Documentation

./!A!dtL-6 A,{~ ~ VAt>S-THE COMPETITION TRIBUNAL CT-90/1

IN THE MATTER OF an Application by Southam Inc., et al. under Section 106 of the Competition Act, R.S.C. 1985, c. C-34, as amended (the "Act");

AND IN THE MATTER of the direct and indirect acquisitions by Southam Inc. of equity interests in the business of publishing The Vancouver Courier, the North Shore News and the Real Estate Weekly. BETWEEN: SOUTHAM INC. LOWER MAINLAND PUBLISHING L RTh1 PUBLISHING INC. YELLOW CEDAR PROPERTIES L NORTH SHORE FREE PRESS LTD. SPECIALTY PUBLISHERS INC. ELTY PUBLICATIONS LTD.

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, .• 1•- •· .... :·.:"· ~:>-~-·-:j/;& THE DIRECTOR OF INVESTIGATION AND RESEARCH

Respondent

AFFIDAVIT OF RONALD W. MITCHELL I. Scope of this Affidavit 1. I was retained by Blake, Cassels & Graydon to prepare an expert affidavit on the viability of Michael Delesalle's plan for the North West Media Group ("NWMG"). This plan includes the acquisition of the Nonh & West Voice ("NWV''); acquisition of the Real

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Applicants

- 2 -Estate Weekly - Nonh Shore Edition ("REW-NS"); combining and integrating the operations of NWV and REW-NS; and the subsequent formation of commercial relationships with third party publishing and marketing service providers. [Expurgated]

2. I will review each of these strategic steps and express my opinion on them. To prepare myself for this task, I have read Delesalle' s plan, the transcript from the discovery of Michael Delesalle, the Application, the Statement of Grounds and Material Facts and the Affidavit of Oswald Jurock filed in connection with these proceedings and certain other documents related to Competition Tribunal No. CT-90/1. I have also spoken with representatives of the REW and the Voice. Further, I have conducted independent research on Delesalle's plan and prepared analyses of the plan's proforma financials. I have called on my strategic planning and related management experience in the newspaper industry to assess the plan.

II. Ronald W. Mitchell - Backeround & Qualifications 3. I am a senior executive with 10 years experience in the newspaper industry. Most recently I was Chief Executive Officer of Thomson Newspaper's British Columbia and Alberta Group. This $100 million group was comprised of 15 daily and weekly, community newspapers. I was responsible for creating and executing the strategic plan for this group, including acquisitions, market positioning, combining and consolidating business units and building new distribution systems. The majority of the newspapers in this group faced direct newspaper, niche publishing and other media competition in their respective markets.

4. Over the course of the last 10 years, I have been responsible for some 42 newspapers across Canada, from Comerbrook, Newfoundland to Campbell River, British Columbia. I have led national start-ups (The Financial Post), major metro dailies (The Edmonton· Sun, Victoria Times Colonist) and community weeklies (Taber, Alberta; Nanaimo,

- 3 -Duncan, Parksville, British Columbia). I have launched many new newspaper products, including the Kelowna and Victoria Home-Finder real estate publications.

5. I was also a Board Member and Vice-Chairman, Marketing Committee of the Canadian Newspaper Association. Prior to my newspaper career, I was a marketing and sales executive with Joseph E. Segram & Sons, Limited and Benson & Hedges (Canada) Limited. These positions involved the purchase of substantial amounts of print advertising. I received an MBA from the University of Western Ontario, School of Business Administration in 1972. A copy of my C. V. is attached as Schedule 1.

ill. Newspaper Industry Overview 6. The Canadian Newspaper industry is currently experiencing its most viable economic period since the late 1980's. A combination of growing advertising revenues, new reader and advertiser marketing initiatives, new technologies and industry consolidation have all contributed to the growth in revenues and profits for the industry. Increased demand for advertising has been fuelled by a strong economy featuring low interest rates, low inflation and job creation. The increased demand has been evident in the retail, automotive, real estate and home furnishing categories. With the economy forecast to grow approximately 36% next year, I expect demand for advertising will continue to increase. Newspapers are especially well positioned to take advantage of the opportunity because of their timeliness, flexibility and ability to carry and change price-oriented ad campaigns.

7. Of particular interest to anyone considering the industry is the price of newsprint. It is a primary cost item for publishers as it ranges between 11-25 % of newspaper revenues. From 1991-1995, newsprint pricing experienced violent fluctuations as supply and demand were often out of step. However, prices bottomed in 1997 and analysts expect to see a more stable market for the balance of this decade and beyond. Consolidation in the newsprint industry has resulted in lower cost suppliers and publishers' efforts to more

- 4 ­efficiently manage the resource have brought the supply and demand for newsprint back into balance, with the likelihood of more price stability for the medium term.

IV. Real Estate Weekly - Norlh Shore Edition 8. A cornerstone of the NWMG plan is the acquisition of the REW-NS and the eventual integration of this business into the combined operation with the NWV. A critical issue, therefore, is whether the REW-NS can be split away from the REW Group and contribute to the new NWMG.

9. To analyze this issue, I reviewed the competitive position of the REW-NS, its profitability and its operational links to its current parent group.

Competitive Position 10. The REW-NS has the largest share, based on observed page count, of all North Shore real estate publications on the North Shore 1 • In 1997, it has averaged approximately 61 % of real estate listing pages compared with approximately 20% for both the Nonh Shore News ("NSN') Homes edition and for all other publications combined.

11. Average 1997 page count of 73 has remained stable for the last 3 years, despite a downturn in the Lower Mainland real estate market in 1995/96; and down from a recent high of 81 pages in 1993. 2 Market Share Trends, North Shore Print Real Estate Advertising Page Count - Realtor Listings (See Exhibit #1)

2 REW Average Page Count/Issue (See Exhibit #2)

- 5 -12. At 73 pages, the REW-NS is the largest edition in the REW group; the lowest is 4 pages and the average is 34 pages 3 • 13. [Expurgated] 4 Profitability 14. [Expurgated] 5 I 6 15. [Expurgated]7 Operations 16. Sales, production and administration for the REW-NS is currently done in-house at the REW group. The NWMG plan envisages a• month transition period during which these operational functions will migrate to the NWMG. This is a reasonable transition period, given that:

• the current sales role is primarily one of order taking. The transition period allows for the new management to obtain a better understanding of the sales role, and also permits the orderly doubling of the NWMG sales force to

3 1997 REW Profit by Edition Analysis (See Exhibit #3 - Expurgated) 4 Multiple REW Edition Advertisements Run in REW North Shore Edition + 1 or More Other REW Editions (See Exhibit #4 - Expurgated)

5 1997 REW Profit by Edition Analysis (See Exhibit 3 - Expurgated) 6 Ibid. 7 Ibid.

- 6 ­accommodate the additional selling activities of the REW-NS. Additionally, Messrs. Delesalle and Anderson will provide sales support. Anderson is currently selling the NWV and thus brings immediate hands on selling experience to the expanded group.

• the NWMG has budgeted • 8 for production. This equates to a per page cost of •. In my experience, this is a reasonable cost per page. For example, in Victoria, B.C., we outsourced page make-up of our real estate guide for$• per page.

• my experience also shows that there are an ample number of skilled employees available to handle work of this nature on a part-time basis. In addition, the REWs electronic digital page set-up system will be made available to the NWMG under the terms of the sale. • percent of REW ads are handled on this system. This facilitates advertising flow during peak production periods and is seen by customers as a value-added service. I have personally been involved in providing this service to customers such as The Bay, Future Shop and Thrifty Foods on Vancouver Island, with resultant share increases amongst those customers. The availability of this technology with the REW-NS will, in my view, continue to provide the NWMG with a competitive advantage in the real estate advertising business.

• In terms of printing the REW-NS post acquisition, the intent is a seamless transition whereby Elty Publications will continue to print at the current rates and contract terms for a transition period of up to • months. Mr. Delesalle plans to take the combined printing of the REW-NS and NWV and "shop the

8 Voice/REW Proforma Financial Projections (See Exhibit #5 - Expurgated)

- 7 -market" for the best possible rate 9 • The higher volume of printing provided by the weekly NWV in combination with the REW-NS will certainly provide NWMG with more purchasing power to secure the best price. My experience in printing on the Lower Mainland (Financial Post, B.C. Edition, Victoria Homefinder) indicated that a very competitive commercial printing market exists. With relatively stable newsprint prices and the significant volume represented by the two products, I believe the plan's proforma printing costs are achievable. [Expurgated]

• as for distribution of the REW-NS after the purchase, the plan calls for a seamless transaction whereby the REW-NS will be delivered as per the existing rates and coverage area. Over time (which the proforma plan estimates to be • months), the REW-NS will migrate to the NWV system in those routes where NWV service can accomodate it. [Expurgated] Once the problems are fixed, the REW-NS will be then delivered in all routes with the NWV.

In the interim, the NSN will deliver the REW-NS in tandem on those problem routes. This will ensure the quality of delivery but it will be seen as a separate standalone publication, not as an insert or supplement of the NSN. NWMG will have to insist on verification of these deliveries.

[Expurgated] In my view, the foregoing represents a reasonable and thoughtful approach to integrating the distribution.

9 Delesalle Examination for Discovery, October 10, 1997, at questions 276-282.

- 8 -17. The foregoing review of the REW-NS shows that it is the market leader, that it is profitable and that operational components which are currently shared within the REW group can be moved, under an orderly transition, to the NWMG. In my opinion, the standalone REW-NS, can serve as a fundamental building block of the NWMG.

V. Norlh & West Voice 18. As a standalone, bi-weekly, free newsprint magazine,the NWV has made steady progress since its launch in July 1996:

• It is approaching • on an operating basis 10 , which in my experience is significant considering that it has just entered its second year of operation in an extremely competitive market.

• It has established an editorial position, featuring local lifestyle and entertainment which clearly differentiates it from the NSN.

• It operates in one of Canada's most affluent areas with household income 11 • Per capita income ranges from $18,700 in the City of North Vancouver, $28,100 in the District of North Vancouver and $39,700 on West Vancouver. For the most part, these are substantially higher than both the British Columbia and Canadian average. This further underscores the spending power of this area.

10 Undertaking addressed to Jeffrey Harder dated October 21, 1997. 11 See Exhibit 6.

- 9 -• As a measure of that power, I examined average household spending on recreational/reading/education 12 , a category that parallels the NWV'S editorial direction. In most cases, the spending in the North Shore is much greater than the B.C. and Canadian averages.

• In terms of demographics, the 50 plus age group is the largest in the North Shore and it will continue to grow. These people have the discretionary income and tend to be more avid newspaper readers. This is another positive factor for newspaper publishing in the North Shore. 13 • It has a management team which understands local or community publishing. This team has recently taken the necessary action to bolster the advertising sales force, with positive revenue results.

• As a bi-weekly, it has the opportunity to increase to a weekly publishing frequency. This provides additional display, classified and advertising flyer revenue potential.

• The North Shore region currently has only 1 weekly newspaper, the NSN. The majority of other Lower Mainland areas, including the West End, Richmond, Surrey, Langley, Burnaby, Coquitlan/Port Moody, Maple Ridge/Pitt Meadows, Abbotsford, Mission and Chilliwack all have competitive offerings. There appears to be an opportunity for heightened competition in the North Shore.

• [Expurgated] 12 See Exhibit 7. 13 Statistics Canada data.

- 10 -• It is a quality publication in terms of design, layout and printing, making it an attractive advertising vehicle for both local and national advertisers.

19. Given the foregoing, the NWV constitutes another viable building block for NWMG's growth strategy. In my opinion, it is a high quality editorial product which can provide a readership and advertising base for the combined operation.

VI. Combinine Operations of the Norlh & West Voice and the Real Estate Weekly-Norlh Shore Edition

20. Upon acquisition of the NWV and the REW-NS, and after a transition period to facilitate a smooth operational handover and build the distribution system, the NWMG plan envisages a combined and profitable operation of the two publications. The combined operation will include a weekly newsprint magazine (the NWV), a weekly real estate publication (the REW-NS) and a distribution system which will deliver both products as well as advertising flyers. In reviewing this plan, I have considered the following:

(i) Plan Concept (ii) Market Position (iii) Competition (iv) Management/Staffing (v) Financial Results (i) Plan ConceRt 21. The combining of two publications, one a standalone lifestyle newsprint magazine, and the other, a market leading real estate publication comprises, in my experience, a unique publishing platform. In my opinion, the new platform has a number of advantages:

- 11 -• it includes two strong and recognizable brand names. Both publications were founded in the North Shore and are integral parts of that region's media and information scene

• including the REW-NS, with its financial strength, facilitates weekly publication of the NWV, thereby enhancing revenue potential from display, classified and flyer customers

• stronger revenue means the NWV can continuously improve its editorial product thereby strengthening its readership and more effectively competing for advertisers against the NSN

• the availability of the REW-NS along with the NWV will enhance readership of the latter; i.e. it will now be viewed in the context of a more regular, frequently published editorial and advertising package

• in essence the combined concept defines a new virtuous circle for publishing on the North Shore of Vancouver (please see Diagram 1).

• management's transition plan for the combined operation is orderly and within reason, based on my experience. The • month ramp-up to weekly publishing for the NWV provides adequate time to build the planned weekly distribution system; and the • month transition period for transferring the REW-NS production process from the REW organization to an in-house operation is conservative, given that approximately • % of the advertising material flows electronically (thereby reducing manual ad handling and page make-up) and full or part-time employees with electronic pre-press skills are widely available

- 12 -Diagram 1 NWMG Virtuous Circle

/ Enhanred ~ / ' Readmhip \ \ Editor . i al Financial & Re Q 1 v enue ua 1ty Management Growth Improvement~ Strength (ii) Market Position • the combined operation will compete in one of Canada's most affluent regions, with a greater than average revenue potential

• the editorial positioning of the NWV differs from that of the market leader; this may provide the potential for increased readership and new advertising potential

• the real estate market in the North Shore, combining desirable areas to live with high prices makes for an attractive real estate advertising environment

• at an average of 73 pages of advertising per week, the REW-NS is the market leader for print real estate publications in the North Shore. This dominant

- 13 ­position will only serve to underpin the viability of the new, combined operation

(iii) Competition • strong competition for display, classified, flyer and real estate advertising currently exists on the North Shore

• display, classified, flyer and real estate competition is provided by the NSN, Vancouver Sun, Province, Lifestyles Magazine and a host of ethnic newspapers

• real estate competition is also provided by the NSN Homes section, the Condo Guide, Real Estate Guide, Lifestyles Magazine, World Journal, Realty Digest, Property Gold and Deep Cove Crier

• Canada Post has exited the economy ad mail or unaddressed bulk mail business. This has provided an opportunity for newspapers and other private distribution groups to solicit flyer business and increase their range of services for customers

• the combined NWMG operation will face stiff competition. However, its financial and brand name strength associated with the REW, along with a quality distribution system, should provide it with an opportunity to compete more effectively than would the NWV on its own

(iv) Mana2ement/Staffin2 • Mike Delesalle, in addition to controlling NWMG, will also take an active, hands-on role. His experience with Lumberland positions him to u.nderstand

- 14 ­customer advertising needs, especially in the area of quality distribution of flyers. He will be a credible representative of the operation and bring the needed management disciplines to the operation of the NWV

• [Expurgated] • Messrs. Anderson and Steele of the NWV have proven community newspaper and magazine experience. This will stand the NWV in good stead as it increases its publishing frequency to weekly

• The staffing levels of the NWV, as outlined in the footnotes to the proforma financial statements, are reasonable and within industry norms for an operation of this size. They also show orderly growth in the area of sales and production as revenues increase and the transition to in-house production activities takes place

(v) Financial Results • I have examined and analysed the proforma financial results for the NWV as provided in the plan document. As part of the analysis, I conducted a review of key operating ratios and compared them to those of a number of other, like-sized community newspaper operations. My views are as follows:

Revenue • [Expurgated] • Classified advertising, although not specifically highlighted in the proformas, constitutes another potential source of revenue growth. Classified can

- 15 ­represent 10-25 % of a newspaper's revenue. It requires a minimum weekly publishing frequency and can be developed by means of inside telephone order takers, outbound telemarketing and effective promotion. All of these requirements are within the capabilities of the NWMG. Classified advertising also builds readership, thereby enhancing the value of the product for both readers and advertisers

• further analysis of revenue was conducted based on the following ratios 14 : revenue per page revenue per revenue page revenue per column inch advertising percentage

In all cases, the rates for the NWV' compared to other community newspapers I analysed.

Expenses The operating expense projections and underlying assumptions for the NlW are reasonable and stand up to scrutiny:

• staffing levels and related expenses for an operation this size are within industry norms (40-50%). This is important as staffing is the single largest newspaper expense

14 See letter to Harder, footnote 10 above. 15 See Exhibit 10 - Expurgated.

5 was well within the range when

- 16 -• newsprint costs, the second largest expense item, are not expected to negatively influence the profitability of this business as per my earlier discussion on this subject.

• in analysing expenses, I considered the following ratios: editorial cost per editorial page printing cost per thousand pages production cost per page distribution cost per thousand copies selling cost as a percentage of sales administration cost per page administration as a percentage of sales

The proforma expenses for the NWV, when expressed in these terms, fall well within the range for the community newspapers I compared. 16 • [Expurgated] Operating Profit • [Expurgated] • first year profitability is also realistic as this plan combines the operations of two established publications. This is in contrast to a raw start-up of an unknown entity, which in a competitive market would take 2-3 years to reach break even. And as indicated earlier, financial viability allows for continuous product improvement which grows readership and revenue.

16 See Exhibit 11 - Expurgated.

- 17 -VII. Conclusion 22. It is my considered opinion that the NWMG plan is viable. It generates an operating margin of • %; which is conservative given my foregoing comments on flyer revenue and selling expenses. A • % margin allows for reinvestment for future years' growth in revenue and earnings. I am confident this plan can be achieved given the market dynamics, established publications included in the plan, and the operating strategies and synergies contemplated.

Dated at the City of Toronto, in the Province of Ontario, this 24th day of October, 1997.

SWORN BEFORE ME at the City ) of Toronto, in the Municipality of ) Metropolitan Toronto, this ) 24th day of October, 1997. ) RONALD W. MITCHELL ) ) ) Commissioner for Taking Affidavits

- 18 -TO: THE REGISTRAR Competition Tribunal 600 - 90 Sparks Street Ottawa, Ontario KIP 5B4

AND TO: DAVIS & COMPANY 2800 Park Place 666 Burrard Street Vancouver, B. C. V6C 2Z7 Attention: Mr. Stanley Wong Counsel for the Director of Investigation and Research