Recently, the Competition Bureau took action to intervene in the Rogers-Shaw deal. The application challenging the merger alleges that the transaction will worsen service and increase prices. The Bureau is also seeking an injunction to stop the deal from happening before its application can be heard. Competition Commissioner, Matthew Boswell, explained in a news release, “We are taking action to block this merger to preserve competition and choice for an essential service that Canadians expect to be affordable and high quality.”
While headline-making mergers such as this can bring great benefits to shareholders, the Competition Bureau has very different considerations to keep in mind. As a shareholder, it can be helpful to understand what regulators look to when assessing the competitive effects of a merger on the market.
The Rogers-Shaw Deal Claims to Enhance Wireless Networks Through Canada
In the Rogers-Shaw merger, Rogers planned to purchase all of the outstanding Class A and Class B Shares of Shaw. Under the terms of the deal, Shaw shareholders would receive a cash payment of $40.50 per share, reflecting a 70 percent premium to Shaw’s Class B Share price. Sixty percent of shares owned by the controlling shareholder of Shaw, the Shaw Family Living Trust, would be exchanged for 23.6 million Class B Shares at an exchange rate of 0.70, thereby making the Shaw family one of the largest shareholders in Rogers. Although being taken over by Rogers, Shaw planned to continue to pay its monthly and quarterly dividends as set out in their terms.
The $26-billion deal was intended to not only provide great shareholder value but also claimed to contribute to enhancing wireline and wireless networks throughout Canada. The basis for this claim was that combining two Canadian companies could increase the merged company’s investing capacity.
What Makes a Merger “Anti-Competitive”?
A merger is defined as “the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over significant interest in the whole or part of a business of a competitor, supplier, customer or other person.” If a merger “prevents or lessens, or is likely to prevent or lessen, competition substantially,” the Competition Tribunal may take action. Potentially anti-competitive mergers are brought to the attention of the Tribunal through an application made by the Competition Commissioner.
A merger is found to substantially affect competition if the merged corporation can create, maintain, or enhance its ability to exercise market power. Market power refers to “the ability of a firm or group of firms to profitably maintain prices above the competitive level for a significant period of time.” If a merger does not have market power effects, it usually cannot be demonstrated that the transaction will have a substantial effect on competition. Generally, the Competition Bureau cares most about the price and output effects of the merger. Other aspects of competition the Bureau will look at include quality, product choice, service, innovation and advertising.
How Mergers Can Affect a Company’s Exercise of Market Power
There are two ways market power can be exercised in this way. First, a merged corporation can exercise its market power unilaterally. In this instance, the merger makes it possible for the merged corporation to increase its prices higher than what would have been possible without the merger while still making a profit.
The second way market power can be exercised to substantially affect competition is through a coordinated exercise of market power. A coordinated exercise occurs when the merger reduces the “competitive spirit” of the market. This could occur, for instance, when the merged corporation coordinates with its competitors to raise prices and remain profitable. If other competitors in the market follow suit with a price increase, that is an exercise of market power.
All Mergers Must Be Assessed in Light of How they Affect the Overall Market
The common thread between both unilateral and coordinated exercises of market power is the ability of the merged corporation to “sustain materially higher prices than would exist in the absence of the merger by diminishing existing competition.” When a merged corporation can do this, it is usually as a result of there being minimal overlap between the former corporations’ existing business in areas where competition was expected to develop or increase before the merger happens.
To assess this aspect of the merger, the Bureau will examine what timely entry or expansion by either corporation would have likely happened on a sufficient scale or with sufficient scope to prevent the same exercise of market power without the merger. “Timely” refers to a reasonable period of time of entry with consideration of the characteristics of the market in question. “Likely” means the probability that entry by either corporation or by rival firms. “Sufficient” means that entry by one of the merging corporations would have triggered a material increase or decrease in prices without the merger.
It’s Too Soon to Tell What Will Happen with Rogers-Shaw
Currently, Rogers, Bell and Telus serve roughly 87 percent of Canadian subscribers. Shaw is the fourth-largest wireless carrier in Canada, with roughly two million customers in Ontario, Alberta, and British Columbia. Although only fourth, a Competition Bureau investigation in 2016 concluded that Shaw had become a “robust and disruptive competitor and drove down wireless prices” after it acquired Wind Mobile (now Freedom). It is notable that Rogers has committed to selling Freedom.
Creating a successful fourth wireless carrier has been held as “integral to competition”, according to the Bureau. It is notable that other attempts to do this have been made in the past with Fido, Mobilicity, Call-Net, Clearnet, and AT&T Canada. Each one of these wireless carriers is presently owned by Rogers, TELUS, and Manitoba Telecom Services. The result of the Competition Bureau’s application remains to be seen.
The Business Law Lawyers at Campbells LLP in Oakville Help Clients with Corporate and Regulatory Matters
At Campbells LLP, our knowledgeable corporate lawyers regularly advise clients on administrative and regulatory matters and appear before administrative tribunals like the Competition Bureau with positive results. We can help your company establish an effective in-house compliance program and review all marketing practices to ensure they are within the boundaries of the Competition Act to maximize your message while minimizing any potential exposure. To speak with a lawyer about your corporate or regulatory needs, please contact us online or at 905-828-2247 to schedule a consultation.