Competition Bureau’s concerns over newspaper swap revealed in court filing

The Competition Bureau says that Postmedia Inc. and Torstar Corp. agreed to close titles and not compete in certain regions as part of a deal to exchange newspaper assets, according to court documents.

Canada’s two largest newspaper chains announced a deal to swap 41 publications and subsequently announced plans to close 36 of them on Nov. 27. The companies said they had no option but to shutter certain titles and lay off 291 staff, due to falling print advertising revenue as a result of technological disruption.

In court documents filed in order to obtain warrants to search the offices of Postmedia, Torstar and Metroland — a division of Torstar — the Competition Bureau’s lead investigator Pierre-Yves Guay said he believes the companies “entered into a conspiracy” to allocate sales, territories, customers or markets and to fix, maintain, control, prevent, lessen or eliminate supply of a product under section 45 of the Competition Act.

Search warrants were carried out on March 12. In the Metroland office in Mississauga, the bureau says it found Torstar documents on the transaction calling it “Project Lebron.”

No charges have been laid. Spokespeople for both Postmedia, which owns the National Post, and Torstar both denied any wrongdoing and said they were co-operating with the investigation. Lawyers for both companies argue the transaction should be evaluated under merger provisions of the act. This section allows consideration on whether a business is likely to fail.

“Postmedia is strongly of the view that there has been no contravention of the Competition Act with respect to this matter,” spokeswoman Phyllise Gelfand said.

“As we have said previously, Torstar does not believe it has contravened the Competition Act and is co-operating with the Competition Bureau in connection with its review,” Torstar spokesman Bob Hepburn said.

Postmedia and Torstar didn’t alert the Competition Bureau before the transaction was announced because it did not meet the size threshold of $88 million. No cash changed hands in the deal, although both companies said they expected to save $5-to-$7 million in operating costs.

The Mergers Directorate of the Competition Bureau began looking in to the Postmedia-Torstar deal the day it was announced. Two days later, the Cartels Directorate, headed by Guay, began a separate criminal investigation.

In the court filing, Guay said Postmedia and Torstar signed a non-compete agreement as part of the deal that set out reciprocal restrictions on operations in specific geographic areas, for certain periods of time. They agreed not to operate printed publications, free daily newspapers, flyers and digital news publications in certain areas.

Guay said the companies also signed an asset purchase agreement that outlined which employees would be terminated. They agreed to prepare termination notices and severance agreements to be delivered on the transaction’s closing date.

After the transaction was announced, the bureau received a complaint from John Hammill, who was a regional sales director at the Orillia Packet & Times at the time of the transaction but lost his job when the paper closed, the ITO says.

Information provided by Hammill, when interviewed by the bureau in January, “contradicts public statements made by the senior officers of Postmedia and Torstar,” the ITO alleges.

Guay alleges that the non-compete agreement, the co-ordination of the termination of employees, and public statements made by senior executives that the acquired properties were located within each other’s “primary regions,” all indicate that there was a conspiracy between the two companies to divide up territory and reduce the supply of advertising and flyer services. Offences of this nature carry penalties of up to $25 million in fines and 14 years in prison.

In the documents, Guay said Peter Glossop, a lawyer for Torstar, and Richard Annan, who represented Postmedia, reached out to him and other members of the Cartels Directorate on Dec. 15, asking for information about the nature and scope of the criminal investigation. In his statement, Guay said he told the papers’ lawyers he would not disclose details.

During those calls, “all counsel expressed a general sense of surprise and disappointment that the bureau was investigating the transaction as a possible violation of section 45 of the act.” The lawyers pointed out that the bureau had reviewed similar transactions in the past under the merger provision of the act.

That provision directs the Competition Bureau to take into consideration whether a business, or part of a business, is likely to fail, which would have the effect of reducing competition.

The Postmedia-Torstar deal isn’t the first time in recent history that newspaper chains have swapped and subsequently closed papers. In 2014, Glacier Media and Black Press swapped more than a dozen community papers in B.C. and subsequently closed them. The Competition Bureau did not intervene.

ALL COUNSEL EXPRESSED A GENERAL SENSE OF SURPRISE ... THAT THE BUREAU WAS INVESTIGATING.