On August 19, 2014, the Competition Bureau (Bureau) announced that Bragg Communications Inc. (Eastlink) has decided not to proceed with its proposed acquisition of Bruce Telecom from the Municipality of Kincardine, Ontario, after the Bureau informed the parties that it would challenge the proposed acquisition before the Competition Tribunal. This followed the Bureau’s determination that the acquisition would likely have substantially lessened competition in the sale of telecommunications services in Port Elgin and Paisley, Ontario.

The proposed transaction between Eastlink and Bruce Telecom is interesting for a few reasons. This transaction was not notifiable under the Competition Act, but nevertheless prompted a Competition Bureau investigation.^[1] Also of note, the Bureau highlighted that although the transaction impacted relatively small communities, it would not hesitate in taking enforcement action given the importance of competitive telecommunications markets to a modern digital economy. Finally, this is the second time this year that the Bureau has reported that a transaction has been abandoned by the parties as a result of regulatory challenges.^[2]

Background

Earlier this year, Eastlink, a telecommunications company operating across Canada, agreed to purchase Bruce Telecom from the Municipality of Kincardine. This transaction was not notifiable to the Bureau under the Competition Act’s financial thresholds. Instead, the deal was brought to the Bureau’s attention by several consumer complaints.

Bureau’s Analysis

The Bureau found that the proposed acquisition would likely have substantially lessened competition for the sale of (i) wireline broadband Internet services and (ii) bundles of home telephone, television and/or wireline broadband Internet services in Port Elgin and Paisley.

The Bureau found that Eastlink and Bruce Telecom were direct competitors in home telephone, television and wireline broadband Internet services in the two communities. According to the Bureau’s position statement,^[3] had the proposed acquisition taken place, customers in Port Elgin and Paisley would likely have paid higher prices, had less choice and received lower quality service for certain wireline services. The Bureau also found that Eastlink’s incentives to innovate, invest in its network and deploy the latest technologies would have been substantially lessened if it had been allowed to acquire Bruce Telecom.

The Bureau also considered barriers to entry into wireline telecommunications. It determined that barriers were high due to sunk costs related to building out a network and establishing a market presence; economies of scale in achieving viability; and the difficulties in competing against entrenched incumbents. The relatively low population densities in Port Elgin and Paisley were also seen to compromise the likelihood of entry into those areas.

Product markets

As part of its analysis, the Bureau found that wireless telecommunications services (mobile and fixed) are not close substitutes for wireline broadband Internet services due to performance and price differences. It also determined that it was unlikely that improvements in wireless services (quality and pricing) could be made in a sufficient or timely manner to constrain the merged entity’s enhanced market power in wireline broadband Internet services. The Bureau also found that there are no close substitutes for bundles of telecommunications services. Bundles typically are priced significantly lower than the aggregate price of individual components and offer consumers the convenience of receiving a single bill from one service provider.

Conclusion

The Eastlink-Bruce Telecom transaction highlights the risk of regulatory challenge of mergers. It is a reminder that mergers of any size may be reviewed and challenged by the Competition Bureau. As a result, a substantive competition analysis (including possible opposition to the deal by customers or other stakeholders) should be part of the assessment of proposed transactions of any size which may give rise to competition issues.

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^[1] Mergers may be challenged for up to a year after their completion, even in circumstances where notification to the Bureau is not required.
^[2] See our article Louisiana-Pacific Corporation and Ainsworth Lumber Co. Ltd. Terminate USD$1.1B Deal Due to Regulatory Hurdles.
^[3]http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03790.html