NO. CT-90/1 THE COMPETITION TRIBUNAL 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, ~amended;
AND IN THE MATIER OF the direct and indirect acquisitions by Southam Inc. of equity interests in the business of publishing The Vancouver Courier, the Norllt Shore News and the Real Estate Weekly
BE1WEEN: COMPETlTlOi·J. 1~ · '. ·: ".': <:: \L TRIBUNAL OE I.A cow.;; ••a .. RENC~ R SOUTHAM INC. NOV 25 i997 Xf r~ LOWER MAINLAND PUBLISHING L Rf.CISTRAA • ...- ,., ·~· -. ":I 'C u fit::'..,k.rf.',, •• ~~ I RIM: PUBLISHING INC. D • l YELLOW CEDAR PROPERTIES L . ·- . LJ a-:7h 6 (~-NORTH SHORE FREE PRESS LTD .• ~g.qw~, t-J . ,.,.;_._._. SPECIAL TY PUBLISHERS INC. EL TY PUBLICATIONS LTD.
-and-THE DIRECTOR OF INVESTlGATION AND RESEARCH
AFFIDAVIT OF D. JEFFREY HARDER (OCTOBER 24, 1997)
PUBLIC VERSION
Applicants Respondent
AF.FIDAVIT I, D. JEFFREY HARDER, of the City of Vancouver, and the Province of British Columbia, make oath and say as follows:
1. I am a Chartered Accountant, a Chartered Business Valuator, a Certified Management Consultant and an Accredited Senior Appraiser. My curriculum vitae is attached as Exhibit A Since 1989 I have been a partner in the Firm ofBDO Dunwoody, Chartered Accountants and Consultants. Form 1980 to 1989 I was employed by BDO Dunwoody, Chartered Accountants and Consultants. My professional practice is .in the areas of business and securities valuation, mergers and acquisitions, litigation support and :financial consulting.
2. I have been retained by the Director of Investigation and Research in connection with this proceeding to carry out business valuation, financial analyses, and consulting services in regard to Southam Inc. 's direct and indirect acquisitions of equity interests in the business of publishing The Vancouver Courier, the Nortli Shore News, and the Real Estate Weekry; to consider the business and strategic implications to a potential purchaser of the divestiture by Lower Mainland Publishing Ltd. of either the North Shore News Real Estate Hornes Supplement or the Real E'itate Weekly North Shore Edition; and to consider the business and strategic implications of the purchase of the Real Estate Weekly North Shore Edition by Michael W. Delesalle through a company named North and West Voice Publishing Ltd.
SUBSCRIBED AND SWORN BEFORE ME ) at the City of San Francisco, in the State of ) California on the~ day of October, 1997 ) .\.~ ~-*-) D. JEFFREY ER ~~afa~ ) )
EXHIBIT A D. JEFFREY HARDER CURRICULUM VITAE
PROFESSIONAL STATUS Partner, BDO Dunwoody, Chartered Accountants and Consultants, Vancouver, British Columbia Senior Officer, BDO Valuation Inc., Chartered Business Valuators, Vancouver, British Columbia Senior Officer, BDO Corporate Finance Inc., Vancouver, British Columbia
EDUCATION AND PROFESSIONAL DESIGNATIONS BA, Political Science (Brandon University) 1979 CA, Institutes of Chartered Accountants ofM anitoba and British Columbia (University ofManitoba, Faculty of Administrative Studies) 1983 CBV, Canadian Institute of Chartered Business Valuators (University of Toronto, Programme of Studies in Business and Securities Valuation) 1987 CMC, Institute of Certified Management Consultants of Canada 1989 ASA, Senior Member of The American Society of Appraisers 1990 CFE, Association of Certified Fraud Examiners 1994
AREAS OF PRACTICE Business and securities valuations Mergers and acquisitions Litigation support Investigative and forensic accounting Financial consulting
PROFESSIONAL EXPERIENCE Four years inBDO Dunwoody's general practice areas of accounting, auditing and taxation. Thirteen years in BOO Dunwoody's special practice areas involved exclusively in business and securities valuations, mergers and acquisitions, litigation support, investigative and forensic accounting and financial consulting.
Business and securities valuations of private and public companies in a national and international context for:
Income tax matters Corporate reorganizations Expropriations Loan guarantees :Matrimonial settlements Employee share purchases
D. JEFFREY HARDER CURRICULUM VITAE
PROFESSIONAL EXPERIENCE (Continued) Purchase and sale ofb usiness interests Securities regulations and public offerings (OSC9.l, VSE and ASE) Estate and retirement matters Insolvency related assigrunents Shareholder/partner disputes Venture capital investment
Litigation support assignments in a national and international context includes: Economic loss calculations Loss of profit claims Construction claims Insurance claims Expropriations Forensic accounting investigations Insolvency related assignments Income tax matters Matrimonial settlements Shareholder/partner disputes Product liability claims Guarantor actions Anti-competition matters Special investigation
Investigative and forensic accounting assignments includes: Insurance investigations Employee theft and fraud Securities matters Acc.ounting for hidden assets and earnings Insolvency matters
Financial consulting assignments in a national and international context includes: Mergers, acquisitions and divestitures Feasibility and investment analysis Financial proposals Workouts and investment monitoring Business and strategic planning Capital raising
D. JEFFREY HARDER CURRICULUM VITAE
PROFESSIONAL EXPERIENCE (Continued) Industry experience in a national and international context includes: A broad range of manufacturing industries Service, retail/wholesale trading and distribution Analytical laboratories and environmental testing Communications, media and entertainment Professional practices Hotels, restaurants and tourism and recreation facilities Golf courses and ski resons Consumer products Property ownership, construction and management Transportation, including rail, sea, road and air Forest products, including logging, sa\VIIlilling and pulp mills Mining Oil and gas Electric energy Food processing and agribusinesses Computer hardware and software A broad range of technology businesses Automotive and aerospace industries Health care Fanning and ranching
GENERAL Mr. Harder is currently the President and a member of the Canadian Institute of Chartered Business Valuators' national Board ofD irectors. Mr. Harder is past Secretary and President of the British Columbia Chapter of the Canadian Institute of Chartered Business Valuators. Mr. Harder is Chairman ofBDO Dunwoody's National Financial Advisory Services CoIIUllittee. He has lectured on financing for the Canadian Institute of Chartered Accountants and on valuation issues for law firms, financial institutions, the Canadian Institute of Chartered Business Valuators and the American Society of Appraisers. Mr. Harder has written articles on valuation subjects for several professional publications, including CA Magazine. Mr. Harder bas qualified as an expert witness and given testimony in the British Colwnbia Courts, the Tax Cowt of Canada, before the Competition Tnbunal of Canada, the British Columbia Expropriation. Compensation Board and in arbitration. Mr. Harder acted as a Review Team member in a provincial special investigation in regard to international electric energy investments made by BC Hydro, a crown corporation, and a related private placement. :Mr. Harder is a member oft he Investigative and Forensic Accounting Interest Group of the Canadian Institute of Chartered Accountants and the Canadian Tax Foundation.
EXHIBITB REPORT TO: THE DIRECTOR OF INVESTIGATION AND RESEARCH BY: D. JEFFREY HARDER RE: TIIE DIVESTITURE BY LOWER MAINLAND PUBLIS:EllGN LTD. OF EITHER THE NORTH SHORE NEWS REAL ESTATE HOMES
SUPPLEMENT OR THE REAL ESTATE WEEKLY NORTH SHORE EDITION
CONTENTS Page WfRODUCTION ................................................................................................................... l SCOPE OF REVIBW .............................................................................................................. 2 MICHAEL W. DELESALLE OPTION TO ACQUIRE .......................................................... 4 TIIE REAL ESTATE WEEKLY NORTH SHORE EDITION
NORTH AND WEST VOICE PUBLISHING LTD. AND ....................................................... 8 THE NORTH & WEST VOICE
THE BUSINESS PLAN FOR THE NORTH & WEST VOICE AND ................................... 11 THE REAL ESTATE WEEKLY NORTH SHORE
Page 1 ThITRODUCTION I. I have been retained by the Director of Investigation and Research (the "Director") in connection with this proceeding to cany out business valuation, financial analyses and consulting services in regard to Southam Inc. 's direct and indirect acquisitions of equity interests in the businesses of publishing Tlie Vancouver Courier, the North Shore News and the &al Estate Weekly; and to consider the business and strategic implications to a potential purchaser of the divestiture by Lower Mainland Publishing Ltd. of either the North Sho.,e News Real Estate Homes Supplement or the Real Estate Weekly North Shore Edition; and to consider the business and strategic implications of the purchase of the Real Estate Weekly North Shore Edition by Michael W. Delesalle through a company named North and West Voice Publishing Ltd.
2. In the context of this report, the following is a summary of certain defined. terms used throughout:
• North Shore Nt!Ws ("NSN'); • North Shore News Real Estate Homes Supplement ("NSN Homes Supplement"); • Real Estate Weekly ("REW''); • &al Estate Weekly Nonh Shore Edition ("REW North Shore");. • CollectivelyNSNHomes Supplement and REW North Shore (the "pu.blications"); • Lower Mainland Publishing Ltd. ("LMPL"); • Elty Publications Ltd. ("Elty'); • Southam Inc. ("SNG"); • North&: West Voice ("Voice"); • Featureline Ftlms Inc. (''Featureline"); and • North and West Voice Publishing Ltd. ("Voice Publishing").
Page2 3. On August 15, 199ll completed my first Affidavit ("1991 Affidavit") and on October 23, 1992 I completed my second Affidavi~ (''1992 Affidavit") in connection with these proceedings. For purposes of this Affidavit I have assumed that since the completion of my 1991 and 1992 Affidavits, there has been no material change in the operations of either L:MPL, NSN, NSN Home Supplement, REW or REW North Shore.
SCOPE OF REVIEW 4. My 1991and1992 Affidavits set out the documents made available to me by the Director. In addition to the materials I reviewed in the preparation of my 1997 Affidavit, I reviewed the following information received by Davis & Company up to October 23, 1997:
• Letter ofE ngagement dated June 2, 1997 between LMPL and Dilon, Whittall, Gill & Company Ltd.; • "Potential Purchasers" contact list dated June 16, 1997; • "Potential Purchasers Expressing Serious Interest" list dated July 31, 1997; • Corporation Income Tax: Return for North Shore Free Press Ltd. for the year ended August 31, 1996; • REW - Top 10 Advertisers 1996; • Summaxy of Real Estate Weekly Fixed Assets; • Elty- Capital Asset Detail l 992- 1996; • NSN - Tope 25 Advertisers 1996; • NSN - List of Fixed Asset Net Book Value at March 31, 1997; • North Shore Free Press Ltd. - Segmented Balance Sheet as at April 1997; • Letter from LMPL dated August 13, J9 97 and related materials about the diversitures of either NSN or REW; • Letters of intent from ·and Michael W. Delesalle; • • REW - Confidential Information Memorandum from Dilon, Whittall, Gill & Company Ltd.; • REW North Shore - Confidential Information Memorandum from LMPL;
Page 3 • NSN - Confidential Infunnation Memorandum from .Dilon, Whittal~ Gill & Company Ltd.; • NSN Homes Supplement - Confidential Information Memorandum from LMPL; • Affidavit of.Michael WilliamDelesalle dated September 3, 1997; • Affidavit of Oswald Jurock dated July 14, 1997; • "Introduction to Cyberbia InfoSystems Inc. Corporate Profile" Summary; • Letter from Douglas, Symes & Brissenden dated October 3, 1997 and related materials; • Examination for Discovery of John Collison dated September 25, 1997 and related Discovery material undertakings dated October 8, 1997; • George Richard Anderson Examination for Discovery dated September 24, 1997; • Michael William Delesalle Examination for Discovery dated October 10 and 11, 1997 and related materials provided as undertakings by Blake, Cassels & Graydon up to October 23, 1997; • Letters from Blake Cassels & Graydon dated October 6 and October 8, 1997 providing operating infonnation about the Voice, the .REW North Shore and the NSN Home Supplement; •
• ·• • • • Draft Asset Purchase Agreement among Elty, LMPL and Voice Publishing dated October 23, 1997, and excluding all schedules and related documents.
Page4 5. In addition to revieWing these documents, I: • met with representatives of Dilon, Whittall, Gill & Company Ltd. and LMPL to discuss the progress of the sale of either NSN or REW; • met with Michael Delesalle and his professional ad~sors to discuss his business plan for the operation ofthe Voice in combination with the REW North Shore; and •
MICHAEL W. DELESALLE OPTION TO ACQUIRE TIIBREAL ESTATE WE:tKLr NORTH SHORE EDITION
6. I understand that pursuant to a letter of intent dated June 25, 1997 Michael Delesalle intends to purchase the REW North Shore for a cash purchase price payable on the closing of the proposed transaction
7. The principal components of.Michael Delesalle's proposed purchase of the REW North Shore as I understand them were as follows:
• • • • •
Page5 • •
8. I understand that the offering price for the REW North Shore c was based on estimated revenues and earnings before interest, taxes, depreciation and amortization ("EBl'IDA'') for REW North Shore's last fiscal year as follows:
9. This information was extracted from the REW North Shore Confidential Information Memorandum ("IM'') dated May 27, 1997 prepared by LMPL and Eltv. The EBITA operating margin is - of revenues which is reflective In comparison the EBITA operating margin of all REW editions was 19% in fiscal 1996, ..f or the NSN Home Supplement and • for NSN in fiscal 1996. It should be noted that the EBITDA information for REW North Shore shown in the IM are estimates made by Elty and are subject to certain assumptions about how the publication will be produced,
Page 6 printed and distributed on a stand alone ba:;is. Consequently, there can be no assurance given that an acquiror of the REW North Shore will achieve these proforma results.
10. Based on a purchase price of , for 100% of REW North Shore as compared to operating revenues and operating earnings for fiscal 1996, the valuation multiples are as follows: ~rating revenues Multiple of operatins;~ earnings
The multiple of operating earnings represents a pre-tax capitalization rate of Jn my opinion Michael Delesalle's proposed purchase price ot the commercial restrictions which the draft Asset Purchase AgTeement outlines.
11. I note that there is a difference between the assets which Michael Delesalle has offered to purchase versus what Elty is prepared to sell. The following summarizes the assets relative to REW offered by Elty.
· - This may be because
Page 7 12. The following is a summary of certain of the key differences between the assets and rights which :Michael Delesalle requested from Elty and what is contained in the draft Asset Purchase Agreement:
13.
Page 8 NOR1H AND WEST PUBLISHING LTD. AND THE NORTH & WEST VOICE
14.
15. 16. The Voice is currently a twice per month free distribution tabloid style newspaper which commenced in July 1996. Since the summer of 1997 approximately 50 thousand copies have been distributed to all postal codes between Deep Cove and Lions Bay; although in the older ncighhowhoods of North Vancouver and West Van.~uver only apartment delivery occurred until the September 1997 issues. Bulk drops currently occur in North
Page9 and West Vancouver, racks located in North Vancouver and West Vancouver and Whistler; and distribution in boxes occurs in North Vancouver and West Vancouver. I am unsure as to the frequency and pattern of the Voice distribution prior to June 1997, but it was less extensive than now.
17. The Voice operates from a single location in North Vancouver. The publication employs approximately • full-time staff and contracts out its printing and distnlmtion functions. Produced in a community magazine fonnat the Voice has no separate real estate section and limited flyer inserts.
18.
Page 10
19. Either operating revenues have to grow or the cost-base of operations has to decrease in order for the publication to become financially successful.
Page 11 THE BUSINESS PLAN FOR THE NORTH & WEST VOICE AND THE REAL ESTATE WEEKLY NORTH SHORE
20.
Page 12 21. I understand that Michael Delesalle believes that the REW North Shore under his ownership in combination with the Voice will be immediately profitable for the following reasons:
22. Based on this business plan and these proposed areas of improvements, Michael Delesalle has prepared the following projection for the first year of combined operations after acquisition of REW North Shore by Voice Publishing.
Page 13
23. The financial viability of the two publications under the stewardship of Voice Publishing is difficult to assess because the Voice and Voice Publishing's management do not have a track record of financial performance against which the projections can be compared. As well, it is unclear as to the asset rights for REW North Shore which will be vended to Vo,ce Publishing by Elty. I have the following comments about the projection:
Page 14
• The Voice is not an established publication with an editorial concept which is accepted and read by consumers such that advertisors will consistently be willing to place display ads or flyer inserts with this publication. Consequently, the projected growth in advertising and flyer revenue is aggressive.
• Voice Publishing assumes that it can obtain printing contracts which are at a lower cost than the Voice now has and that after its contract maintenance arrangement with Elty, it can secure at least as favourable printing rates with another party. • There wilt be both a maintenance of existing advertising revenues in the Voice and REW North Shore and substantial growth in Voice display revenues by virtue of advertising sales support, without any passage of time to ensure that readers and consumers accepts this print media concept.
24. In summacy, Michael Delesalle is an entrepreneur who has a vision to create a new print media business on the North Shore and in the Squamish to Whistler corridor He wants to use REW North Shore as an anchor to support this eon.cept to revit~li.ze Voice Publication. Whether his vision for a revitalized Voice is financiauy :>u1.."'1;..,,u .... ,
Page 15 ultimately depends dn consumer acceptance and readership. Without distribution and readership, REW North Shore advertis~ will not likely support the publication. Since the Voice in combination with the REW North Shore is essentially a new print media entrant to this market, only time will determine whether the Voice will gain sufficient readership to be :financially successful.