Annual Report 1994/95 - Continued High Level of Merger Activity

Earlier in this report, I discussed some of the notable merger cases in the telecommunications sector that we have been examining (p. 11). Overall, our examination activity has remained steady over the past five years, as will be noted in Table 5 on page 47. For example, in fiscal year 1994-95, there were 193 examinations commenced compared to 192 during the 1993-94 period. No merger challenge applications to the Competition Tribunal were filed during the year. Three merger proposals were abandoned by the parties as a result of concerns identified by the Bureau.

Wisconsin Central Transportation Corporation (WCTC)/Algoma Central Corporation

On July 28, 1994, it was publicly announced that Algoma Central Corporation would sell all its rail assets to a newly formed Canadian subsidiary of WCTC, the Algoma Central Railway Inc.

On September 23, 1994, I filed a letter with the National Transportation Agency (NTA) in support of this proposed acquisition. The letter highlights three pro-competitive impacts which could result from the proposed transaction, namely: the maintenance of a competitive alternative for shippers; likely lower transportation rates enabling shippers to access and compete in new markets; and the fact that the new entrant would be well positioned to acquire segments of main lines which might otherwise be abandoned by CN or CP, thus preserving intramodal competition.

On December 22, 1994, the NTA announced that it would not disallow the proposed transaction.

Asea Brown Boveri Inc./Westinghouse Canada Inc.

As reported in the Annual Report for 1989-90, the Competition Tribunal issued a Consent Order under section 105 of the Act on June 15, 1989, (as amended on December 18, 1989) in relation to the acquisition by Asea Brown Boveri Inc. (ABB) of the electric power transmission and distribution business of Westinghouse Canada Inc. (Westinghouse).

The Consent Order, which was designed to alleviate the likely anti-competitive effects of the transaction, required that ABB divest certain assets obtained from Westinghouse if it was unable to attain specific tariff relief measures, including full remission of tariffs on imports of certain large power transformers for a period of at least five years. This provision of the order was complied with by virtue of the issuance of the Electrical Power Transformer Remission Order, SOR /90-23 which came into force on January 1, 1990.

At the time the Consent Order was made, my predecessor indicated that he would monitor market conditions and support the renewal of the customs duty remission if competitive conditions required it at the time of expiry. During 1993, I received submissions from a number of interested parties requesting assistance to obtain an extension of the Remission Order which was to expire on December 31, 1994. The examination of the submissions indicated that the Remission Order has been effective in maintaining competitive supply conditions for large power transformers. In particular, it has allowed overseas competitors which were previously precluded from competing in Canada, mainly because of a 15 percent tariff, to submit bids to and obtain orders from Canadian Public Utilities. In addition, it was anticipated at the time of the merger between ABB and Westinghouse that, with the accelerated reduction of tariffs on imports from the United States under the Canada -U.S. Free Trade Agreement, McGraw Edison Company, a subsidiary of Cooper Industries Inc., would become an effective supplier of large power transformers to Canadian customers and replace the competition lost as a result of the merger. On the basis of available information, this does not appear to have happened. I concluded that the continuation of the Remission Order would be beneficial to the competitive environment in the Canadian market for large power transformers. Consequently, I made representations to the Department of Finance in support of an extension of the Remission Order.

On February 14, 1995, an Order in Council, SOR/95-89, was passed extending the Remission Order from January 1, 1995, to December 31, 1999. The product coverage was also expanded to include transformers and shunt reactors of 700 kilovolt class or greater and articles and materials used in the manufacture of the transformers and shunt reactors covered by the Remission Order.

Confederation Life Insurance Company/Great-West Life Assurance Company

Restructuring within the insurance industry, including the failure of Confederation Life Insurance Company, has caused me to review a number of mergers in this industry over the last year. The pending failure of Confederation Life led to an initial transaction whereby the Great-West Life Assurance Company proposed that it acquire the preferred shares of Confederation and enter a capital maintenance agreement. Following the abandonment of this transaction, several of the subsequent transactions whereby the assets of Confederation Life were sold off, including the sale of its individual life and health policies to Maritime Life Assurance Company and the sale of its group life and health policies to the Manufacturers Life Insurance Company, were also reviewed by the Bureau.

I share the view of industry experts that the trend within the insurance industry will be towards further consolidation, particularly as major new entrants begin to expand their activities in both the life and health area and the property and casualty area. I believe that the failure and subsequent redeployment of the Confederation Life assets illustrates how a rapid restructuring within an industry can be examined by the Bureau without causing any delay.

Gemini

As reported in last year's Annual Report, the Gemini case was ultimately resolved when the Competition Tribunal varied, on November 24, 1993, its original July 1989 Gemini consent order so as to require the dissolution of Gemini, thereby releasing Canadian Airlines from its obligations under the hosting contract with Gemini. Subsequent appeals from this decision were eventually abandoned.

The November 24, 1993, Tribunal order allowed Canadian Airlines to transfer its hosting activities to Sabre, the computer reservation system (CRS) operated by American Airlines Inc., a wholly-owned subsidiary of AMR Corporation. This transfer was a condition precedent to consummating with AMR a transaction which would preserve Canadian in the marketplace, thereby averting a substantial lessening of competition. The equity transaction was completed on April 28, 1994. The transfer of Canadian's hosting functions to Sabre occurred in November 1994.

Gemini was restructured into two companies. Advantis Canada, owned by IBM, assumed the computer and telecommunications network and information technology functions, including hosting, which previously had been operated by Air Canada and Gemini. Galileo Canada Inc., owned by Air Canada, assumed Gemini's CRS business.

Quebecor Printing Inc./ Maclean Hunter Printing Limited

On December 23, 1994, Quebecor Printing Inc. (QPI) filed a notification of its intent to purchase Maclean Hunter Printing Limited, Litho Plus Limited, The Jasper Printing Group Ltd. and Templeton Studio Ltd. from Rogers Communications Inc. On January 16, 1995, a Consent Interim Order was issued by the Competition Tribunal allowing QPI to make the acquisitions but ordering QPI to maintain the acquired businesses separate from its operations for a 21-day period, so that I could complete my assessment. This was the first use by the Bureau of the Interim Consent Order provisions of sections 100 and 105 of the Act.

I conducted a detailed examination to assess the impact of this transaction on competition in the market for heatset web offset commercial printing. This printing process is typically used to print catalogues, magazines and periodicals, advertising inserts and circulars, and general commercial material. On February 7, 1995, I announced that I would not challenge the transaction based on the fact that QPI would continue to face vigorous and effective competition from its main competitor, G.T.C. Transcontinental Group Ltd., as well as from some medium-sized regional competitors and from a number of smaller niche players.

Southam Inc./Lower Mainland Publishing Inc.

On February 13-16, 1995, the Federal Court of Appeal heard appeals from the Competition Tribunal's decisions of June 2, 1992, and December 10, 1992. This matter was previously reported in the 1993-94 Annual Report.

I appealed the June 2, 1992, decision with respect to the finding that community newspapers were not in the same product market as daily newspapers and thus the acquisitions did not substantially lessen competition. I also appealed the Tribunal's refusal to consider whether the acquisitions prevented competition substantially in the form of future product innovations or other competitive pressures from outside the product market as defined by the Tribunal.

The respondents in the initial case appealed from the Competition Tribunal's December 10, 1992, decision which had ordered them to divest, at their option, either the North Shore News or the Real Estate Weekly in their entirety. The appellants argued that the Tribunal had applied the wrong standard in seeking a remedy and had failed to weigh considerations of harm or inconvenience to respondents.

Respondents also sought leave to introduce further evidence in respect of their appeal of the December 10, 1992, remedy decision. This motion was dismissed.

The decision was taken on reserve by the Federal Court of Appeal.

The March 9, 1992 order of the Competition Tribunal staying the execution of the divestiture order pending disposition of the appeal of the remedy decision remains in place. The parties have agreed that the interim hold separate order will remain in place pending the outcome of the appeal of the Tribunal's June 2, 1992 decision.

FICG Inc./Coles Book Stores Limited

In September 1994, FICG Inc., the operator of SmithBooks, and Coles Book Stores Limited, a subsidiary of Southam Inc., announced the proposed merger of the two book store chains. The transaction was the subject of an extensive examination under the merger provisions.

I obtained extensive documentary and oral information from the parties to the transaction and numerous industry participants, including publishers and retailers. The examination focused particularly on the impact of the transaction on Canadian publishers and exclusive agents and the potential impact on book prices and selection. On the basis of the available evidence, I concluded that there were not sufficient grounds for an application to the Competition Tribunal in respect of the merger.

I concluded that the relevant market comprised the English language trade book retailing services provided by book stores in Canada. The available evidence indicated that the merged entity would account for approximately half of the sales of Canadian publishers and exclusive agents in this market. Accordingly, I conducted a careful analysis of the relevant section 93 factors.

Among the section 93 factors, the issue of barriers to entry was key in this matter. The available information did not warrant a conclusion that the merged entity would likely be able to exercise market power for any length of time without attracting competitive entry. A significant entry barrier identified in the examination, the restrictive covenants in many of the leases of Coles and SmithBooks which precluded other book retailers from obtaining access to prime retail locations, was removed when the parties to the merger advised me that the existing restrictive covenants would be waived prior to closing the transaction and that any future leases would not contain such provisions. Other entry barriers to the relevant market appear to be relatively low.

As a result of high market share of the parties and the serious concerns expressed by a large number of industry participants, I decided to monitor the effects of the transaction for the three-year period allowed by the Act.

A detailed background document on my analysis of this merger was issued on March 21, 1995. The parties completed the transaction in April 1995.