Annual Report of the Commissioner of Competition for the year ending March 31, 2000

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Reviewing Mergers

The number of mergers examined by the Competition Bureau has increased dramatically in recent years. This year, the Bureau faced serious challenges meeting its designated service standards, in part, because a significant number of mergers were horizontal (among firms in the same industry), requiring closer examination and thus imposing a heavier workload, and because some potentially problematic mergers involved many local markets, requiring resource-intensive investigations.

Several significant legislative changes were introduced over the year to create a more flexible and efficient review process, as well as to allow for the exemption of certain types of mergers from prenotification (see Chapter 6, page 28, for details).

Merger Benchmarking

In a modern and dynamic economy it is vitally important that merger review remain effective and efficient. In 1999-2000, the Bureau undertook a process-mapping exercise of the merger review process and met with stakeholders and officials of other anti-trust authorities to learn from their experiences and incorporate "best practices" into merger review. Once completed, this comprehensive benchmarking study of the Canadian merger review process should help the Bureau provide stakeholders with a more effective, efficient and timely process.

Case Summaries

The following are summaries of some of the major cases the Bureau reviewed over the past year. Other transactions that raised competition issues came from industries such as telecommunications, financial services, oil and gas, transportation, chemicals, real estate, forestry, broadcasting, retail and pharmaceuticals.

Air Canada and Canadian Airlines

On August 13, 1999, the federal ministers of Transport and Industry jointly announced a 90-day suspension of the provisions of the Competition Act to allow Air Canada and Canadian Airlines, Canada's largest and second largest airlines, to discuss the potential restructuring of Canada's airline industry. A key concern was the survival of Canadian, since it was experiencing financial difficulties. At that time, the Minister of Transport asked the Competition Bureau for advice on how best to promote competition in the event that a single dominant airline should emerge, either through an Air Canada-Canadian merger or through the failure of Canadian.

On October 22, 1999, following extensive industry consultations, the Bureau provided the Minister of Transport with a series of recommendations on how best to alleviate competition concerns in a single-dominant-carrier environment. The recommendations set out terms and conditions that could be imposed upon the dominant carrier, including the following:

• surrender of some take-off and landing slots at Toronto's Pearson International Airport
• surrender of certain facilities at various airports across Canada
• sharing of its frequent flier program with other Canadian carriers
• agreement not to base travel agent commission overrides on market share in the domestic market.

As well, the recommendations laid out a number of policy changes, including the following:

• raising the foreign ownership limit from 25 percent to 49 percent
• allowing foreign carriers to transport passengers from one Canadian city to another via a foreign hub
• allowing foreign-owned "Canada-only" carriers.Finally, the Bureau recommended strengthening the Competition Act to deal more effectively with anti-competitive conduct, particularly predation, in the airline industry.

In November 1999, with the expiry of the 90-day suspension period, the Bureau was notified of Air Canada's proposed acquisition of Canadian. Accordingly, it undertook a two-stage review of the acquisition under the merger provisions of the Competition Act. First, it confirmed that Canadian was facing imminent financial failure. Second, it looked at certain commitments that Air Canada was prepared to make if the merger was allowed to proceed, as follows:

• to surrender slots at Pearson Airport
• to surrender gates, loading bridges and counters at a number of airports across Canada
• to delay launching a discount carrier in Eastern Canada to give other Canadian carriers the opportunity to become established
• to offer Canadian Regional Airlines for sale
• to allow other Canadian carriers to participate in its Aeroplan program
• to base its domestic travel agent commission overrides on volume rather than market share
• to enter into interline and joint fare agreements with other Canadian air carriers.

The Bureau concluded that the merger, together with these commitments, was preferable to the bankruptcy and liquidation of Canadian. Consequently, on December 21, 1999, it informed Air Canada that it would not oppose its acquisition of Canadian. The Minister of Transport subsequently approved the merger, noting that the government would introduce new legislation governing the airline industry, including amendments to the Competition Act to allow for greater substantive and injunctive powers against anti-competitive conduct. The Bill was introduced in Parliament on February 17, 2000.

Superior Propane and ICG Propane

In July 1998, Superior and ICG Propane, the two largest propane suppliers in Canada, announced their intention to merge. Following an extensive, cross-country investigation, the Competition Bureau concluded that this would substantially lessen or prevent competition for the supply and delivery of propane to retail and wholesale customers in both the national and local markets. This conclusion was based on a number of factors, including high post-merger market shares, barriers to entry and limited or no effective remaining competition in many markets.Consequently, the Bureau filed an application with the Competition Tribunal in December 1998 contesting the merger. The hearings began in Calgary on September 23, 1999 and continued until February 9, 2000. A decision in this case is pending.

Canadian National Railway Corporation and Burlington Northern Santa Fe Railway Company

On December 20, 1999, Canadian National Railway Corporation (CN) and Burlington Northern Santa Fe Railway Company (BNSF) announced their intention to merge. Since the two companies have rail operations in both the United States and Canada, the transaction is subject to review in both countries — in Canada, under the merger provisions of the Competition Act, and in the U.S. by the Surface Transportation Board (STB).

In response to this announcement, the STB held proceedings from March 7–10, 2000 to obtain public views on major rail consolidations and the future structure of the North American rail industry.

On March 16, 2000, the STB announced a 15-month moratorium on U.S. rail merger applications to give it the opportunity to develop new merger review rules applicable to future rail transactions. Both CN and BNSF are appealing this ruling before the U.S. Court of Appeal in Washington, D.C. Should the CN-BNSF transaction proceed, it is the Bureau's intention to undertake a thorough review of its competitive impact.

British American Tobacco and Rothmans International

On January 11, 1999, British American Tobacco (BAT), a major shareholder in Imasco, announced that it was buying Rothmans International for $11.4 billion.

The tobacco industry in Canada is highly concentrated. As a result of the proposed merger, BAT (through its 42 percent share in Imasco) would have an indirect interest in Imperial Tobacco and control of Rothmans in Canada. Together these two firms account for approximately 88 percent of manufactured cigarette sales and 81 percent of the sales of fine-cut or "roll-your-own" products in Canada.

After a thorough review of the proposed transaction, the Competition Bureau concluded that a merger would likely substantially lessen or prevent competition in the Canadian manufactured cigarette and fine-cut tobacco markets, due to a high level of concentration, high barriers to entry, the lack of effective remaining competition, and the virtual absence of import competition.

As a result, BAT agreed to divest its interest in Rothmans in Canada. The Competition Tribunal issued a consent order on August 6, 1999. An interim hold-separate order was in place at year-end, pending completion of the divestiture.

Ultramar Ltd. and Coastal Canada Petroleum Inc.

In July 1999, Ultramar Ltd. entered into an agreement to purchase an Ottawa petroleum product terminal facility and customer accounts from Coastal Canada Petroleum Inc. As a result of competition concerns, the Bureau filed an application for a consent order with the Competition Tribunal on February 15, 2000 to maintain competition in the storage and wholesale supply of gasoline and other petroleum products in the Ottawa region.

The draft consent order provided for a number of measures, including continued access by independent marketers to a competitive source of supply for seven years, and the refurbishment and reactivation of Ultramar's Ottawa terminal. Ultramar would also have been required to offer the Coastal petroleum terminal for sale at fair market value if it failed to abide by the terms of the consent order.

The application was heard by the Competition Tribunal after March 31, 2000.

Lafarge Corporation and Holnam Inc. (certain assets)

In February 1998, Lafarge Canada Inc. notified the Competition Bureau that it was planning to acquire a cement distribution terminal in New Westminster, British Columbia, and a limestone quarry on Texada Island, British Columbia, from Holnam Materials West Ltd. At the same time, Lafarge Corporation in the United States planned to acquire a cement plant in Seattle, Washington, and related distribution and quarry assets also in Washington from Holnam Inc. The Bureau and the U.S. Federal Trade Commission reviewed these transactions concurrently.

The Bureau's competition concerns were resolved as follows:

• Lafarge undertook to divest the former Holnam cement distribution terminal in New Westminster to an unrelated party who would maintain it as a competing cement supplier in B.C. Terminal operations were held separate and apart from Lafarge, pending completion of the divestiture.
• Lafarge also undertook to allow Holnam to sell cement in the B.C. interior, a region historically supplied by a Holnam plant in Montana or by its distribution terminal in Washington. This undertaking resolved concerns about the excessively restrictive terms of the non-compete provision included in the original asset purchase agreement.

In March 1999, Lafarge completed the divestiture of the New Westminster terminal to a subsidiary of Lone Star Northwest Inc. of Seattle, a cement importer and distributor. Acquisition of the terminal marked this company's first significant entry into the cement industry in Canada.

The inquiry was discontinued in April 1999.

Loblaw-Provigo, Loblaw-Oshawa, Sobeys-Oshawa and Métro-Richelieu-Loeb

The Competition Bureau's review of four transactions between November 1998 and December 1999 led to significant divestitures of assets in relation to grocery industry mergers in Canada. The transactions were as follows:

• the acquisition by Loblaw Companies Inc. of Provigo Inc.
• the acquisition by Métro-Richelieu from Loblaw of certain Provigo assets in Ontario
• the acquisition by Loblaw of the retail and wholesale grocery business of the Oshawa Group Ltd. in Atlantic Canada
• the acquisition by Sobeys Inc. of the Oshawa Group's retail and wholesale operations across the country, with the exception of Atlantic Canada, and of a coast-to-coast food service distribution business, operating as SERCA Foodservice Inc.

In the first instance, the Bureau concluded that by acquiring Provigo, Loblaw became a major grocery retailer in Quebec where previously it had very little market presence. At the same time, the Bureau identified significant competitive concerns in Ontario resulting from the acquisition. Consequently, Loblaw divested Provigo assets to Métro-Richelieu in 24 retail markets in eastern and northern Ontario, as well as two warehouses and the Loeb trademark. It also agreed to divest its interest in an additional eight markets by December 31, 2000.

With regard to the third transaction, the Bureau identified anti-competitive effects in four markets: Dartmouth, Halifax and New Minas, Nova Scotia, and St. John's, Newfoundland. Consequently, Loblaw agreed to divest its interests in a store in each market. The Bureau plans to monitor the impact of the transaction in several other markets.

Finally, the acquisitions by Sobeys resulted in competition concerns in six retail grocery markets, four in Quebec and two in Ontario. Sobeys undertook to divest its interests in a store in each of these markets by December 31, 2000. In addition, the Bureau concluded that the transaction would have serious anti-competitive effects on food service distribution in the Maritimes. As a result, Sobeys divested the SERCA distribution operations in Moncton, New Brunswick, to MFS Foodservices Inc.

The Coca-Cola Company of Canada and Cadbury Beverages Canada Inc.

In a worldwide transaction initially valued at US$1.85 billion, Coca-Cola announced in December 1998 that it intended to acquire the carbonated soft drink business of Cadbury Schweppes in all markets except the U.S. and France. In Canada, Cadbury owns a number of non-cola-based carbonated soft drink products, including Canada Dry, Dr. Pepper, Pure Spring, Crush and C-Plus. Cadbury does not own bottling operations in Canada but, instead, has licensed the use of its trademark brands to Coke or Pepsi.

At the end of 1999-2000, the Bureau was continuing its examination of this proposed transaction.

Canadian Waste Services and Browning-Ferris Industries Ltd.

In May 1999, Canadian Waste Services, the largest waste management company in Canada, announced its intention to merge with Canada's second largest waste management company, Browning-Ferris Industries Ltd. These companies were the primary providers of solid non-hazardous waste collection and disposal services for commercial, industrial, institutional and residential customers in many local markets across the country.

After a thorough investigation, the Bureau concluded that the proposed merger would substantially lessen or prevent competition in the provision of commercial collection services in 17 local markets in which the parties had overlapping operations, as well as in the provision of disposal services for waste generated in Montréal, the Greater Toronto Area and Chatham-Kent in Ontario. In response to competition concerns raised by the Bureau, and after several months of negotiation, the parties restructured the proposed merger by significantly reducing the businesses to be acquired.

At the end of March 2000, the Bureau advised the parties that it would not challenge the acquisition by Canadian Waste of certain collection and disposal businesses of Browning-Ferris that did not raise competition issues. However, Canadian Waste's acquisition of Browning-Ferris' landfill in Southern Ontario continued to raise competition concerns. The Bureau consented to the acquisition of this landfill, subject to the operations of the landfill being held separate from Canadian Waste's operations pending the resolution of competition concerns through a contested proceeding before the Competition Tribunal.

Toronto-Dominion Bank and Canada Trust

In August 1999, Toronto-Dominion Bank announced its intention to merge with CT Financial Services Inc., the parent company of Canada Trust. After a thorough review, the Bureau concluded that the proposed merger would substantially lessen or prevent competition in the provision of branch banking services to individuals in three local markets: Kitchener, Port Hope and Brantford, Ontario, as well as in the credit card network market. Given that Canada Trust had one of the largest credit card portfolios within the MasterCard credit card network and that Toronto-Dominion Bank intended to convert Canada Trust's portfolio to Visa following the merger, the Bureau determined that the removal of Canada Trust from the MasterCard network would have seriously undermined the long-term viability of MasterCard in Canada.

Toronto-Dominion Bank and Canada Trust proposed to remedy the Bureau's competition concerns by agreeing to sell certain branches in the affected markets as well as either selling the Canada Trust MasterCard portfolio or converting TD's Visa portfolio to MasterCard.

The proposed merger also required the approval of the Minister of Finance. On the recommendation of the Commissioner of Competition, the merger between Toronto-Dominion and Canada Trust was ultimately approved by the Minister of Finance on January 31, 2000, provided that the merging parties committed to implementing the proposed remedies to address the competition concerns. These commitments consisted of written undertakings by the Toronto-Dominion Bank and Canada Trust to the Competition Bureau detailing the assets to be sold and the processes to be followed during the divestiture period. As of March 31, 2000, the divestitures had not been completed.

Pearson plc and Viacom International Inc.

On November 30, 1998, Pearson plc acquired the educational and reference publishing affiliates of Viacom International Inc. In Canada, this transaction added Viacom's Prentice Hall Canada to Pearson's existing publishing line-up of Copp Clark Limited, Addison-Wesley Longman and Les Editions du Renouveau Pédagogique. At the end of its review, the Bureau took the position that the transaction would likely substantially lessen competition for textbooks in French-as-a-second-language programs for elementary and high school grades and in mathematics programs for elementary grades. To address these concerns, Pearson plc agreed to divest titles in these two areas, thereby introducing new competitors into these important educational markets.

	1995-1996	1996-1997	1997-1998	1998-1999	1999-2000
Examinations Commenced two or more days of review included notifiable transactions, advance ruling certificates and examinations commenced for other reasons some examinations commenced may arise from notifications and advance ruling certificate requests in relation to the same transaction	227	314	392	361	425
Notifiable Transactions	101	141	196	191	198
Advance Ruling Certificate Requests	147	224	285	226	273
Examinations Concluded**
Posing No Issue Under the Act	210	299	406	346	392
With Monitoring Only	1	1	2	0	0
With Pre-closing Restructuring	0	1	0	0	2
With Post-closing Restructuring and Undertakings	0	0	3	1	6
With Consent Orders	0	1	1	2	1
Through Contested Proceedings	0	0	0	2	0
Parties Abandoned Proposed Mergers in Whole or in Part as a Result of the Commissioner's Position	4	0	0	3	1
Total Examinations Concluded (includes advance ruling certificates and advisory opinions issued and matters that have been concluded or withdrawn before the Competition Tribunal)	215	302	412	354	402
Advance Ruling Certificates Issued (included in Total Examinations Concluded)	122	189	238	191	223
Advisory Opinions Issued (included in Total Examinations Concluded)	3	2	3	7	3
Examinations Ongoing at Year-end	48	60	40	47	70
Total Examinations During the Year	263	362	452	401	472
Applications and Notices of Application before the Tribunal
Concluded or Withdrawn	1	1	2	4	1
Ongoing	2	2	2	1	2

^{* Numbers for previous fiscal years have been revised.
** Note: If a transaction has a notification as well as an advance ruling certificate request, it is only counted once.}

Breakdown of Mergers by Year, 1995 to 2000

Business Line	1995-1996	1996-1997	1997-1998	1998-1999	1999-2000
Total Minus Securitizations	191	262	320	309	361
Pre-merger Notification Filing*	63	67	90	109	92
Advance Ruling Certificate Request	147	224	285	226	273
Other Examinations	17	23	17	26	60
Total Mergers	227	314	392	361	425
Asset Securitizations	36	52	72	52	64

^{* Excludes notification when an advance ruling certificate was requested.}

Note: Total Mergers is the total number of examinations commenced during the fiscal year.

Merger Review: Meeting Service Standards

Complexity	Number of transactions			Target	Service Standard Met
	Nov.1997 Mar.1998 N	Apr.1998- Mar.1999 N	Apr.1999- Mar.2000 N
					Nov.1997-Mar.1998 N (%)	Apr.1998- Mar.1999 N (%)	Apr.1999- Mar.2000 N (%)
Total	99	324	358		90       (90.9)	293     (90.4)	335     (93.6)
Not Complex	95	263	303	14days	86       (90.5)	236     (89.7)	287     (94.7)
Complex	4	56	48	10wks	4       (100.0)	52       (92.9)	42       (87.5)
Very Complex	-	5	7	5mths	-	5       (100.0)	6         (85.7)

Note: The total number of transactions is based on the service standard predicted end date and not the date the transaction was received. Service standards have not been applied to transactions that are not subject to user fees, namely those not subject to pre-merger notification, and those for which an advance ruling certificate has not been requested.