISTNUM 1 \l 1763 MS LOCK: Yes. The debt was ‑‑ they were making payments in excess of the required minimum repayment as well but we can endeavour to reconcile that, both the cash and the debt.
LISTNUM 1 \l 1764 COMMISSIONER DUNCAN: Okay. So they were making extra debt payments. Well, that would help if you can confirm that.
LISTNUM 1 \l 1765 One other point on the statements that I just wanted to mention to you. As you know, the Commission in determining the value of a transaction adds in the other commitments. We are not here to discuss whether we should or shouldn't do that, that is for another forum, but we are intending to add the other commitments, as we normally do.
LISTNUM 1 \l 1766 Looking at Note 24 of these statements, we see that there is ‑‑ I will just turn to it myself. That is on pages 25 and 26. We see that there is an amount there for intellectual property rights and for operating leases.
LISTNUM 1 \l 1767 We would propose to go with those numbers, adjusting just to eliminate the eight months of 2007. I just wanted to draw that to your attention in case you have any comment on that or why we should or should not use that number and maybe you will have since you had other things flowing into the cash.
LISTNUM 1 \l 1768 MS LOCK: Yes. We do ‑‑ we did anticipate that this might come up and I have prepared an updated schedule of the operating lease commitments. I was not aware that you would also consider intellectual property commitments.
LISTNUM 1 \l 1769 I know you don't want to discuss it but I guess I would say that we don't agree with the inclusion of operating leases or other operating commitments in the purchase price. They are operating expenses, they are not financing arrangements.
LISTNUM 1 \l 1770 We did have certain leases that were financing arrangements that we did acquire and those have been included in our net net figure but the operating leases are operating expenses and we don't agree with their inclusion.
LISTNUM 1 \l 1771 In addition to that, in terms of the amount, the $99 million that is shown for operating leases includes payments for common area charges, utilities, cleaning services, property taxes that are estimated in the future. Even in a capital lease situation, you would not include those amounts when you calculated the liability.
LISTNUM 1 \l 1772 COMMISSIONER DUNCAN: It refers to "leases", I am surprised to hear it includes things like that, but that's fine.
LISTNUM 1 \l 1773 If you want to give us a detail, that will help us in our arriving at a number.
LISTNUM 1 \l 1774 MR. O'LEARY: From a valuation perspective I would comment that these are really operating expenses and when you look at transactions in the marketplace and equity caps and transaction values they are a detractor, a decreaser of value. They don't add on. They don't have the kind of a leash here that really transfers the ownership. It's finite.
LISTNUM 1 \l 1775 COMMISSIONER DUNCAN: The Commission, as you know, is trying to arrive at a value for the purpose of determining the tangible benefits. For that purpose this has been the definition that has been applied. So thank you for that, though. I appreciate it. I didn't mean for you not to be able to say it. I appreciate you saying it, that's fine.
LISTNUM 1 \l 1776 MS LOCK: I will just add one more thing in terms of the schedule that we will provide and the update, is the other thing that I think would be appropriate is to calculate the present value of those future payments. The payments that are listed in the notes are the gross values. A lot of these payments, that lease ‑‑ the primary cause of that balance is a lease that terminates in 2018, so to include that undiscounted value would be inconsistent with a capital lease kind of concept.
LISTNUM 1 \l 1777 COMMISSIONER DUNCAN: Just to be consistent with what I have seen the adjustment to be, we haven't considered, I don't believe, present value, but if you want to set that out, that's fine.
LISTNUM 1 \l 1778 MS LOCK: Okay.
LISTNUM 1 \l 1779 COMMISSIONER DUNCAN: Set that out and we will consider it when we get it. That's fine.
LISTNUM 1 \l 1780 MS LOCK: Okay.
LISTNUM 1 \l 1781 MS BELL: Can I just make one clarification on the operating leases?
LISTNUM 1 \l 1782 I hear what you are saying, that the Commission has been including operating leases as part of the value, but this is a very recent development because in the past the Commission didn't used to include operating leases. This has occurred I guess in the last two or three transactions that I am aware of, but this is not an item that traditionally has been included as part of the value of the transaction.
LISTNUM 1 \l 1783 I just wanted to make clear I guess our objection is based on the fact that it seems to be a new departure from usual Commission practice in dealing with these things and it would have perhaps been appropriate to consider this type of thing in a broader context of a policy review or a review in terms of what should be included in a valuation.
LISTNUM 1 \l 1784 COMMISSIONER DUNCAN: Thank you.
LISTNUM 1 \l 1785 MS BELL: All right.
LISTNUM 1 \l 1786 COMMISSIONER DUNCAN: The other thing I wanted to talk about was synergies. Again that is part of the confidential information so we will try not to speak of the amount.
LISTNUM 1 \l 1787 But I'm looking at your letter of September 17th and the gist of it in the response to Question 21 is that the synergies you are feeling are attributed approximately equally to both Alliance Atlantis and to CanWest.
LISTNUM 1 \l 1788 But I think your argument is that the synergies shouldn't be added into the value of the transaction ‑‑ 100 per cent of the synergies shouldn't be added into the value of the transaction but only 50 per cent should be.
LISTNUM 1 \l 1789 So I'm having a little bit of trouble with that. I'm just thinking we have been talking here earlier about the shows from Alliance Atlantis that might air on conventional stations and so I think there will be synergies obviously that CanWest will benefit from, but the whole group, I just find it difficult to justify not including the full amount for the purpose of calculating the tangible benefits.
LISTNUM 1 \l 1790 So if we could just hear your comments a bit on that, that would be helpful.
LISTNUM 1 \l 1791 MR. O'LEARY: Yes. We did answer that in the written response and I think I can elaborate and it may help crystallize this.
LISTNUM 1 \l 1792 Our objective in doing the valuation was to come up with fair market value for the business and its components. That is the point as the highest price, which is consistent with the multiples.
LISTNUM 1 \l 1793 We did the same thing that we would do on any evaluation on this one. You want to work with a forecast that for the subject business includes a fair allocation of synergies. When you get into cost synergies for example they will ultimately be shared between different segments of the business because you are cutting things that they share. If you don't do that, you end up with improper financial reporting going forward.
LISTNUM 1 \l 1794 So the valuation exercise is consistent with the way that the company would ultimately report.
LISTNUM 1 \l 1795 CanWest did retain an outside consultant to help them allocate the synergies and our firm was allowed to speak to them, speak to CanWest about how that allocation was made and to get comfortable with the forecast and that it was suitable for our purpose.
LISTNUM 1 \l 1796 What we were looking for was a forecast that included the subject company's share of the synergies. That allows them to move forward in the right way. Our valuation is consistent with the way that the company will report, assuming they achieve those results.
LISTNUM 1 \l 1797 We were satisfied that that allocation was done in a reasonable manner.
LISTNUM 1 \l 1798 When we do the valuation we look at more than one approach, we look a multiples as well. You could argue the multiples are at the upper end of the scale here, but it is consistent with the size of the deal, the importance of the deal, and so on. So we were comfortable with that, but it does serve as a check. So you have one approach that is based on purely historical data, no synergies. You have another one that involves looking at the forecast which includes the Alliance synergies.
LISTNUM 1 \l 1799 There are some offsets. Any buyer would expect to achieve synergies in their own business, but there is also a lot of risk around synergies, a lot of risk around integration of the businesses and the teams and what practitioners tend to do is use reasonably low discount rates that don't really say, "Well, there is this integration risk, a lot of risks around the deal that maybe we should add onto that discount rate".
LISTNUM 1 \l 1800 So you have a reasonably conservative discount rate which partly recognizes that if you don't achieve the synergies in one business maybe you are going to get some over here. But the way businesses are priced, you just look at that subject company's forecast and you want to make sure that it is getting its fair share of the synergies.
LISTNUM 1 \l 1801 COMMISSIONER DUNCAN: I am assuming from your comments, then, that in your opinion the synergies that we have been given are conservative?
LISTNUM 1 \l 1802 MR. O'LEARY: No, no, that's not the case at all. In fact, they are approximately a third of the existing EBITDA of the business and they need to do a lot of positive change quickly to hit their forecast. There is a lot of growth in that forecast.
LISTNUM 1 \l 1803 CanWest did a very rigorous analysis of their forecast, they had senior management involved, they allowed us to review that forecast before it was complete to give our input, to compare it to historical growth trends, to compare it to other transactions that we are aware of, and we felt the overall growth was reasonable and we were comfortable that this forecast was suitable for our valuation.
LISTNUM 1 \l 1804 COMMISSIONER DUNCAN: I'm just thinking, we are not trying to influence how these numbers will be reported in the future, that is not our objective. We are just trying to arrive at a reasonable value for the purposes of calculating tangible benefits. So that is the reason that we are thinking that the full amount of the benefit should be ‑‑ of the synergies should be added.
LISTNUM 1 \l 1805 MR. O'LEARY: Yes. That is not the way we would perform these valuations.
LISTNUM 1 \l 1806 On this deal, or any other deal, we look at what the results of the subject company are going to be and the market in the rates of return and so on does allow, by having lower returns and so on, like 8 to 8.5 per cent is what the whack was for this business, which is fairly conservative for the magnitude of what has to be done here to integrate them. The market does account for that in many ways.
LISTNUM 1 \l 1807 We are comfortable that this is consistent with the way we do each and every valuation and it is appropriate to have a fair allocation and then to take that forecast cash flow for Alliance and come up with what we believe to be the appropriate discount rates and get a value. That value does jive and is approximately the same as our multiples approach. As I mentioned, we are at the upper end of the scale here, to a large extent, on the multiples that we used, but we felt that was reasonable given the size and importance of the deal.
LISTNUM 1 \l 1808 COMMISSIONER DUNCAN: I gather from your letter, your response in September, that you don't feel that any of the synergies that are going to be realized by CanWest should figure into the calculation of the transaction value for the purpose of calculating tangible benefits.
LISTNUM 1 \l 1809 MR. ASPER: From the buyer's perspective it's a bit circular, because the very existence of those synergies is what allows for a higher purchase price and therefore a higher benefits number. So you are counting them one way or the other. You are counting them, because there wouldn't be the $1.5 billion paid for the business, there would be a lower number if there weren't the synergies.
LISTNUM 1 \l 1810 I think it is also worth pointing out, further to your comment about programming, we would pay. As we move programming back and forth to different networks there is a price. The buyer, the user of that programming pays. There is transfer pricing.
LISTNUM 1 \l 1811 The issue for us why we like the transaction is the access to those programs, the ability to even do that, you still have to pay an accountant for it.
LISTNUM 1 \l 1812 COMMISSIONER DUNCAN: Just an aside to that, because I'm picking up on something that struck me when I was listening earlier.
LISTNUM 1 \l 1813 The promotion, when you promote on the other services, when you do cross‑promotion, do you bill there as well each other, even if it is on paper?
LISTNUM 1 \l 1814 MR. ASPER: We do. Yes, we do.
LISTNUM 1 \l 1815 Again, the benefit is just the access, the fact that one could do it. What's better about these being ‑‑ today we could go to Alliance Atlantis as a arms‑length party and try to acquire promotion time and vice versa on their networks, but it would be a question of whether they felt like doing it. The price might be higher. I mean there are in‑house rates and there are most‑favoured‑nation rates.
LISTNUM 1 \l 1816 So that is the benefit of the transaction, is just the access. We still have to fully account. We have two different shareholders, or different sets of shareholders between Global and CW Media in this case.
LISTNUM 1 \l 1817 COMMISSIONER DUNCAN: Thank you.
LISTNUM 1 \l 1818 MS LOCK: If I may, sorry?
LISTNUM 1 \l 1819 I look at the value of the assets for benefits purposes in the context of the total purchase price, and the total purchase price did come down from the time at which Ernst & Young did the valuation from 1447 I believe down to 1402 million, $1.4 billion. On that we have proposed to pay benefits on $1.369 billion in terms of the valuation.
LISTNUM 1 \l 1820 So in the context of the purchase price we propose to pay benefits on all the $33 million of the purchase price. When you look at the assets required outside the assets that do attract benefits, $33 million does not cover the value of those assets, so I am not sure as to the relevance of the valuation of the benefits that are going to accrue to Global Television in terms of when we have proposed to pay benefits on the acquisition price of the business.
LISTNUM 1 \l 1821 COMMISSIONER DUNCAN: I am sorry, I am just not quite ‑‑
LISTNUM 1 \l 1822 Just let me get my little schedule.
LISTNUM 1 \l 1823 COMMISSIONER DUNCAN: It seems that I have lost it.
LISTNUM 1 \l 1824 At any rate, I don't quite get your comment. Maybe you want to just ‑‑
LISTNUM 1 \l 1825 MS LOCK: I just refer back to the August 15th exhibit of the purchase price allocation, and in that allocation the purchase price associated with all of the broadcast assets is 1402, ending in 489, as you had pointed out earlier.
LISTNUM 1 \l 1826 That is the total purchase price of the acquisition, and we have, based on the valuation, proposed to pay benefits on all but $33 million of that purchase price.
LISTNUM 1 \l 1827 I am not sure ‑‑ I think the discussion of valuation of the synergies that may accrue to Global Television is a little bit academic, in that we have already proposed to pay the benefits on the purchase price.
LISTNUM 1 \l 1828 COMMISSIONER DUNCAN: Except that in that letter ‑‑ not to belabour it, but in that September letter it sounded ‑‑ I think it is clear, and it is clear from the conversation here that the synergies realized by CanWest, which represent 50 percent of the total synergies, are not factored into the calculation.
LISTNUM 1 \l 1829 MS LOCK: They are not factored into the valuation that was done by Ernst & Young.
LISTNUM 1 \l 1830 COMMISSIONER DUNCAN: Yes, and they are not factored into the calculation at this point.
LISTNUM 1 \l 1831 MR. O'LEARY: The valuation is the fair market value of the business, which is, again, the highest ‑‑ the definition, by itself, is the highest price payable by prudent parties. That is the standard we used.
LISTNUM 1 \l 1832 COMMISSIONER DUNCAN: Thank you, Mr. O'Leary, I understand that. I don't think I am questioning that.
LISTNUM 1 \l 1833 THE CHAIRPERSON: If I understood you correctly, Mr. Asper, you said that all of this is irrelevant because it is reflected in your purchase price.
LISTNUM 1 \l 1834 You wouldn't have bid that much if there weren't the synergies to your company.
LISTNUM 1 \l 1835 MR. ASPER: Yes. The way I would put it is, they are factored into the purchase price, but not the valuation. But, effectively, they are the same thing.
LISTNUM 1 \l 1836 COMMISSIONER DUNCAN: Thank you.
LISTNUM 1 \l 1837 Thank you, Mr. Chairman.
LISTNUM 1 \l 1838 THE CHAIRPERSON: Okay. That takes us to benefits.
LISTNUM 1 \l 1839 Commissioner Arpin.
LISTNUM 1 \l 1840 COMMISSIONER ARPIN: Thank you, Mr. Chairman. I have a few questions regarding the benefit package that you have put before us.
LISTNUM 1 \l 1841 My first line of questioning will deal with the issue of the period in which you want to have these benefits expended.
LISTNUM 1 \l 1842 My first question is fairly basic. Could you elaborate on the necessity to increase the time period to 10 years, rather than 5 or 7 years as is customary for tangible benefits?
LISTNUM 1 \l 1843 MS WILLIAMS: Yes, we would be happy to, actually, because a lot of time and attention, from our point of view, went into crafting this benefits package, and not just assuming either a historical guidance or a one‑size‑fits‑all strategy.
LISTNUM 1 \l 1844 I am actually going to ask my colleague Christine Shipton to take you through the specifics of the 10‑year plan. Christine has probably touched more original Canadian drama in this country than almost anywhere else, so I think she brings a real perspective to what is needed and why this 10 years makes a lot of sense.
LISTNUM 1 \l 1845 MS SHIPTON: Thanks, Barb.
LISTNUM 1 \l 1846 I have to say that when we designed the benefits package I actually welcomed the 10‑year range, only because, in my experience, especially with drama over the last 20 years in this country, it just hurts us if we rush the process.
LISTNUM 1 \l 1847 As we have said in our submission, Commissioner, we have taken the cradle‑to‑grave approach, which is not just starting at development, it is actually starting at training.
LISTNUM 1 \l 1848 Training and development means finding the right talent and the new talent that is in this country.
LISTNUM 1 \l 1849 We have allowed for and have proposed a payment plan over that 10 years that allows for initiatives to get out of the gate rather quickly. We are not seeing that there aren't projects that couldn't start quickly, but, really, we want to make sure we are doing this right.
LISTNUM 1 \l 1850 The goal, as we have said, is to make sure that we have a sustainable infrastructure in our production community that is producing great drama and bringing other people through the system that will then produce great drama.
LISTNUM 1 \l 1851 MS WILLIAMS: I think, sir, we also acknowledge that this is an interesting time in our industry. There is a lot of consolidation. There is a lot of change. There is a lot of benefits money, frankly, that is out there.
LISTNUM 1 \l 1852 We are, again, looking to a sustainable production community, and looking to be able to manage the money to take advantage of the great projects when they are there; not putting a stress and strain on a community that is suddenly potentially overloaded, relatively, with dollars, but trying to be sure that we can sustain this industry as much as possible over a longer period.
LISTNUM 1 \l 1853 COMMISSIONER ARPIN: I am looking at the table that you have attached to your reply dated June 13, where you spread it out over a 10‑year period. I note that, finally, if I could boil it down to, particularly, on‑screen and other related programming, there is an amount of $90 million, which, based on your 10‑year plan, will come up to be an average of $9 million per year. Over a 7‑year period it would be $12.8 million.
LISTNUM 1 \l 1854 If I look at the CTV situation when BCE came into play, a similar amount was $140 million, committed over a 7‑year period. So it would be an average of $20 million per year that CTV expended ‑‑ and still is, as a matter of fact.
LISTNUM 1 \l 1855 Could you tell us, taking into consideration the perspective that you just gave us, what you have seen as negative in the money that flowed from CTV at the speed of $20 million per year, and how negative it was?
LISTNUM 1 \l 1856 MS WILLIAMS: I think there are a couple of thoughts. One is, I think it would be fair to say that the money coming from CTV was coming at a unique time and was more alone in the system than the collective moneys that are going to be out in the system now. I think that is part of the answer.
LISTNUM 1 \l 1857 I think part of the answer, also, is what Christine mentioned, which is that there is nothing in this plan that suggests that we can't go more quickly, or that we couldn't go and put $20 million right away in that first year, if that is what we found the creative process suggested we should do.
LISTNUM 1 \l 1858 But one of our experiences in this is that one actually can't manage the creative process on a nice, tidy, finance chart, despite the inclination of some parts of the company sometimes to suggest we should.
LISTNUM 1 \l 1859 And we really look forward to the opportunity to following the creative process here and being sure that when the right ideas are there we can properly develop them, and we can pilot them, which is something that, in Canada, we have not had the great luxury of doing. It is something that we look at rather enviously to our partners in the south, their ability to pilot and take the time to see what really works and where a project might go.
LISTNUM 1 \l 1860 So to take the time to pilot, and then green light, and then be sure that we have the right timelines to allow us to market and promote properly, as opposed to meeting some deadline that says: We have to rush some money out the door to hit a timeline that hasn't proven to be as supportive of the creative process as it would like.
LISTNUM 1 \l 1861 I guess we are pleading flexibility for the creative side of ourselves.
LISTNUM 1 \l 1862 COMMISSIONER ARPIN: I am hearing the programming people saying that if the programming is right, they are ready to put in $20 million. The business people ‑‑ the CFO, what is his view about putting up $20 million immediately to support new Canadian programming?
LISTNUM 1 \l 1863 MR. ASPER: There is probably no point in asking the CFO at this point.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1864 COMMISSIONER ARPIN: Or the CEO.
LISTNUM 1 \l 1865 MR. ASPER: Every year we know that we have to spend money in various areas on programming ‑‑ the development of it, the training ‑‑
LISTNUM 1 \l 1866 We see as even valuable supporting those institutions that train the writers and directors of the future, and producers.
LISTNUM 1 \l 1867 But we know that there is a development budget in the company, and we know that there has to be, and we are betting by this acquisition that these channels can help Global, as well, in addition to Global helping them have a bigger development budget to find those hits.
LISTNUM 1 \l 1868 With the collectivity of these channels, we will be able ‑‑ everything comes back to scale. The larger a company you are, the more you can put out there to try to get that home run. It goes to programming, it goes to investment in infrastructure, in talent ‑‑ all aspects of the business.
LISTNUM 1 \l 1869 COMMISSIONER ARPIN: You just raised another flag. The general purpose of those tangible benefits is usually to help out the new organization that you are buying to develop themselves to have much better programming.
LISTNUM 1 \l 1870 Now, if what you are suggesting here is that part of that money ‑‑ and I know it is part of your plan ‑‑ is to be used by Global itself, which is that the news component is to the benefit of ‑‑
LISTNUM 1 \l 1871 There is no doubt in my mind that it is for the benefit of Global, because there are no news services in Alliance Atlantis, the purchase services.
LISTNUM 1 \l 1872 What is the rationale for making use of a portion of that money for the benefit of Global?
LISTNUM 1 \l 1873 MS BELL: You are referring specifically to the news initiatives?
LISTNUM 1 \l 1874 COMMISSIONER ARPIN: Yes. That is the one that is the most obvious.
LISTNUM 1 \l 1875 In the other instances there might be other cases, but from the record it is not that obvious.
LISTNUM 1 \l 1876 In the drama area, I would probably think that there will be some benefits that could flow to Global, but it is not clearly laid out, while the news aspect is clearly laid out.
LISTNUM 1 \l 1877 MR. ASPER: Just to clarify what I meant, I meant that a byproduct of the success of the development of Alliance Atlantis may be the creation of those hits that Barb and Walter talked about earlier that could get larger audiences on the Global television market or E! or something like that. But there is no ‑‑ I don't ‑‑ there is no money development or money in that benefits package other than the news that is directly going to Global or any of the Global group stations.
LISTNUM 1 \l 1878 MS BELL: In terms of the news initiatives, Vice‑Chairman, we think that it's completely within the benefits policy. In fact, news enhancements or public affairs programs are in fact cited in the benefits policy as acceptable tangible benefits.
LISTNUM 1 \l 1879 The Commission also in its benefits policy takes a flexible approach in terms of how many of the benefits would be specifically attached to the assets being acquired or local benefits and system‑wide benefits. We see news and public affairs as a system‑wide benefit. It is not a large proportion of the benefits package but we think it's very much in the public interest and we feel that it's completely consistent with a benefits policy.
LISTNUM 1 \l 1880 COMMISSIONER ARPIN: Is it really in the public interest or is it in the global interest to develop foreign bureaus so that they are in a better position to compete with the other incumbents?
LISTNUM 1 \l 1881 MR. ASPER: Steve Wyatt, our Vice‑President, News, to answer the question.
LISTNUM 1 \l 1882 MR. WYATT: We believe that it does benefit the system for a couple of reasons.
LISTNUM 1 \l 1883 Obviously, yes, it will benefit Global's news operations to expand our reach around the world. But you know bureaus have come an important part of broadcasting generally in that we can use these facilities around the world to open access to corners of the world where our independent producers that work with us on documentary development can gain access to material, and we would use these bureaus to support that activity as well.
LISTNUM 1 \l 1884 In terms of benefiting the system, you know, we had a bull's eye with the development of Global National as part of our benefits package under the WIC acquisition. And I think this is an extension of that, really, to demonstrate that by extending our region out globally, well, we don't really exist at all now. You know, the growth of that program, the Canadian public has responded to in great numbers will, you know, take it to its next phase. And again, we can use those facilities to give access to our independent producer partners to extend their reach as well.
LISTNUM 1 \l 1885 COMMISSIONER ARPIN: The table that you filed with your June 13 report shows that ‑‑ and it's based on a calculation that Ernst & Young has made ‑‑ it equates to $70 million, expenditures of $70 million over a seven‑year period or $64 million over a 10‑year period.
LISTNUM 1 \l 1886 When I'm looking at the calculation that you have made are you somehow suggesting that CanWest is ready to immediately set aside that amount of money; either one or the other scenario?
LISTNUM 1 \l 1887 MS BELL: I am sorry. I am not sure what ‑‑ are you looking ‑‑ which schedule are you looking at? I apologize.
LISTNUM 1 \l 1888 COMMISSIONER ARPIN: Well, I'm looking at the June 13 letter; the attachment to the June 13 letter and that we were discussing a few minutes ago.
LISTNUM 1 \l 1889 MS LOCK: I believe that that was in response to the Commission's request that we calculated was the present value of the benefits ‑‑
LISTNUM 1 \l 1890 COMMISSIONER ARPIN: Yes.
LISTNUM 1 \l 1891 MS LOCK: ‑‑ over seven years versus 10 years would be.
LISTNUM 1 \l 1892 COMMISSIONER ARPIN: Yes.
LISTNUM 1 \l 1893 MS LOCK: So that was simply the response, our response to the Commission.
LISTNUM 1 \l 1894 COMMISSIONER ARPIN: So it's not a suggestion that CanWest makes that they immediately cut the cheque and put it into a fund?
LISTNUM 1 \l 1895 MS LOCK: No.
LISTNUM 1 \l 1896 MS BELL: No, and I think also when we did that exercise ‑‑ I don't have the chart in front of me, but I think we were asked to do this over a 10‑year period if they were equal payments, and that's not at all how we have planned this. The strategy is not to be making equal payments.
LISTNUM 1 \l 1897 COMMISSIONER ARPIN: No.
LISTNUM 1 \l 1898 MS BELL: Yes.
LISTNUM 1 \l 1899 COMMISSIONER ARPIN: That is clearly ‑‑
LISTNUM 1 \l 1900 MS BELL: Yes, it's a specific exercise, yes.
LISTNUM 1 \l 1901 COMMISSIONER ARPIN: Now, I need to ask you a question based on ‑‑ while we are not ‑‑ there is going to be an opportunity in early February to discuss the CTF report, but there is your recommendation in the CTF report that says that the CTF board should consider when establishing the broadcast performance envelope any self‑administered benefits money approved by the CRTC to be allocated during that year, because I know that you want to manage all the funds that ‑‑ except the money that will go to Hot Docs ‑‑ the other funds that you are contemplating to invest that has tangible benefits will be managed by CanWest.
LISTNUM 1 \l 1902 Now, could you comment on the proposed ‑‑ the proposed taskforce recommendation?
LISTNUM 1 \l 1903 MS BELL: Just from ‑‑ and I will begin and then I will ask Barb Williams to chime in.
LISTNUM 1 \l 1904 But just from a procedural fairness issue you have had a number of other large transactions before you this year and both CTV and Rogers, for example, have large benefit packages that are going into programming that they are self‑administering. So it would be from a fairness standpoint or a public policy standpoint, I think, a little unfair to ask CanWest then to take a different approach at this point in time.
LISTNUM 1 \l 1905 THE CHAIRPERSON: I asked him the same question. There is no question of unfairness here. I put exactly that same question to Rogers.
LISTNUM 1 \l 1906 MS BELL: All right.
LISTNUM 1 \l 1907 THE CHAIRPERSON: So get ‑‑
LISTNUM 1 \l 1908 MS BELL: Did they answer the same thing?
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1909 THE CHAIRPERSON: Well, they didn't talk about procedural fairness. They didn't say anything was a good idea. So that's why we are asking you.
LISTNUM 1 \l 1910 MS BELL: Actually, it may not be procedural. It may be the wrong term but it's certainly competitively unfair. There you go.
LISTNUM 1 \l 1911 Barb?
LISTNUM 1 \l 1912 MS WILLIAMS: We also think what we have suggested is a good idea and let me tell you why and Christine Shipton, I know, will want to add to this.
LISTNUM 1 \l 1913 We actually thought carefully about the self‑direction question and we thought carefully about drama versus documentary. Again, I reiterate just to speak to the care and attention we took with the development of this benefits package, and we do see a difference frankly between what the drama community may best be served by and what the documentary community may best be served by.
LISTNUM 1 \l 1914 And specifically, in the area of drama we acknowledge that it is still a challenged area for us as a Canadian industry. We do not ‑‑ you know, we have not yet reached the levels of success that I think we would all like to be at or that we think we can attain. And in an effort to best use the substantial benefits dollars to get us there, we believe that in fact CTV has demonstrated with their benefit package why what they did works and, hence, why we are suggesting we do the same thing.
LISTNUM 1 \l 1915 It focuses all the time and attention on the creative process as opposed to the financing structure which is often where the emphasis ends up going when it's managed by a fund and has other financing pieces that have to be compiled to pull it together. It's one stop shopping for the producer which, again, gives the producer the confidence that they can focus on the creative when they bring that project in the door and not be worried about any of the other surrounding issues that sometimes complicate things when you are working as part of a funding agency.
LISTNUM 1 \l 1916 It provides certainty for producers that the financing is really going to be there in its totality should the creative be the right project. It keeps the emphasis, we believe, where it needs to be there and allows us to be most efficient with those dollars and most effective with those dollars.
LISTNUM 1 \l 1917 The documentary community, frankly, is in a bit of a different place and it's why we chose to do it differently.
LISTNUM 1 \l 1918 And Christine, maybe you want to speak to why we made that choice there.
LISTNUM 1 \l 1919 MS SHIPTON: The documentary community is one that's flourishing, we believe, in this country and there is a real need for that gap financing and that kind of gap financing is best administered by a third party.
LISTNUM 1 \l 1920 And also, we also felt that it was important that all documentary producers benefit from that, whether their broadcast licence be with the CanWest or an Alliance Atlantis channel, but for any of the broadcasters attached.
LISTNUM 1 \l 1921 MS WILLIAMS: There is an enormous amount of shelf space out there for documentary production which just makes it a bit of a different place than drama and there was this acknowledged organization called "Hot Docs" that the documentary community really supports and actively underscores that we thought was the right place to hold that money. There is not a comparable organization, frankly, in the drama community.
LISTNUM 1 \l 1922 COMMISSIONER ARPIN: Now, in your reply to one of the Commission's questions ‑‑ it was question 28 ‑‑ your reply of June the 1st, you are dealing with the documentary section and you say that you have put a provision for completion financing of independent documentary production and the creation of a $1 million development fund.
LISTNUM 1 \l 1923 And you have said in answer to 28(c), and you gave an example was ‑‑ you referred to closed captioning and stating that it's merely an example of the many elements that could be covered by this program.
LISTNUM 1 \l 1924 Could you for the record clarify what other elements will be ‑‑ could be found also by this initiative?
LISTNUM 1 \l 1925 MS SHIPTON: I don't think it so much specifying specific elements. It is when a budget is put together for a documentary it includes all it takes to produce that documentary, and closed captioning is one of the elements.
LISTNUM 1 \l 1926 And in our system today documentary filmmakers find that they are just ‑‑ they are often short the money. Even though licence fees have been going up for documentaries in terms of accessing tax credits; other funds, they are continually finding that they have to defer their own fees even just to make sure the film gets made.
LISTNUM 1 \l 1927 So there isn't any specific elements.
LISTNUM 1 \l 1928 COMMISSIONER ARPIN: The drama producers are making the same argument.
LISTNUM 1 \l 1929 MS WILLIAMS: I would agree. I think the difference is that the documentary community ‑‑ and I am going to make some generalizations here and there will be exceptions, I know, to what I am about to say, but generally speaking the documentary community has more financing options across more broadcasters' schedules than the drama producers do. And generally speaking the drama budgets are far greater than the documentary budgets.
LISTNUM 1 \l 1930 And so generally speaking, that gap that the documentary producer faces is smaller. The gap that the drama producer faces often is enormous and that's why a system that allows for some small gap financing on a fairly regular, predictable basis out of something like what we are suggesting with Hot Docs which serves the documentary community very well. Whereas, what we are suggesting with the self‑directed funds when we need much larger chunks of money and the financing options are far fewer and the gap is much bigger, that self‑directing those funds and being sure we can really put significant amounts of money behind the right project at the right time makes much more sense for the drama community.
LISTNUM 1 \l 1931 COMMISSIONER ARPIN: Now, am I right to understand that being managed by a third party like Hot Docs, anybody who does documentaries could go and ask for that financial support or is it only producers making documentaries for one of the components of Global or CanWest investment?
LISTNUM 1 \l 1932 MS SHIPTON: It is for producers with broadcast licences from any broadcaster in Canada.
LISTNUM 1 \l 1933 COMMISSIONER ARPIN: Both French and English or only English?
LISTNUM 1 \l 1934 MS WILLIAMS: I'm not sure we asked ourselves that question, to be honest.
LISTNUM 1 \l 1935 THE CHAIRPERSON: Well, maybe you could provide us the answer.
LISTNUM 1 \l 1936 COMMISSIONER ARPIN: At some point in time.
LISTNUM 1 \l 1937 MS WILLIAMS: We will provide that answer shortly.
LISTNUM 1 \l 1938 COMMISSIONER ARPIN: I will deal with your response to question No. 23, which is on pages 14 and 15 of your June 1st letter.
LISTNUM 1 \l 1939 You dealt with the pilot projects for scripted drama and other priority programming, except that you did not define what qualifies as a pilot.
LISTNUM 1 \l 1940 Is it one episode or is it a number of episodes?
LISTNUM 1 \l 1941 MS SHIPTON: A pilot is traditionally one episode, whether it's a 30‑minute scripted or a one‑hour scripted.
LISTNUM 1 \l 1942 COMMISSIONER ARPIN: And in the event that a proposed program is terminated at the pilot stage, will this episode be broadcast at some point in time?
LISTNUM 1 \l 1943 MS SHIPTON: Traditionally, it's not.
LISTNUM 1 \l 1944 COMMISSIONER ARPIN: Similarly CS because they don't have CAFCP; they can't access their CAFCO.
LISTNUM 1 \l 1945 MS SHIPTON: Then that would have to be taken into account, absolutely.
LISTNUM 1 \l 1946 COMMISSIONER ARPIN: So whatever the quality of the pilot is?
LISTNUM 1 \l 1947 MS SHIPTON: If the quality of the pilot is excellent and it stands alone and deserves to be broadcast, absolutely we would broadcast it.
LISTNUM 1 \l 1948 What I'm saying is it has to be taken into account. When we go to approach the financing of the pilot with the producer, we would have to have that as a caveat. There are no tax credits if we are not airing it. We realize that.
LISTNUM 1 \l 1949 COMMISSIONER ARPIN: Now, I have some questions regarding your program to digitalize archive footage.
LISTNUM 1 \l 1950 In your reply to question 34 of the June 1st letter, you said that this initiative shall be otherwise to CanWest since it had already been granted to CTV in the year 2000.
LISTNUM 1 \l 1951 Could you further expand on why a decision made in 2000 still applies today when it has become good business practice to digitize archives?
LISTNUM 1 \l 1952 MS BELL: I don't think that it's ‑‑ many of the Commission's decisions in terms of what qualifies as benefits haven't changed dramatically in the last seven years.
LISTNUM 1 \l 1953 I think, as we said in our response, we are now digitizing all of our content or new content. But in terms of the archives, we would not be undertaking that exercise because of the cost.
LISTNUM 1 \l 1954 I'll ask Steve Wyatt to expand on that. We think it qualifies definitely as a benefit.
LISTNUM 1 \l 1955 MR. WYATT: We are in the process right now of converting all our news operations to a digital processing platform. What that means is that from the point that they are operating digitally, all of the material will be automatically archived in that format.
LISTNUM 1 \l 1956 We have vast libraries in our stations that are rich in history. It would cost quite a bit of money to get that into a digital format, catalogue it and make it widely accessible, not only to us but again to our independent producer partners and documentary development and that sort of thing.
LISTNUM 1 \l 1957 We think there is a great benefit to that.
LISTNUM 1 \l 1958 Our first priority really is to get us to a level of digital production at our news operations first, and that's where we direct our resources.
LISTNUM 1 \l 1959 COMMISSIONER ARPIN: If I hear well. Ms Bell's answer is that it only has value if there is a tangible benefit attached to it; otherwise, you are ready to scrap your archives.
LISTNUM 1 \l 1960 MR. WYATT: Again, the benefit really is to make it accessible to a wide variety of people; to make use of it in the public airwaves. That's where the real benefit is.
LISTNUM 1 \l 1961 MR. ASPER: I think if I could just add some commentary about the process of capital expenditures and spending in our business, at least the way we operate is there would be a budget that someone like Steve and Kathy Dore and others would come forward with in any given year. It would include a wish list of capital expenditures.
LISTNUM 1 \l 1962 I guess I can say quite clearly that this wouldn't make the list, at least the list that they walked out of the room with, because it would be behind all the high definition conversions, the creation of the digital newsrooms, the new software for the news service, the creation of the bureau in Ottawa that Kevin Newman and the Global national group are moving into, a long list of continuing expenditures on our sales system and other computer and IT related things.
LISTNUM 1 \l 1963 I think the point is this wouldn't be done. We wouldn't scrap the archives. They would probably sit there in a storage room for some time.
LISTNUM 1 \l 1964 When I look at how does this benefit the system, it comes back to if we do digitize it, there is a lot of good information, historical information and content there that will get to the screen, that Canadians will see, that will provide them more information about their country, and particularly its past, that they won't otherwise see.
LISTNUM 1 \l 1965 They might have some reference to it by a news announcer but if some event takes place now that has its roots back in ‑‑ I can think of a certain inquiry that might be taking place that's in the news today that involves a lot of footage that's 20 years old. That now gets to the screen.
LISTNUM 1 \l 1966 COMMISSIONER ARPIN: I'm cross‑referencing a good number of answers that you have given today. At the outset you said that the WIC benefit package has served Global because it has allowed them to come up and build a big news operation that today is number one.
LISTNUM 1 \l 1967 Now comes the time that the technology allows to digitize the archives and the news gathering archives that you have, but the investment into programming that you have done so far has not benefited you enough to contemplate archiving, digitizing the archives for future use as a going concern.
LISTNUM 1 \l 1968 MR. ASPER: Well, I guess it comes back to the priorities. We would like to have 20 years of archives digitized, or 30 years. But it is costly. It ranks lower down on the list of things that we have to do and that are urgent in the sense that they are most relevant to our business success going forward.
LISTNUM 1 \l 1969 COMMISSIONER ARPIN: It is costly but it is surely relative because, first, the amount that you have allocated to that program is not that big an amount. I think if my memory serves me well, we are talking here $3.5 million over a seven‑year period.
LISTNUM 1 \l 1970 MS BELL: It is five.
LISTNUM 1 \l 1971 COMMISSIONER ARPIN: Five million.
LISTNUM 1 \l 1972 It is somehow labour intensive, but you have been talking about capital investment. If we were to say yes, where will the money go: capital investment or manpower?
LISTNUM 1 \l 1973 MR. ASPER: I guess I would put it in a basket of non‑usual operating expenses, whether it's capital or ‑‑ there's always a labour component to something that might get called a capital expenditure, as I say, whether it's high definition conversion or anything else.
LISTNUM 1 \l 1974 In a budgeting process it would be under a non‑operating expense, a capital expense effectively.
LISTNUM 1 \l 1975 COMMISSIONER ARPIN: You have said in your reply that if the Commission was to approve the digitization of the archives that you would make them available at no cost to educational institutions and not‑for‑profit organizations.
LISTNUM 1 \l 1976 In not‑for‑profit organizations, are you including the CBC and TVO in that category?
LISTNUM 1 \l 1977 MS BELL: No.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1978 MR. ASPER: If it's mutual, if they were willing to do the same for us, certainly.
LISTNUM 1 \l 1979 MS BELL: No. And it's only rights‑cleared material obviously.
LISTNUM 1 \l 1980 COMMISSIONER ARPIN: What type of not‑for‑profit organization were you contemplating when you wrote that reply?
LISTNUM 1 \l 1981 MR. WYATT: We would share our material with educational institutions, journalism schools. In cases where we would work with an independent producer in documentary development, we would make the archives available for that sort of thing.
LISTNUM 1 \l 1982 COMMISSIONER ARPIN: As long as the documentary producer is working on a product for one of your operations.
LISTNUM 1 \l 1983 MR. WYATT: Yes.
LISTNUM 1 \l 1984 COMMISSIONER ARPIN: And if the Commission was to say no to that initiative, saying that it doesn't qualify as a tangible benefit, have you taken into consideration other initiatives to which you could allocate that money?
LISTNUM 1 \l 1985 MS BELL: No, we haven't. We thought you would accept it so we haven't given any consideration to that.
LISTNUM 1 \l 1986 If the Commission were to not accept any of the initiatives, we would have to get back to you and identify where we would reallocate those funds.
LISTNUM 1 \l 1987 COMMISSIONER ARPIN: Regarding your social benefit now, you have identified some categories of recipients, but in some instances you haven't mentioned who will be those recipients.
LISTNUM 1 \l 1988 Could you provide us with an update with the one recipient that you have already agreed to support through this type of tangible benefit?
LISTNUM 1 \l 1989 MS BELL: I believe that the only area where we did not identify recipients was the $2,010,000 that was going into festivals.
LISTNUM 1 \l 1990 The reason that we have done that, as we explained in the application, was simply because a lot of the festivals ‑‑ actually, festivals pop up from one year to the next; some of them discontinue.
LISTNUM 1 \l 1991 We felt that we would be I guess unfairly restricting ourselves if we identified all those groups. And we would provide funding to a number of festivals over the period, including a number of diversity festivals.
LISTNUM 1 \l 1992 As you know, Vice‑Chairman, in the last few years especially in terms of diversity of organizations and festivals a lot of new initiatives have come up and they are very worthwhile. We were concerned about locking people out if we gave you a definitive list. That is the only initiative where we have done this. Everywhere else, we have provided the name of the recipient.
LISTNUM 1 \l 1993 COMMISSIONER ARPIN: Another social benefit that you have proposed is the broadcast diversity journalism program. I understand from reading the submission that you have made and answering earlier questions that it is a project that will be made available to Global's news employees and you could expand it to include maybe APTN, as you say in one of your replies.
LISTNUM 1 \l 1994 If the Commission was to say that this is an interesting program but it doesn't fit the definition of a tangible benefit, would you still contemplate doing it only for your own employees?
LISTNUM 1 \l 1995 MS BELL: Well actually, it involves local students, so it is not just for employees. I think it would involve some employees but it actually is open for students to come and share ideas with people who work in journalism and broadcast journalism.
LISTNUM 1 \l 1996 But I am not in a position to answer the question as to whether or not we would go ahead with that project if it was not accepted as a benefit.
LISTNUM 1 \l 1997 COMMISSIONER ARPIN: As you know, there was a similar program ‑‑ well, not similar because that one is tailored towards journalism but in the Astral/Standard acquisition, there were two training programs where the Commission concluded that they didn't meet the spirit of the benefit policy.
LISTNUM 1 \l 1998 I don't know if you have had a chance to see what the Commission said regarding the Astral/Standard project and if you have further comments to have your own projects qualify. The Commission just a few weeks ago said that the training program presented by Astral didn't meet the letter and the spirit of the notion of tangible benefit.
LISTNUM 1 \l 1999 MS BELL: Vice‑Chairman, I will look at that decision again and we can get back to you in the last phase if you like.
LISTNUM 1 \l 11000 COMMISSIONER ARPIN: Okay, fine. Thank you.
LISTNUM 1 \l 11001 So obviously, if we were to say that it didn't meet the spirit, you don't have today an alternative program?
LISTNUM 1 \l 11002 MS BELL: That is correct.
LISTNUM 1 \l 11003 MR. ASPER: I think I would make the comment that there is no shortage of those who would wish they were included in this package.
LISTNUM 1 \l 11004 COMMISSIONER ARPIN: Well, Mr. Chair, those were my questions.
LISTNUM 1 \l 11005 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 11006 Commissioner Duncan.
LISTNUM 1 \l 11007 COMMISSIONER DUNCAN: I just have one question with regards to your response of August 20th to question 67 and it is dealing ‑‑ I am sorry, it is paragraph 67.
LISTNUM 1 \l 11008 MS BELL: I was going to say I know we got a lot of questions but not that many.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 11009 COMMISSIONER DUNCAN: Paragraph 67. In the third bullet there you say that you are willing to commit a minimum percentage of 60 percent to 10‑10 drama and then you go on to say that the remaining 40 percent will consist of scripted drama category programming below the 10‑10 threshold.
LISTNUM 1 \l 11010 I just wanted to clarify because on to the next sentence it mentions the 8‑10. Can we read that 10‑10 to be ‑‑ that that would be the limit, you wouldn't go below 8‑10?
LISTNUM 1 \l 11011 MS SHIPTON: We actually hadn't contemplated that. We were hoping for flexibility to go as low as 6 out of 10.
LISTNUM 1 \l 11012 The rationale behind this is to somehow extend this amount of money to as many hours of drama as we can and that may mean having partners or other financiers that only allow us to do a 6 out of 10 drama.
LISTNUM 1 \l 11013 COMMISSIONER DUNCAN: Would it likely ever be less than that?
LISTNUM 1 \l 11014 MS SHIPTON: It would never be less than 6 out of 10, absolutely not.
LISTNUM 1 \l 11015 COMMISSIONER DUNCAN: All right.
LISTNUM 1 \l 11016 COMMISSIONER KATZ: It doesn't qualify.
LISTNUM 1 \l 11017 COMMISSIONER DUNCAN: Six out of 10 is the lowest you can go?
LISTNUM 1 \l 11018 COMMISSIONER KATZ: Yes.
LISTNUM 1 \l 11019 COMMISSIONER DUNCAN: Okay.
LISTNUM 1 \l 11020 MS SHIPTON: That is the lowest we can go.